10-K 1 form10k.txt POMEROY IT 10-K 01-05-2007 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 5, 2007 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 (I.R.S. Employer of incorporation or organization) Identification No.) 1020 Petersburg Road, Hebron, Kentucky 41048 -------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (859) 586-0600 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $.01 ---------------------------- (Title of class) Indicate by checkmark if the registrant is well-known seasoned issuer, as defined in rule 405 of the Securities Act YES NO X ----- ----- Indicate by checkmark if the registrant is not required to file reports pursuant to section 13 or section 15(d) of the Act. YES NO X ----- ----- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 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 aggregate market value of voting stock of the Registrant held by non-affiliates was approximately $55.0 million as of July 5, 2006. The number of shares of common stock outstanding as of February 28, 2007 was 12,355,703.

DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K Into Which Portions of Documents Document Are Incorporated -------- ---------------- Definitive Proxy Statement for the 2007 Part III Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before May 5, 2007.

POMEROY IT SOLUTIONS, INC. FORM 10-K YEAR ENDED JANUARY 5, 2007 TABLE OF CONTENTS PART I Page ---- Item 1. Business 1 Item 1A. Risk Factors 7 Item 1B. Unresolved Staff Comments 11 Item 2. Properties 11 Item 3. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 11 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters 11 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25 Item 8. Financial Statements and Supplementary Data 25 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 26 Item 9A. Controls and Procedures 26 Item 9B. Other Information 29 PART III Item 10. Directors, Executive Officers and Corporate Governance 29 Item 11. Executive Compensation 29 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 29 Item 13. Certain Relationships and Related Transactions, and Director Independence 29 Item 14. Principal Accountant Fees and Services 29 PART IV Item 15. Exhibits and Financial Statement Schedules 30 SIGNATURES Senior Vice President, Chief Financial Officer 36 Directors 36

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS -------------------------------------------------------------- Certain of the matters discussed under the captions "Business", "Properties", "Legal Proceedings", "Market for Registrant's Common Equity, Related Stockholder Matters" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" may constitute 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 and in documents incorporated herein by reference, including, without limitation, those statements made in conjunction with the forward-looking statements under "Business", "Properties", "Legal Proceedings", "Market for Registrant's Common Equity, Related Stockholder Matters" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the factors discussed under "Risk Factors". All written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by such factors. PART I ITEM 1. BUSINESS COMPANY OVERVIEW Pomeroy IT Solutions, Inc. is a national information technology ("IT") solutions provider with a comprehensive portfolio of consulting, infrastructure and lifecycle services. Our mission is to provide customers with increased efficiencies, decreased costs, and the ability to maximize their existing IT investments. We are committed to our customers, our employees and our shareholders and aim to consistently meet and exceed their expectations. OUR SOLUTION-FOCUSED COMPANY ------------------------------ Pomeroy seeks to understand the strategic goals of customers' organizations as well as the specific challenges faced by IT executives. Through this collaborative approach, the Company's sales and technical teams can combine the right people, partners, technologies and methodologies to deliver solutions that meet those goals and challenges. The Company takes advantage of its low-cost business model and scalability to deliver the most economical, flexible solutions to its customers. Ultimately, this allows our customers to reinvest savings into their organizations. OUR GROWTH STRATEGY --------------------- Pomeroy's growth strategy is to gain share in existing markets, expand geographical coverage, and increase the breadth and depth of our service offerings. Pomeroy will continue to focus on increasing higher margin services, increasing the percentage of recurring revenue, controlling operating expenses and maintaining a strong balance sheet. Key elements of this strategy are to: - be the low cost provider of the complete solutions which are developed, integrated and managed for its customers, - expand service offerings particularly in the higher end services and networking areas, - expand offerings and grow the customer base through strategic acquisitions, and - maintain and enhance technical expertise by hiring and training highly qualified technicians and systems engineers. Pomeroy's sales are generated primarily by its 130 person direct sales and sales support personnel. Pomeroy's business strategy is to provide its customers with a comprehensive portfolio of product and service offerings. The Company believes that its ability to combine competitive pricing of computer hardware, software and related products with comprehensive higher margin services allows it to compete effectively against a variety of competitors, including independent dealers, superstores, mail order and direct sales by manufacturers. With many businesses seeking 1 assistance to optimize their information technology investments, Pomeroy is using its resources to assist customers in their decision-making, project implementation and management of IT capital. OUR SERVICES ------------- Pomeroy delivers premier IT services to enterprise clients, small and mid-size businesses, and government entities. Leveraging 25 years of strong technology services background and industry leading partnerships, Pomeroy's core competencies span IT Outsourcing and Out-tasking, Supply Chain Management, Consulting and Systems Integration and Program and Resource Management. IT OUTSOURCING AND OUT-TASKING services that help clients optimize the various elements of distributed computing environments. Encompassing the complete IT lifecycle, services include desktop and mobile computing, server and network environments, and are multi-vendor in scope. The capabilities in this portfolio are: Help Desk, IT hardware management and support, software support, network support and mobile product support. SUPPLY CHAIN MANAGEMENT services that are designed to help organizations procure and distribute IT systems. These services wrap around Web-order management, provisioning, configuration assurance, image management, systems integration, warehousing logistics, and distribution. This portfolio is comprised of: product acquisition, product distribution, asset management, advanced integration, end-of-life services, software licensing and logistics. CONSULTING AND SYSTEMS INTEGRATION services help clients plan, design, deploy, and manage high-performance, high-availability technology infrastructures. The capabilities in this portfolio focus on: High Performance/Blade server technologies, storage technologies, network and IP technologies, information security, and Microsoft technologies. PROGRAM AND RESOURCE MANAGEMENT services, support clients' project resources, ensures compliance and success for a complete project, and serves as a dynamic repository for program data, standards, methodologies, lessons learned, and best practices. Many solutions offered by Pomeroy span all four portfolios, providing innovative technologies and the highest level of technical expertise that enable clients to leverage existing IT investments, reduce risks associated with new technology adoption, and minimize on-going operational costs. These solutions include: HELP DESK SERVICES: Pomeroy manages Help Desk services from entry-level and off-hour coverage packages to customized offerings based on specific client service level agreements (SLA) and reporting requirements. Pomeroy offers help desk and ITIL support consulting to assist clients in optimizing internal support processes. Partnering with self-help and self-healing e-support vendors, the company helps clients implement and manage Web-enabled user-managed support. HARDWARE MANAGEMENT AND SUPPORT SERVICES: Pomeroy can support part or all of a client's IT asset management functions - from performing an initial baseline inventory via the Web to selecting and implementing tracking and database tools for both hardware assets and software licenses. Pomeroy's vendor-neutral heritage and partnerships with virtually every leading equipment supplier are at the heart of the company's Hardware Support Services. These offerings include break/fix and install, move, add, and change (IMAC) services; out-of-warranty hardware support and repair; technology refresh and integration; equipment disposition strategy planning and certified destruction of obsolete equipment. Most computer products are sold pursuant to purchase orders. For larger procurements, the Company may enter into written contracts with customers. These contracts typically establish prices for certain equipment and services and require short delivery dates for equipment and services ordered by the customer. These contracts do not require the customer to purchase computer products or services exclusively from Pomeroy and may be terminated without cause upon 30 to 90 days notice. Most contracts are for a term of 12 to 24 months and, in order to be renewed, may require submission of a new bid in response to the customer's request for proposal. 2 Pomeroy provides its services to its customers on a time-and-materials basis and pursuant to written contracts or purchase orders. Either party can generally terminate these service arrangements with limited or no advance notice. Pomeroy also provides some of its services under fixed-price contracts rather than contracts billed on a time-and-materials basis. Fixed-price contracts are used when Pomeroy believes it can clearly define the scope of services to be provided and the cost of providing those services. Pomeroy has also established relationships with industry leaders including the authorization to perform warranty and non-warranty repair work for several vendors. From the extensive list of technology brands we offer to our clients, Pomeroy has selected an exclusive group of best in breed manufacturers with which to develop comprehensive alliance agreements. These alliances underscore our commitment to providing our customers with the most sought-after technology solutions. Pomeroy engages our alliance partners at the highest levels, in order to meet our customers' needs in accordance with our standards of excellence. The Pomeroy Alliance Program goals are: - To build strong on-going business relationships with a select group of vendors and manufacturers - To maintain extensive sales of, and technical readiness on, alliance product and solution sets - To bring the advantages of strong industry relationships to bear on individual customer projects for the benefit of the customer The following are the manufacturers included within our Alliance Program. American Power Conversion Belkin Corporation Brother International Corporation Cisco Systems Crucial Technology Hitachi Data Systems Hewlett Packard IBM Kingston Technology Lefthand Networks Lexmark International, Inc. Logitech MGE UPS Microsoft Corporation NEC Display Nortel Networks Okidata Ricoh Corporation Samsung Sony Startech.com Sun Microsystems Viewsonic Xerox Corporation Pomeroy believes that its relationships with such vendors enable it to offer a wide range of products and solutions to meet the diverse requirements of its customers. Additionally, Pomeroy's ability to bundle products with solutions enables its customers to obtain the flexibility, expertise, and conveniences of multiple vendors from a single source provider of IT solutions. Pomeroy has select dealer agreements with its major vendors/manufacturers. These agreements are typically subject to periodic renewal and termination on short notice. Substantially all of Pomeroy's dealer agreements may be terminated by either party without cause upon 30 to 90 days advance notice, or immediately upon the occurrence of certain events. A vendor could also terminate an authorized dealer agreement for reasons unrelated to Pomeroy's performance. Although Pomeroy has never lost a major vendor/manufacturer, the loss of such a vendor/product line or the deterioration of Pomeroy's relationship with such a vendor/manufacturer could have a material adverse effect on Pomeroy. 3 Significant product supply shortages have resulted from time to time due to manufacturers' inability to produce sufficient quantities of certain products to meet client demand. As in the past, the Company could experience some difficulty in obtaining an adequate supply of products from its major vendors. Historically, this has resulted, and may continue to result, in delays in completing sales. These delays have not had, and are not anticipated to have, a material adverse effect on the Company's results of operations. However, the failure to obtain adequate product supply could have a material adverse effect on the Company's operations and financial results. OUR MARKETS ------------ Pomeroy's target markets include Fortune 1000 companies ("Enterprise"), small to medium sized business ("SMB"), governmental agencies and educational institutions ("Public Sector") and vendor alliance customers. These customers fall into government and education, financial services, health care and other sectors. Pomeroy's clients are located throughout the United States, with largest client population being based in the Midwest, Southeast, & Northeast. Refer to Item 1A. Risk Factors for Dependence on Major Customers. COMPETITION The computer products and services market is highly competitive. Pomeroy competes for product sales directly with local and national distributors and resellers. In addition, Pomeroy competes with computer manufacturers that sell product through their own direct sales forces to end users and to distributors. Although Pomeroy believes its prices and delivery terms are competitive, certain competitors offer more aggressive hardware pricing to their customers. Pomeroy competes, directly and indirectly, for services revenues with a variety of national and regional service providers, including services organizations of established computer product manufacturers, value-added resellers, systems integrators, internal corporate management information systems and consulting firms. Pomeroy believes that the principal competitive factors for information technology services include technical expertise, the availability of skilled technical personnel, breadth of service offerings, reputation, financial stability and price. To be competitive, Pomeroy must respond promptly and effectively to the challenges of technological change, evolving standards and its competitors' innovations by continuing to enhance its service offerings and expand sales channels. Any pricing pressures, reduced margins or loss of market share resulting from Pomeroy's failure to compete effectively could have a material adverse effect on Pomeroy's operations and financial results. Pomeroy believes it competes successfully by providing a comprehensive solution portfolio for its customers' information technology asset management and networking services needs. Pomeroy delivers cost-effective, flexible, consistent, reliable and comprehensive solutions to meet customers' information technology infrastructure service requirements. Pomeroy also believes that it distinguishes itself on the basis of its technical expertise, competitive pricing and its ability to understand its customers' needs. Competition, in particular the pressure on pricing, has resulted in industry consolidation. In the future, Pomeroy may face fewer but larger competitors as a consequence of such consolidation. These competitors may have access to greater financial resources than Pomeroy. In response to continuing competitive pressures, including specific price pressure from the direct telemarketing, internet and mail order distribution channels, the computer distribution channel is currently undergoing segmentation into value-added resellers who emphasize advanced systems together with service and support for business networks, as compared to computer "superstores," who offer retail purchasers a relatively low cost, low service alternative and direct-mail suppliers which offer low cost and limited service. Certain direct response and internet-based fulfillment organizations have expanded their marketing efforts to target segments of the Company's customer base, which could have a material adverse impact on Pomeroy's operations and financial results. While price is an important competitive factor in Pomeroy's business, Pomeroy believes that its sales are principally dependent upon its ability to provide comprehensive customer support services. Pomeroy's principal competitive strengths include: (i) quality assurance; (ii) service and technical expertise, reputation and experience; (iii) competitive pricing of products through alternative distribution sources; (iv) prompt delivery of products to customers; (v) various financing alternatives; and (vi) its ability to provide prompt responsiveness to customers services needs and to build performance guarantees into services contracts. EMPLOYEES As of January 5, 2007, Pomeroy had 2,212 full-time employees consisting of the following: - 1,710 technical personnel; - 87 service delivery management personnel; - 130 direct sales representatives and sales support personnel; 4 - 19 management personnel; and - 266 administrative and distribution personnel. Pomeroy offers its full-time employees the options to participate in health and dental insurance, short and long term disability insurance, life insurance, 401(k) plan and an employee stock purchase plan. Also, Pomeroy is now offering a non-benefit option for those resources who would like to opt for higher compensation packages in lieu of benefits packages. This employee workforce consists of 1,171 technical personnel. Pomeroy has no collective bargaining agreements and believes its relations with its employees are good. Pomeroy is committed to continuing to build its areas of expertise and offerings through continual hiring and training of personnel, and strategic acquisitions of companies that bring new skill sets and experience. OUR TECHNICAL TEAM Pomeroy technical resources are trained in the nine functional areas of project management outlined in the standard known in the industry as the Project Management Body of Knowledge, an open standard developed by the Project Management Institute. Additionally, the company has adopted Six Sigma quality principles and established a robust training program with Yellow Belt certification requirements for all consultants, technicians, and engineers and Green Belt requirement for management and leadership roles. Pomeroy's technical personnel maintain some of the highest credentials. Maintaining a knowledgeable and resourceful technical staff is an objective that Pomeroy cultivates through career development programs that promote education and skills training. These certifications include:

CISCO CCIE, CCNA, CCNP, CCDP, CCDA, CCSP, CCVP, INFOSEC Professional, and Cisco Specialist certifications (CQS) in IP Communications, Advanced Wireless LAN, and Advanced Security NOVELL: CNE, MCNE, CNA, and Certified GroupWise Engineer MICROSOFT: MCP, MCSA, MCSA Security Specialization, MCSE Messaging Specialization, MCSE, MCSE+1, MCDST, MOS, MCDBA, CRM Professional and Office Specialists and Experts IBM: xSeries Certified System Engineer, eServer Certified Specialist, IBM Technical Specialist RS 6000 SP, and IBM Advanced Technical Expert RS 6000, Tivoli Storage Manager Technical Sales HEWLETT PACKARD: HP Certified Professionals (NT, NetWare, Alpha/Unix, and StorageWorks), HP Accredited Integration Specialist, HP Certified System Engineers (HP- UX) and Master Accredited Systems Engineers - SAN Architect Data Availability Solutions NORTEL: Nortel Support & Design Specialists, Nortel Support & Design Experts, Technical Specialist and Experts COMPTIA: A+ Certified Technicians, Network+, IT Project+, Linux+, Server+, i-Net+ and Security+ SUN: Storage Engineers, Solaris System and Network Administrator (ISC)2 Certified Information Systems Security Professional (CISSP) ORACLE: Oracle Certified Professional (OCP) EMC: Implementation Engineer -Expert, Technology Architect-Expert, NAS Associate and Legato EmailXtender and EmailXaminer Administrator ALTIRIS: Certified Professional (ACP) CITRIX: Certified Administrator (CCA) F5 NETWORKS: Product Specialist HELP DESK INSTITUTE: Support Specialists, Helpdesk Manager, Helpdesk Analyst and Support Center Manager LEFTHAND NETWORKS: LeftHand Certified System Engineer PMI: Project Management Associates and Professionals (PMP) SYMANTEC/VERITAS: Certified Specialists and Professionals VMWARE: VMware Certified Professional BICSI: Installer Level 1 and 2, Technician, and Registered Communications Distribution Designer (RCDD(R)). 5 3COM: Certified IP Telephony NBX Expert, PEREGRINE: Asset Center certified ITIL: IT Service Management Certifications - Foundations, Practitioner and Managers WARRANTY CERTIFIED Apple, Brother, Dell, Epson, Gateway, HP, Lenovo, IBM, Kyocera, TO SERVICE: Lexmark, Okidata, Sony, Toshiba, and Xerox

OUR ISO CERTIFICATION Purchasing products and/or solutions from Pomeroy assures that highly skilled professionals adhere to world-class quality standards which are leveraged to manage the IT initiatives of its customers. Since 1997, Pomeroy's Distribution Center has been registered to the International Organization of Standardization ("ISO") ISO 9001:2000 Quality Standard. The ISO Quality Standard has been accepted by the U.S. and over eighty other countries around the world as the basis for a world class Quality Management System ("QMS"). Pomeroy's QMS specifies the policies, procedures and processes necessary to satisfy customer requirements and ensures those processes are appropriately managed, controlled and continually improved. As a result of Pomeroy's ISO 9001:2000 registration, Pomeroy's customers can be assured that Pomeroy's QMS meets international standards. Documented procedures and records that demonstrate its commitment to the very highest quality standards back up the Company's ISO registration. The information technology needs of its customers are serviced by Pomeroy's ISO 9001:2000 registered distribution and integration center located in Hebron, Kentucky. This facility is approximately 161,000 square feet and distributes and integrates products and technologies sold by the Company as well as products supplied by its customers. Pomeroy also operates a service depot operation within this centralized facility. OUR FACILITIES The Company believes that its distribution and integration center is adequately designed to support its customers' business and technology needs for the foreseeable future. Pomeroy's distribution and integration center utilizes state-of-the-art warehouse management and enterprise resource planning ("ERP") systems in order to manage the supply chain needs of our clients, which include procurement, stage, stock, pick and management of the company's on-hand physical and perpetual inventories. The radio-frequency based warehouse management system controls and manages the flow of physical inventory from the earliest point of demand generation, purchase order creation, to the final step in the supply chain process, shipping to meet its customers' delivery and integration needs. The warehouse management system controls re-order points and directs its fulfillment needs to the product source which can deliver at the lowest possible capital cost while maintaining the speed to market required by Pomeroy's customers. The warehouse management system tracks the inventory in a real time mode, updating Pomeroy's ERP system, which then in turn updates its customers' specific technology driven supply chain management systems. The intelligence inherent within the system is flexible, allowing customization to almost any specific communication standard required by Pomeroy's diverse customer base. Essentially, Pomeroy has the ability to link its ERP and warehouse management systems to its customers' supply chain management ("SCM") systems. As a result, the Company has been able to provide its customers with product shipping information as well as the ability to efficiently process orders while safeguarding its inventory. BACKLOG Other than future sales and revenues from existing long-term contracts, Pomeroy does not have a significant backlog of business since it normally delivers and installs products purchased by its customers within 10 days from the date of order. Accordingly, backlog is not material to Pomeroy's business or indicative of future sales. From time to time, Pomeroy experiences difficulty in obtaining products from its major vendors as a result of general industry conditions. These delays have not had, and are not anticipated to have, a material adverse effect on Pomeroy's results of operations. 6 PATENTS AND TRADEMARKS The Company owns no trademarks or patents. Although Pomeroy's various dealer agreements do not generally allow the Company to use the trademarks and trade names of these various manufacturers, the agreements do permit the Company to refer to itself as an "authorized representative" or an "authorized service provider" of the products of those manufacturers and to use their trademarks and trade names for marketing purposes. Pomeroy considers the use of these trademarks and trade names in its marketing efforts to be important to its business. ACQUISITIONS Acquisitions have contributed significantly to Pomeroy's growth. The Company believes that acquisitions are one method of increasing its presence in existing markets, expanding into new geographic markets, adding experienced service personnel, gaining new product offerings and services, obtaining more competitive pricing as a result of increased purchasing volumes of particular products and improving operating efficiencies through economies of scale. In recent years, there has been consolidation among providers of computer products and services and Pomeroy believes that this consolidation will continue, which, in turn, may present additional opportunities for the Company to grow through acquisitions. The Company continually seeks to identify and evaluate potential acquisition candidates. During fiscal 2006 and 2005, the Company did not make any acquisitions. During fiscal 2004, the Company completed one acquisition. The total consideration paid consisted of $46.1 million, which was funded from cash on hand and borrowings from Pomeroy's existing line of credit. The results of operations of the acquisition are included in the consolidated statements of operations from the respective date of the acquisition. See Note 12 to the Consolidated Financial Statements for unaudited pro forma results of operations of the Company for fiscal 2004 as if the acquisition had occurred on January 6, 2004. CHANGE IN SEGMENTS During the fourth quarter of 2005, the Company realigned its management and reporting responsibilities into functional lines: Sales, Service Operations, Finance and Administrative. Management and the board of directors now review operating results on a consolidated basis. As a result the Company now reports one reportable segment and this information in this report has been revised to reflect the Company's current segment reporting. INFORMATION We make available free of charge on our web site at www.pomeroy.com our Annual --------------- Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (the "SEC"). We also make available on our web site other reports filed with the SEC under the Securities Exchange Act of 1934, including our proxy statements and reports filed by officers and directors under Section 16(a) of that Act. We do not intend for information contained in our web site to be part of this Form 10-K or any other report that we file with the SEC. ITEM 1A. RISK FACTORS The following factors, among others, are likely to affect Pomeroy's operations and financial results and should be considered in evaluating Pomeroy's outlook. Pricing Pressures ----------------- Pomeroy believes its prices and delivery terms are competitive; however, certain competitors may offer more aggressive pricing to their customers. The Company has experienced and expects continued pricing pressure due to industry consolidation and the efforts of manufacturers to sell directly to Pomeroy's customers. In addition, the general weakness in the U.S. economy has impacted Pomeroy's business. In an attempt to stimulate sales to existing and new customers, the Company believes that pricing pressures may increase in the future, which could require the Company to reduce prices, which may have an adverse impact on its operating results. Decreasing prices of Pomeroy's products and services offerings will require the Company to sell a greater number of products and services to achieve the same level of net sales and operating income. 7 Dependence on Major Customers ----------------------------- During fiscal 2006, approximately 38.5% of Pomeroy's total net product and service revenues were derived from its top 10 customers. Only one customer, IBM Corporation, accounted for more than 10% of Pomeroy's total net product and service revenues with approximately $74.5 million in revenues for fiscal 2006. The revenues generated from IBM Corporation are primarily resulting from services provided. The loss of one or more significant customers could have a material adverse impact on the Company's operating results. Government Contracts -------------------- A portion of Pomeroy's revenue is derived from contracts with state and local governments and government agencies. In the event of a dispute, the Company would have limited recourse against the government or government agency. Furthermore, future statutes and/or regulations may reduce the profitability of such contracts. In addition, certain of the Company's government contracts have no contractual limitation of liability for damages resulting from the provision of services. Dependence on Key Personnel ------------------------------ The success of Pomeroy is dependent on the services of Stephen E. Pomeroy, President and Chief Executive Officer of the Company and other key personnel. The loss of the services of Stephen E. Pomeroy, or other key personnel could have a material adverse effect on Pomeroy's business. Pomeroy has entered into employment agreements with certain of its key personnel, including Stephen E. Pomeroy. Pomeroy's success and plans for future growth will also depend on its ability to attract and retain highly skilled personnel in all areas of its business. Dependence on Technical Employees ------------------------------------ The future success of Pomeroy's services business depends in large part upon the Company's ability to attract and retain highly skilled technical employees in competitive labor markets. There can be no assurance that Pomeroy will be able to attract and retain sufficient numbers of skilled technical employees. The loss of a significant number of Pomeroy's existing technical personnel or difficulty in hiring or retaining technical personnel in the future could have a material adverse effect on the Company's operations and financial results. Dependence on Vendor Relationships ---------------------------------- The Company's current and future success depends, in part, on its relationships with leading hardware and software vendors and on its status as an authorized service provider. Pomeroy is currently authorized to service the products of many industry-leading hardware, software and internetworking product vendors. Without these relationships, the Company would be unable to provide its current range of services, principally warranty services. The Company may not be able to maintain, or attract new relationships with the computer hardware and software vendors that it believes are necessary for their business. Since Pomeroy utilizes vendor relationships as a marketing tool, any negative change in these relationships could adversely affect its financial condition and results of operations while it seeks to establish alternative relationships. In general, authorization agreements with vendors include termination provisions, some of which are immediate. The Company cannot assure that vendors will continue to authorize it as an approved service provider. In addition, the Company cannot assure that vendors, which introduce new products, will authorize it as an approved service provider for such new products. Significant product supply shortages have resulted from time to time because manufacturers have been unable to produce sufficient quantities of certain products to meet demand. The Company expects to experience some difficulty in obtaining an adequate supply of products from its major vendors, which may result in delays in completing sales. The loss of any vendor relationship, product line, or product shortage could reduce the supply and increase costs of products sold by Pomeroy and adversely impact the Company's competitive position. Growth and Future Acquisitions --------------------------------- In the past, Pomeroy has grown both internally and through acquisitions. Pomeroy continues to focus on customer satisfaction as well as execution of its market development and penetration strategies. Pomeroy's business strategy is to grow both internally and through acquisitions. There can be no assurance that, in the future, Pomeroy will be successful in repeating the growth experienced in recent years related to service revenues. Pomeroy expects future growth will result from acquisitions in addition to organic growth. In fiscal 2004, Pomeroy completed one acquisition and continues to evaluate expansion and acquisition opportunities that would complement its ongoing operations. As part of Pomeroy's growth strategy, it plans to continue to make investments in complementary companies, assets and technologies, although there can be no assurance that Pomeroy will be able to identify, acquire or profitably manage additional companies or successfully integrate such additional companies into Pomeroy without substantial costs, delays or other problems. In addition, there can be no assurance that companies acquired in the future will be profitable at the time of their acquisition or will achieve levels of profitability that justify the investment therein. 8 Acquisitions may involve a number of special risks, including, but not limited to, adverse short-term effects on Pomeroy's reported operating results, disrupting ongoing business and distracting management and employees, incurring debt to finance acquisitions or issuing equity securities which could be dilutive to existing stockholders, dependence on retaining, hiring and training key personnel, incurring unanticipated problems or legal liabilities and amortization of acquired intangible assets. Some or all of these special risks, if they occur could have a material adverse effect on Pomeroy's operations and financial results. Material Weaknesses in Internal Control over Financial Reporting ---------------------------------------------------------------- Pomeroy faces certain risks in connection with the material weaknesses it has identified in its internal control over financial reporting (See Item 9A). The material weaknesses identified for fiscal years 2004 and 2005 contributed to the delay in Pomeroy's filing of the quarterly report on Form 10-Q for the third quarter of fiscal 2005 and the restatements of the quarterly results for the first and second quarters of fiscal 2005. Pomeroy has completed the identification and implementation of modifications to controls and procedures needed to remediate the material weaknesses. In the future, if the controls assessment process required by Section 404 of the Sarbanes-Oxley Act reveals new material weaknesses or significant deficiencies, the correction of such material weaknesses or deficiencies could require remedial measures that could be costly and time-consuming. In addition, the discovery of new material weaknesses could also require the restatement of prior period operating results. If Pomeroy continues to experience material weaknesses in its internal control over financial reporting, Pomeroy could lose investor confidence in the accuracy and completeness of its financial reports, which would have an adverse effect on its stock price. If Pomeroy is unable to provide reliable and timely financial reports, its business and prospects could suffer material adverse effects. For example, under Pomeroy's current credit facility, financial statements must be presented in a timely manner. Delay in these filings would result in a default. An event of default could adversely affected Pomeroy's ability to obtain financing on acceptable terms. Business Technology Systems ---------------------------- Pomeroy relies upon the accuracy, availability and proper utilization of its business technology systems to support key operational areas including financial functions, product procurement and sales, and engagement and technician management, staffing and recruiting. To manage its growth, Pomeroy is continually evaluating the adequacy of its existing systems and procedures. Over the last year, the company has focused its efforts on improving the reliability, availability and serviceability of the technologies and applications used in support of its services business and invested in tools to improve financial reporting. The Company has also signed agreements with industry leading firms in support of its business recovery and system availability capabilities. Pomeroy anticipates that it will regularly need to make capital expenditures to upgrade and modify its business technology systems, including software and hardware, as Pomeroy grows and the needs of its business change. There can be no assurance that Pomeroy will anticipate all of the demands which expanding operations may place on its business technology systems. The occurrence of a significant system failure or Pomeroy's failure to expand or successfully implement its systems could have a material adverse effect on Pomeroy's operations and financial results. Vendor Receivables ------------------- Any change in the level of vendor rebates or manufacturer market development funds offered by manufacturers that results in the reduction or elimination of rebates or manufacturer market development funds currently received by Pomeroy could have a material adverse effect on Pomeroy's operations and financial results. In particular, a reduction or elimination of rebates related to government and educational customers could adversely affect Pomeroy's ability to serve those customers profitably. In addition, there are specific risks, discussed below, related to the individual components of vendor receivables that include vendor rebates, manufacturer market development funds and warranty receivables. The determination of an appropriate allowance is based on the deterioration in the aging of the vendor receivables, the expected resolution of the disallowed claims (see primary reasons for vendor rebate claims being disallowed in "Vendor Rebates" below) and the general posture of the OEMs regarding resolution. Vendor Rebates --------------- The most significant component of vendor receivables is vendor rebates. Vendor rebate programs are developed by OEMs allowing them to modify product pricing on a case-by-case basis (generally determined by individual customers) to maintain their competitive edge on specific transactions. Pomeroy contacts the OEM to request a rebate for a specific transaction, and if approved, the OEM provides Pomeroy with a document authorizing a rebate to be paid to Pomeroy at a later date when a claim is filed. If the business is won, Pomeroy records the sale and the cost of the sale is reduced by the amount of the rebate, which is recorded as a vendor receivable. Rebate programs involve a complex set of rules varying by manufacturer. As a result of the rules and complexity of applying the rules to each item sold, claims are often rejected and require multiple submissions before credit is given resulting in longer aging of vendor receivables than other types of receivables. In addition, sometimes a claim is rejected altogether and no credit is 9 given. Primary reasons for claims being disallowed and corresponding re-files include serial number issues (missing, incomplete, transposed, data base match-up discrepancies, etc.), pricing issues (dispute in calculation of rebate amounts) and other missing or incomplete documentation (bid letters, customer information, etc.) Pomeroy has made substantial process and system enhancements geared towards minimizing refiling rebate claims, but there is no assurance that Pomeroy will be able to successfully claim all of the vendor rebates that were passed along to the customers in a form of a reduction in sales price. Pomeroy has written off vendor receivables in the past and may do so in the future. Manufacturer Market Development Funds ---------------------------------------- Several manufacturers offer market development funds, cooperative advertising and other promotional programs to distribution channel partners. Pomeroy utilizes these programs to fund some of its advertising and promotional programs. While such programs have been available to the Company in the past, there is no assurance that these programs will be continued. Total advertising costs associated with these programs are charged to expense as incurred and are deemed immaterial. Warranty Receivables --------------------- The Company performs warranty service work on behalf of the OEM on customer product. Any labor cost or replacement parts needed to repair the product is reimbursable to Pomeroy by the OEM. It is the Company's responsibility to file for and collect these claims. The inability of the Company to properly track and document these claims could result in the loss of reimbursements. Inventory Management --------------------- Rapid product improvement and technological change resulting in relatively short product life cycles and rapid product obsolescence characterize the information technology industry. While most of the inventory stocked by Pomeroy is for specific customer orders, inventory devaluation or obsolescence could have a material adverse effect on Pomeroy's operations and financial results. Current industry practice among manufacturers is to provide price protection intended to reduce the risk of inventory devaluation, although such policies are subject to change at any time and there can be no assurance that such price protection will be available to Pomeroy in the future. In prior fiscal years, many manufacturers reduced the number of days for which they provided price protection. During fiscal 2006, most of the reductions stabilized, however, current terms and conditions remain subject to change. In addition to the price protection mentioned above, subject to certain limitations, Pomeroy currently has the option of returning inventory to certain manufacturers and distributors. The amount of inventory that can be returned to manufacturers without a restocking fee varies under Pomeroy's agreements and such return policies may provide only limited protection against excess inventory. There can be no assurance that new product developments will not have a material adverse effect on the value of the Company's inventory or that the Company will successfully manage its existing and future inventory. In addition, Pomeroy stocks parts inventory for its services business. Parts inventory is more likely to experience a decrease in valuation as a result of technological change and obsolescence. Price protection practices are not ordinarily offered by manufacturers with respect to service parts. Stock Price ------------ Pomeroy's stock price is affected by a number of factors, including quarterly variations in revenue, gross profit and operating income, general economic and market conditions, and estimates and projections by the investment community. As a result, Pomeroy's common stock may fluctuate in market price. 10 ITEM 1B. UNRESOLVED STAFF COMMENTS NONE ITEM 2. PROPERTIES Pomeroy's principal executive offices, distribution facility, national training center, and national service operations center comprised of approximately 36,000, 161,000, 22,000, and 69,000 square feet of space, respectively, are located in Hebron, Kentucky. These facilities are leased from Pomeroy Investments, LLC ("Pomeroy Investments"), a Kentucky limited liability company controlled by David B. Pomeroy, II, Chairman of the Board, under a ten-year triple-net lease agreement, which expires in July 2015. The lease agreement provides for 2 five-year renewal options. Pomeroy also has non-cancelable operating leases for its regional offices, expiring at various dates between 2007 and 2012. Pomeroy believes there will be no difficulty in negotiating the renewal of its real property leases as they expire or in finding other satisfactory space. In the opinion of management, the properties are in good condition and repair and are adequate for the particular operations for which they are used. Pomeroy does not own any real property. ITEM 3. LEGAL PROCEEDINGS Various legal actions arising in the normal course of business have been brought against Pomeroy. Management believes these matters will not have a material adverse effect on Pomeroy's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information and Holders The following table sets forth, for the periods indicated, the high and low sales price for the Common Stock for the fiscal quarters indicated as reported on the NASDAQ National Market.

Fiscal 2006 Fiscal 2005 ------------------ ------------------ High Low High Low -------- -------- -------- -------- First Quarter $ 10.73 $ 8.20 $ 16.27 $ 14.37 Second Quarter $ 9.49 $ 7.04 $ 15.38 $ 9.57 Third Quarter $ 8.31 $ 7.02 $ 13.49 $ 10.41 Fourth Quarter $ 8.81 $ 7.18 $ 11.59 $ 7.29

As of February 28, 2007, there were approximately 260 holders of record of Pomeroy's common stock. Dividends --------- During 2006 and 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 are restricted under Pomeroy's current credit facility. Under such credit facility, cash dividends and stock redemptions are limited to $5 million annually. 11 PERFORMANCE GRAPH The following Performance Graph compares the percentage of the cumulative total stockholder return on the Company's Common shares with the cumulative total return assuming reinvestment of dividends of (i) the S&P 500 Stock Index and (ii) the NASDAQ Composite Index. [GRAPHIC OMITTED]

01/05/02 01/05/03 01/05/04 01/05/05 01/05/06 01/05/07 -------- -------- -------- -------- -------- -------- Pomeroy 100 86.50 105.60 104.70 60.90 57.50 ----------- -------- -------- -------- -------- -------- -------- S&P 500 100 77.49 95.71 100.96 108.61 120.23 ----------- -------- -------- -------- -------- -------- -------- NASDAQ COMP 100 67.40 99.40 101.60 110.60 117.50 ----------- -------- -------- -------- -------- -------- --------

12 Unregistered Sales of Equity Securities and Use of Proceeds ----------------------------------------------------------- NONE. PURCHASES OF EQUITY SECURITIES BY THE COMPANY On March 31, 2006, the Board of Directors of the Company authorized a program to repurchase up to 500,000 shares, but no more than $5.0 million. The Company intends to effect such repurchases, in compliance with rule 10b-18 under the Securities Exchange Act of 1934. The acquired shares will be held in treasury or cancelled. The Company anticipates financing the repurchases program out of working capital. This stock redemption program was approved to remain in place and in full force/effect for a period of 18 months.

Issuer Purchases of Equity Securities (c) Total number of shares (b) Average purchased as part (d) Maximum number (a) Total number of price paid per of publicly of shares that may yet Period shares purchased share announced plan be purchased under the plan 4/6/06 - 5/5/06 - $ - - 500,000 5/6/06 - 6/5/06 - $ - - 500,000 6/6/06 - 7/5/06 20,000 $ 7.17 20,000 480,000 7/6/06-8/5/06 11,980 $ 7.21 11,980 468,020 8/6/06-9/5/06 49,750 $ 7.78 49,750 418,270 9/6/06-10/5/06 90,908 $ 7.97 90,908 327,362 10/6/06-11/5/06 - $ - - 327,362 11/6/06-12/5/06 50,399 $ 7.42 50,399 276,963 12/6/06-1/5/07 97,378 $ 7.63 97,378 179,585 ------------------- ---------------------------------------------- Total 320,415 320,415 179,585 =================== ==============================================

13

ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share data) For the Fiscal Years --------- --------- --------- --------- --------- 2006 2005 2004(1) 2003(2) 2002(3) --------- --------- --------- --------- --------- Consolidated Statement of Operations Data: Net product and service revenues $631,632 $714,749 $742,290 $598,423 $702,800 Cost of revenues 539,596 623,019 647,154 528,030 615,135 --------- --------- --------- --------- --------- Gross profit 92,036 91,730 95,136 70,393 87,665 --------- --------- --------- --------- --------- Operating expenses: Selling, general and administrative (4,5,6,9) 80,973 86,010 72,346 50,279 59,653 Depreciation and amortization 4,894 5,568 4,393 5,319 5,720 Goodwill charge (7) 3,472 16,000 - - - --------- --------- --------- --------- --------- Total operating expenses 89,339 107,578 76,739 55,598 65,373 --------- --------- --------- --------- --------- Income (loss) from operations 2,697 (15,848) 18,397 14,795 22,292 Interest income (582) (193) (310) (133) - Interest expense 1,149 1,028 561 58 541 --------- --------- --------- --------- --------- Interest expense (income), net 567 835 251 (75) 541 --------- --------- --------- --------- --------- Income (loss) before income tax 2,130 (16,683) 18,146 14,870 21,751 Income tax expense (benefit) (8) 987 (6,021) 7,213 5,799 6,742 --------- --------- --------- --------- --------- Net income (loss) $ 1,143 $(10,662) $ 10,933 $ 9,071 $ 15,009 ========= ========= ========= ========= ========= Earnings (loss) per common share (basic) $ 0.09 $ (0.85) $ 0.89 $ 0.74 $ 1.18 Earnings (loss) per common share (diluted) $ 0.09 $ (0.85) $ 0.88 $ 0.73 $ 1.18 Consolidated Balance Sheet Data: Working capital $ 90,538 $ 84,022 $ 80,959 $116,786 $123,334 Long-term debt, net of current maturities - - 250 913 - Equity 205,211 204,486 212,722 199,797 203,674 Total assets 305,021 295,145 332,888 269,199 248,496

1) During fiscal 2004, the Company and Pomeroy Acquisition Sub, Inc., a wholly owned subsidiary of the Company, completed a merger with Alternative Resources Corporation ("ARC"). See Notes 5 and 12 of Notes to Consolidated Financial Statements. 2) During fiscal 2003, Pomeroy acquired all the outstanding common stock of Micrologic Business Systems of K.C., Inc. and acquired certain assets of eServ Solutions Group, LLC. 3) During fiscal 2002, Pomeroy acquired certain assets of Verity Solutions, LLC. During fiscal 2002, the Company sold substantially all of the assets of TIFS. 4) During fiscal 2006, 2005, 2003 and 2002 Pomeroy increased its allowance against trade and vendor receivables by $1.7 million, $2.0 million, $0.2 million and $0.9 million, respectively. 5) During fiscal 2003, Pomeroy's results include a charge of $150 related to a litigation settlement. During fiscal 2002, Pomeroy's results include a charge of $300 related to a litigation settlement. 14 6) During fiscal 2006, the Company recorded severance charges totaling $0.1 million. During fiscal 2005, the Company recorded severance charges totaling $0.9 million resulting primarily from a re-alignment of the structure of the Company's internal organization. Additionally, during fiscal 2005, the Company recorded restructuring charges aggregating $1.4 million due to unrecoverable assets related to the Company's former wholly-owned subsidiary, Technology Integration Financial Services ("TIFS"). Substantially all of the assets of TIFS were sold in fiscal 2002. During fiscal 2004, Pomeroy's results include an after tax charge of $1.5 million ($0.12 per diluted share) related to the Company recording restructuring and severance charges totaling $2.4 million. During fiscal 2002, Pomeroy's results include an after tax charge of $2.5 million ($0.20 per diluted share) related to the Company recording an increase in reserves and a restructuring charge totaling $4.0 million. 7) During fiscal 2006 and 2005, Pomeroy recorded a charge for the write down of goodwill totaling $3.5 million and $16 million, respectively. 8) During fiscal 2002, Pomeroy's results include an income tax benefit of $1.6 million ($0.13 per diluted share) due to a tax accounting change. 9) During fiscal 2006, Pomeroy's results include $1.6 million related to share based compensation due to adoption of FAS 123R. This expense was $0 in the prior years. QUARTERLY RESULTS OF OPERATIONS - UNAUDITED (in thousands, except per share data) The following table sets forth certain unaudited operating results of each of the eight prior quarters. This information is unaudited, but in the opinion of management, includes all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of operations of such periods.

Fiscal 2006 -------------------------------------------------------- First Second Third Fourth Quarter (1) Quarter (3) Quarter (3,4) Quarter (3) ------------ ------------ -------------- ------------ Net product and service revenues $ 150,692 $ 164,118 $ 154,933 $ 161,889 Gross profit $ 21,038 $ 24,783 $ 22,660 $ 23,555 Net income (loss) $ (1,419) $ 2,031 $ (1,012) $ 1,543 Comprehensive income (loss) $ (1,419) $ 2,027 $ (1,013) $ 1,539 Earnings (loss) per common share: Basic $ (0.11) $ 0.16 $ (0.08) $ 0.12 Diluted $ (0.11) $ 0.16 $ (0.08) $ 0.12

Fiscal 2005 -------------------------------------------------------- First Second Third Fourth Quarter (1) Quarter Quarter (1,2,3) Quarter (1,4) ------------ -------- ---------------- -------------- Net product and service revenues $ 165,832 $192,025 $ 185,001 $ 171,891 Gross profit $ 22,816 $ 25,147 $ 22,516 $ 21,251 Net income (loss) $ 565 $ 2,365 $ (1,480) $ (12,112) Comprehensive income (loss) $ 667 $ 2,365 $ (1,480) $ (12,112) Earnings (loss) per common share: Basic $ 0.05 $ 0.19 $ (0.12) $ (0.96) Diluted $ 0.04 $ 0.19 $ (0.12) $ (0.96)

1. During fiscal 2006 and 2005, the Company recorded severance charges totaling $0.1 million in first quarter fiscal 2006 and $0.9 million in fiscal 2005 of which $0.1 million, $0.3 million and $0.5 million were in the first, third and fourth quarters, respectively, resulting primarily from a re-alignment of the structure of the Company's internal organization. 15 2. During the third quarter of fiscal 2005, the Company recorded restructuring charges aggregating $1.4 million due to unrecoverable assets related to the Company's former wholly-owned subsidiary, Technology Integration Financial Services ("TIFS"). Substantially all of the assets of TIFS were sold in fiscal 2002. 3. During fiscal 2006, Pomeroy increased its allowance against trade and vendor receivables totaling $1.7 million of which $0.2 million, $0.3 million and $1.2 million were in the second, third and fourth quarter, respectively and $2.0 million in the third quarter of fiscal 2005. 4. During the third quarter of fiscal 2006 and the fourth quarter of fiscal 2005, Pomeroy recorded a goodwill impairment charge of $3.5 million and $16 million, respectively. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Company's results of operation and financial position should be read in conjunction with its consolidated financial statements included elsewhere in this report. In addition, the factors described under "Risk Factors" should be considered in evaluating the Company's outlook. CRITICAL ACCOUNTING POLICIES In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Management believes that it consistently applies judgments and estimates and such consistent application results in financial statements and accompanying notes that fairly represent all periods presented. However, any errors in these judgments and estimates may have a material impact on the Company's statement of operations and financial condition. Critical accounting policies, as defined by the Securities and Exchange Commission, are those that are most important to the portrayal of the Company's financial condition and results of operations and require management's most difficult and subjective judgments and estimates of matters that are inherently uncertain. The Company considers its critical accounting policies to be (1) revenue recognition, (2) vendor and trade receivable allowances, (3) valuation of long-lived assets, (4) income taxes and (5) contingencies and accruals. Revenue recognition In December 2003, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, which superseded SAB 101, Revenue Recognition in Financial Statements. SAB 104 updated certain interpretive guidance included in SAB 101, including the SAB 101 guidance related to multiple element revenue arrangements, to reflect the issuance by the Emerging Issues Task Force ("EITF") of EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. Generally, the Company, in accordance with SAB 104, recognizes revenue on the sale of products when the products are shipped, persuasive evidence of an arrangement exists, delivery has occurred, collection of the relevant receivable is probable and the sales price is fixed or determinable. Generally the Company, in accordance with the requirements of SAB 101, determines if revenue should be reported based on (a) the gross amount billed to a customer because it has earned revenue from the sale of the goods or services or (b) the net amount retained (that is, the amount billed to the customer less the amount paid to a supplier) because it has earned a commission or fee by determining if the Company performs as an agent or broker without assuming the risks and rewards of ownership of the goods, in that case sales would be reported on a net basis. When the Company provides a combination of products and services to customers, the arrangement is evaluated under Emerging Issues Task Force Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables," or EITF 00-21, which addresses certain aspects of accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. The application of the appropriate accounting guidance to our revenue requires judgment and is dependent upon the specific transaction and whether the sale includes items such as configuration, training, installation, service, or a combination of these items. Service revenue is recognized when the applicable services are provided or for service contracts, ratably over the lives of the contracts. Vendor and trade receivable allowances Pomeroy maintains allowances for doubtful accounts on both vendor and trade receivables for estimated losses resulting from the inability of its customers or vendors to make required payments. The determination of a proper allowance for vendor receivables is based on an ongoing analysis as to the recoverability of the Company's vendor receivable portfolio based primarily on account aging. The determination of a proper allowance for trade receivables is based on an ongoing analysis as to the credit quality and recoverability of the Company's trade receivable portfolio. Factors considered are account aging, historical bad debt experience, current economic trends and others. The analysis is performed on both vendor and trade receivable portfolios. A separate allowance account is maintained based on each analysis. 17 Valuation of long-lived assets Long-lived assets, including property and equipment, goodwill and other intangible assets are reviewed for impairment when events or changes in facts and circumstances indicate that their carrying amount may not be recoverable. Events or changes in facts and circumstances that Pomeroy considers as impairment indicators include the following: - Significant underperformance of the Company's operating results relative to expected operating results; - Net book value compared to fair value; - Significant adverse economic and industry trends; - Significant decrease in the market value of the asset; - Significant changes to the asset since the Company acquired it; and - The extent that the Company may use an asset or changes in the manner that the Company may use it. When the Company determines that one or more impairment indicators are present during the Company's annual testing of its goodwill, excluding long-lived assets, Pomeroy compares the carrying amount of the asset to the net future undiscounted cash flows that the asset is expected to generate. If the carrying amount of the asset is greater than the net future undiscounted cash flows that the asset is expected to generate, Pomeroy would recognize an impairment loss to the extent the carrying value of the asset exceeds its fair value. An impairment loss, if any, would be reported in the Company's results of operations. When the Company determines that one or more impairment indicators are present for its goodwill, Pomeroy compares its reporting unit's carrying value to its fair value. During fiscal 2005, the Company re-aligned the structure of its internal organization such that management and the board of directors now review operating results on a consolidated basis. As a result, the Company now has one reporting unit for goodwill testing. In fiscal 2004 the Company had two reporting units for goodwill testing which were a products reporting unit and a services reporting unit. The Company has adopted January 5 as the valuation date for the annual testing. Write down of goodwill, if any, would be reported in the Company's results of operations. During the third quarter of fiscal 2006 and the fourth quarter of fiscal 2005, the Company recorded a write down of goodwill of $3.5 million and $16 million, respectively as further discussed herein. Income taxes Pomeroy is required to estimate income taxes in each of the jurisdictions in which the Company operates. This process involves estimating the Company's actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company's consolidated balance sheet. The Company must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent that the Company believes recovery is not likely, the Company must establish a valuation allowance. To the extent the Company establishes a valuation allowance in a period, the Company must include an expense within the tax provision in the statement of operations. Pomeroy has not recorded a valuation allowance to reduce the carrying amount of recorded deferred tax assets representing future deductions, as the Company believes it will have sufficient taxable income in the future to realize these deductions. Pomeroy considers future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. In the event Pomeroy were to determine that it would not be able to realize its deferred tax assets in the future, an adjustment to the deferred tax asset would decrease income in the period such determination was made. Contingencies and Accruals We are subject to the possibility of various loss contingencies and accruals arising in the ordinary course of business. We accrue an estimated loss contingency when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. RESULTS OF OPERATIONS The following table sets forth for the periods presented information derived from our consolidated statements of operations expressed as a percentage of net product and service revenues: 18

Net Product and Service Revenues Financial Results For the Fiscal Years -------------------------------------- ------------------------------------------------------------------------- % of % of % of 2006 Revenues 2005 Revenues 2004 Revenues ------------------------------------------------------------------------- Net product and service revenues: Product $ 373,232 59.1% $ 483,431 67.6% $ 545,115 73.4% Service 258,400 40.9% 231,318 32.4% 197,175 26.6% ------------------------------------------------------------------------- Total revenues 631,632 100.0% 714,749 100.0% 742,290 100.0% ------------------------------------------------------------------------- Gross profit Product 29,543 4.7% 36,048 5.0% 41,097 5.5% Service 62,493 9.9% 55,682 7.8% 54,039 7.3% ------------------------------------------------------------------------- Total gross profit 92,036 14.6% 91,730 12.8% 95,136 12.8% ------------------------------------------------------------------------- Gross profit % Product % 7.9% 7.5% 7.5% Service % 24.2% 24.1% 27.4% Operating expenses: Selling, general and administrative 80,973 12.8% 86,010 12.0% 72,346 9.7% Depreciation and amortization 4,894 0.8% 5,568 0.8% 4,393 0.6% Goodwill charge 3,472 0.5% 16,000 2.2% - 0.0% ------------------------------------------------------------------------- Total operating expenses 89,339 14.1% 107,578 15.0% 76,739 10.3% ------------------------------------------------------------------------- Income (loss) from operations 2,697 0.5% (15,848) -2.2% 18,397 2.5% Interest income (582) -0.1% (193) 0.0% (310) 0.0% Interest expense 1,149 0.2% 1,028 0.1% 561 0.0% ------------------------------------------------------------------------- Interest expense, net 567 0.1% 835 0.1% 251 0.0% ------------------------------------------------------------------------- Income (loss) before income tax 2,130 0.4% (16,683) -2.3% 18,146 2.5% Income tax expense (benefit) 987 0.2% (6,021) -0.8% 7,213 1.0% ------------------------------------------------------------------------- Net income (loss) $ 1,143 0.2% $ (10,662) -1.5% $ 10,933 1.5% =========================================================================

19 FISCAL YEAR 2006 COMPARED TO FISCAL YEAR 2005 Total Net Product and Service Revenues. Total net product and service revenues decreased to $631.6 million in fiscal 2006 from $714.7 million in fiscal 2005. Product sales decreased $110.2 million to $373.2 million in fiscal 2006 from $483.4 million in fiscal 2005. The decrease in product sales is primarily attributable to several factors: continuing competitive pressure in the marketplace; reduction in IT spending by our customers; and delays in IT project deployments by our customers. Product margins increased to 7.9% in fiscal 2006 compared to 7.5% in fiscal 2005. The year over year product margins increased due to the mix of product sales. Service revenues increased $27.1 million to $258.4 million in fiscal 2006 from $231.3 million in fiscal year 2005. The increase in service revenues relates primarily to the growth from new service contracts. Service margins increased to 24.2% in fiscal 2006 compared to 24.1% in fiscal 2005. The Company continues to take steps to improve utilization and productivity in order to increase margins. Gross Profit. Gross profit increased $0.3 million to 92.0 million in fiscal 2006 from $91.7 million in fiscal 2005. Gross profit, as a percentage of revenue, increased to 14.6% in fiscal 2006 from 12.8% in fiscal 2005. This increase in gross margin is primarily due to a change in the product/service mix, with a greater percentage from higher margin service revenue that produced higher gross margins. Operating Expenses. Total operating expenses decreased $18.3 million to $89.3 million in fiscal 2006 from $107.6 million in fiscal 2005. The decrease is primarily the result of decreases in provision for doubtful accounts of $0.3 million, restructuring and severance charges of $2.2 million, a reduction in the goodwill charge of $12.5 million and employee benefit costs. Expressed as a percentage of total net product and service revenues, these expenses decreased to 14.1% in fiscal 2006 from 15.0% for fiscal 2005. Write Down of Goodwill. Pursuant to the provisions of SFAS 142, the Company performs its goodwill impairment testing on an annual basis. Historically, the Company has performed its annual goodwill impairment test based on the year end valuation date of its fiscal year and reflects the results of that testing in its annual consolidated financial statements included in its Annual Report on Form 10-K. As part of its goodwill impairment testing, the Company reviews various factors, such as the market price of the Company's common stock, discounted cash flows from projected earnings and values for comparable companies to determine whether impairment exists. For the year ended January 5, 2006, the Company determined there was an impairment. The primary factor leading to the impairment was the Company's declining stock price in the fourth quarter of 2005. The second step of the goodwill impairment test was not completed prior to the issuance of the fiscal 2005 financial statements. Therefore, the Company recognized a charge of $16 million as a reasonable estimate of the impairment loss in its fiscal 2005 financial statements. During the third quarter of fiscal 2006, the Company completed the second step of the goodwill analysis as required under SFAS 142. The second step of the goodwill impairment test used to measure the amount of the impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. As a result, in our step two analysis, the Company allocated the fair value of the reporting unit determined in step one to all of the assets and liabilities of the Company (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill. The implied value of the goodwill calculated in our step two analysis was approximately $97.5 million compared to goodwill initially carried on the balance sheet of approximately $117.0 million as of January 5, 2006, indicating a goodwill impairment of approximately $19.5 million. As discussed above, an initial estimated impairment of $16 million was recorded for the year ended January 5, 2006. As a result of completing our step two analysis in the third quarter of fiscal 2006, an additional impairment of approximately $3.5 million was recorded in fiscal 2006. Income (Loss) from Operations. Income from operations increased $18.5 million, to $2.7 million in fiscal 2006 from a loss of $15.8 million in fiscal 2005. The Company's operating margin increased to 0.5% in fiscal 2006 as compared to a negative 2.2% in fiscal 2005. This increase is a result of the decrease in operating expenses as described above. 20 Net Interest Expense. Net interest expense was $0.6 million during fiscal 2006 as compared to $0.8 million during fiscal 2005. This decrease in net interest expense was a result of decreased borrowings under the Company's credit facility and an increase in interest earned due to cash on hand, offset by an increase due to the accretion of interest of future rental payments that were accrued for a leased facility that was part of the ARC acquisition. Income Taxes. The Company's effective income tax rate was 46.3% in fiscal 2006 compared to a benefit of 36.1% for fiscal 2005. This fluctuation was principally related to the reduction of book loss and the permanent differences being a higher percentage of book income. The primary permanent difference was related to the 50% limitation on business meals. Income tax expense was $1.0 million during fiscal 2006 as compared to a benefit of $6.0 million during fiscal 2005. Net Income (Loss). Net income increased $11.8 million, to $1.1 million in fiscal 2006 from a $10.7 million net loss in fiscal 2005. The increase was a result of the factors described above. FISCAL YEAR 2005 COMPARED TO FISCAL YEAR 2004 Total Net Product and Service Revenues. Total net product and service revenues decreased $27.6 million, or 3.7%, to $714.7 million in fiscal 2005 from $742.3 million in fiscal 2004. Product sales decreased $61.7 million, or 11.3%, to $483.4 million in fiscal 2005 from $545.1 million in fiscal 2004. This decrease is the result of customers not renewing product sales agreements and certain customers reducing expenditures during 2005. The loss of sales renewals is primarily a result of personnel turnover as the Company began implementing certain changes to the delivery organization. The Company believes these changes will have a positive impact on future net sales and revenues. Service revenues increased $34.1 million, or 17.3%, to $231.3 million in fiscal 2005 from $197.2 million in fiscal year 2004. This increase relates to increases in revenue associated with the acquisition of Alternative Resources Corporation ("ARC") on July 23, 2004. Gross Profit. Gross profit margin was 12.8% of net product and service revenues in fiscal 2005 and 2004, respectively. This gross profit was driven by increasing margin contribution from service revenue offset by declining margin contribution from product sales. On a forward looking basis, the Company expects to continue its aggressive product pricing in order to maintain market share. Reduced utilization rates from new engagements and service parts write offs has also resulted in downward pressure on service margins. Additionally, the Company expects to continue increasing the breadth and depth of its service offerings, which will have a continued impact on service gross margin. Factors that may have an impact on gross margin in the future include technical employee utilization rates, the mix of the type of products sold and services provided, the percentage of equipment or service sales with lower-margin customers, and the Company's decision to aggressively price certain products and services. Operating Expenses. Total operating expenses increased $30.9 million, or 40.3%, to $107.6 million in fiscal 2005 from $76.7 million in fiscal 2004. The increases are primarily the result of increase in expenses due to the acquisition of ARC in July 2004, a $2.0 million increase in provision for doubtful accounts, $0.5 million increase in non-trade accounts receivable reserves and an increase of $0.9 million in outside consultants fees associated with third quarter late filing and $16.0 million recorded for write down of goodwill (discussed below). Expressed as a percentage of total net product and service revenues, these expenses increased to 15.0% in fiscal 2005 from 10.3% for fiscal 2004. On a forward-looking basis, the Company expects to continue monitoring its selling, general and administrative expenses for strict cost controls. Restructuring and Severance Charges. Restructuring and severance charges reported were $2.3 million for fiscal 2005 and $2.4 million for fiscal 2004. During fiscal 2005, the Company recorded severance charges totaling $0.9 million resulting primarily from a re-alignment of the organizational structure of the Company. Additionally, during fiscal 2005, the Company recorded restructuring charges aggregating $1.4 million due to unrecoverable assets related to the Company's former wholly-owned subsidiary, Technology Integration Financial Services ("TIFS"). Substantially all of the assets of TIFS were sold in fiscal 2002. During fiscal 2004, in connection with certain strategic initiatives, the Company recorded restructuring and severance charges of $1.0 million. The restructuring charge is associated with costs of facilities and processes of Pomeroy that have or will become duplicative or redundant as ARC operations are integrated into the Company. The Company also recorded a non-recurring, one-time charge for severance in the amount of $1.4 million related to the resignation of David B. Pomeroy II as CEO of the Company. David B. Pomeroy II continues to serve as Chairman of the Board of the Company. 21 Write Down of Goodwill. As part of its goodwill impairment testing, the Company reviews various factors, such as the market price of the Company's common stock, discounted cash flows from projected earnings and values for comparable companies to determine whether impairment exists. The Company worked with a valuation firm to assess goodwill impairment and determined there was impairment. The primary factor leading to the impairment was the Company's declining stock price in the fourth quarter of 2005. The second step of the goodwill impairment test was not complete. Therefore, the Company recognized a charge of $16.0 million as a reasonable estimate of the impairment loss in its fiscal 2005 financial statements. The actual impairment loss, once determined by the Company, differed from this estimate. An adjustment to this estimated impairment loss based on the completion of the measurement of the impairment loss was recognized in fiscal 2006 as a change in estimate. Income (Loss) from Operations. Income (loss) from operations decreased $34.2 million, to a loss of $15.8 million in fiscal 2005 from income of $18.4 million in fiscal 2004. The Company's operating margin decreased to a negative 2.2% in fiscal 2005 as compared to a positive 2.5% in fiscal 2004. This decrease is a result of the decrease in sales and in gross profit and the increase in operating expenses as described above. Net Interest Expense. Net interest expense was $0.8 million during fiscal 2005 as compared to $0.3 million during fiscal 2004. This increase in net interest expense was primarily the result of increased average borrowings under our credit facility relating to the ARC acquisition. Income Taxes. Income tax benefit was $6.0 million during fiscal 2005 as compared to expense of $7.2 million during fiscal 2004. This decrease was principally related to the loss recognized in fiscal 2005. Net Income (Loss). Net income decreased $21.6 million, to a $10.7 million net loss in fiscal 2005 from $10.9 million net income in fiscal 2004. The decrease was a result of the factors described above. 22 LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $30.1 million in fiscal 2006. Cash used in investing activities was $0.7 million, which included $2.6 million related to certificate of deposits offset by $2.3 million for capital expenditures and $0.7 million for earn out provisions related to acquisitions completed in prior years and $0.3 million for covenants not-to-compete as required per agreements. Cash used in financing activities was $17.3 million which included $15.3 million of payments on short-term borrowings, $2.5 million for the purchase of treasury stock, and was offset by $0.2 million from the exercise of stock options and related excess tax benefit, and $0.3 million proceeds from the employee stock purchase plan. The amount of cash derived from operating activities will vary based on a number of business factors which may change from time to time, including terms of available financing from vendors, downturns in the Company's business and/or downturns in the businesses of the Company's customers. However, a growth or decline in services revenue in conjunction with a change in the proportion of services revenue to total revenue is an underlying driver of operating cash flow during the period of growth because a majority of the Company's service revenue is generated based upon the billings of the Company's technicians. The cash outlay for these labor/payroll costs is incurred bi-weekly with each pay period. The invoicing for the service is generated on various billing cycles as dictated by the customers, and the respective cash inflow typically follows within 30 to 60 days of invoice date, which may be as long as 60 to 120 days from the time the services are performed. This differs from product revenue in that the time period between the time that the Company incurs the cost to purchase the products and collects the revenue from its customer is typically shorter, usually from 0 to 60 days, and the Company primarily orders inventory for a particular customer rather than stocking large amounts of inventory. The Company anticipates an increase in service revenue and in the proportion of service revenue to total revenue which, if it occurs, may result in a significant decrease in cash flows from operating activities during periods of significant growth or periods of excess technical capacity. In addition, certain services, primarily outsourcing contracts for the Company's Life Cycle Services, require that the Company maintain a specific parts inventory for servicing the customer; thus, an increase or decrease in the type of services provided can impact inventory levels and operating cash flows. Cash flows provided by operating activities in fiscal 2006 were $30.1 million as compared to cash flows used in operating activities of $4.4 million for fiscal 2005. The increase in cash flows from operating activities in fiscal 2006 compared to fiscal 2005 resulted primarily from timing of payments on accounts payable, offset by a reduction in accounts receivable and inventories. Accounts payable and floor plan financing increased $27.7 million, primarily due to increased use of subcontractors on new outsourcing contracts. Trade, vendor and other receivables increased $8.2 million primarily due to timing of payments from customers and vendors. Inventories increased $2.6 million due to customer owned inventory not being shipped by the end of the year. Cash flows used in operating activities in fiscal 2005 were $4.4 million as compared to cash flows provided by operating activities of $5.8 million for fiscal 2004. The decrease in cash flows from operating activities in fiscal 2005 compared to fiscal 2004 resulted from accounts payable and floor plan financing decrease of $25.4 million which is primarily due to a decision to aggressively pursue cash discounts and to the decline in business and by a reduction in trade, vendor and other accounts receivable of $9.2 million due to timing of payments and to the decline in business A significant part of Pomeroy's inventories are financed by floor plan arrangements with third parties. At January 5, 2007, these lines of credit totaled $78.5 million, including $75.0 million with GE Commercial Distribution Finance ("GECDF") and $3.5 million with IBM Credit Corporation ("ICC"). Borrowings under the GECDF floor plan arrangements are made on thirty-day notes. Borrowings under the ICC floor plan arrangements are made on fifteen-day notes. All such borrowings are secured by the related inventory. Financing on substantially all of the arrangements is interest free. 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 million Syndicated Credit Facility Agreement with GECDF. The credit facility has a three-year term and its components include a maximum of $75 million for inventory financing and a revolving line of credit, collateralized primarily by accounts receivable, of up to $110 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 million. Under the agreement, the credit facility provides a letter of credit facility of $5 million. Under the credit facility, the interest rate is based on the London InterBank Offering Rate ("LIBOR") and a pricing grid. As of January 5, 2007 the adjusted LIBOR rate was 7.57%. This credit facility expires June 28, 2007. At January 5, 2007 the Company did not have a balance outstanding under the credit facility and the amount available was $56.5 million. At January 5, 2006, the Company had a balance outstanding under the credit facility of $15.3 million. The credit facility is collateralized by substantially all of the assets of Pomeroy, except those assets that 23 collateralize certain other financing arrangements. Under the terms of the credit facility, the Company is subject to various financial covenants. As of January 5, 2007. Pomeroy was in compliance with those financial covenants. Pomeroy believes that the anticipated cash flow from operations and current financing arrangements will be sufficient to satisfy Pomeroy's capital requirements for the next twelve months. The Company's credit facility expires June 28, 2007. The Company intends to negotiate a new credit facility with terms sufficient for its financing needs and does not anticipate any problems securing a new credit facility before June 28, 2007. However if the company is unable to negotiate a new credit facility, it could adversely effect the Company's ability to operate. On March 31, 2006, the Board of Directors of the Company authorized a program to repurchase up to 500,000 shares, at an aggregate price of no more than $5.0 million. The Company intends to effect such repurchases, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. The acquired shares will be held in treasury or cancelled. The Company anticipates financing the repurchase program out of working capital. This stock redemption program was approved to remain in place and in full force/effect for a period of 18 months. During fiscal 2006, the Company purchased 320.4 thousand shares at an average price per share of $7.67 at a total cost of $2.5 million. Off-Balance Sheet Arrangements and Contractual Obligations Aggregated information about the Company's contractual obligations as of January 5, 2007 is presented in the following table:

Payments due by period ------------------------------------------------------- LESS THAN MORE THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS ------------------------------------------------------------------------------------------- Operating leases $17,873 $ 4,052 $ 5,114 $ 3,243 $ 5,464 Restructuring payments 3,599 1,286 2,313 - - Floor plan arrangements 17,226 17,226 - - - ------------------------------------------------------- Total contractual cash obligations $38,698 $ 22,564 $ 7,427 $ 3,243 $ 5,464 =======================================================

The operating leases, shown above, are not recorded on the consolidated balance sheet. Operating leases are utilized in the normal course of business. The expected timing or payment of obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on changes to agreed-upon amounts for some obligations. Impact of Recent Accounting Pronouncements In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, "Accounting for Income Taxes" ("FASB No. 109"). FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company is currently in the process of determining the impact, if any, that the adoption of FIN 48 will have on the consolidated financial statements. In September 2006, the SEC issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB No. 108"), to address diversity in practice in quantifying financial statement misstatements. SAB No. 108 requires the Company to quantify misstatements based on their impact on each of its financial statements and related disclosures. SAB No. 108 is effective as of the end of the Company's 2006 fiscal year, allowing a one-time transitional cumulative effect 24 adjustment to retained earnings as of January 6, 2006 for errors that were not previously deemed material, but are material under the guidance in SAB No. 108. The Company determined there was no impact on its financial statements by adopting SAB No. 108. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective as of the beginning of the Company's 2008 fiscal year. The Company is currently evaluating the impact of adopting SFAS No. 157 on its financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to interest rate risk primarily through its credit facility with GECDF. Currently, the Company does not have any significant financial instruments for trading or other speculative purposes or to manage interest rate exposure. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Registrant hereby incorporates the financial statements required by this item by reference to Item 15 hereof. 25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During fiscal 2006, the Company changed its independent accounting firm as a result of the resignation of Crowe Chizek and Company LLC ("Crowe Chizek"), which became effective May 16, 2006. As reported in the Company's Form 8-K filed on April 26, 2006 and amended May 19, 2006, (1) there was no disagreement between the Company and Crowe Chizek on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of Crowe Chizek, would have caused it to make a reference to the subject matter of the disagreement(s) in connection with its report, and (2) the Company did not have any reportable events as described under Item 304 (a)(1)(iv) of Regulation S-K except for the existence of material weaknesses in the Company's internal control over financial reporting as disclosed by the Company at January 5, 2005 and January 5, 2006 and concurred with by Crowe Chizek. On July 24, 2006, the Company engaged BDO Seidman, LLP, as its independent registered public accounting firm for the fiscal year ended January 5, 2007, as reported in the Company's Form 8-K filed on July 28, 2006. ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Management of Pomeroy IT Solutions, Inc (the "Company") evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), as of the end of the period covered by this report. Our management, including the Chief Executive Officer and Chief Financial Officer, supervised and participated in the evaluation. Based on the evaluation, management concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us in the 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. MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of January 5, 2007. In making this assessment, the Company's management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on such assessment, management has concluded that the Company's internal control over financial reporting was effective as of January 5, 2007. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING Our management report on internal control over financial reporting for the year ended January 5, 2006 described four material weaknesses in our internal control over financial reporting with respect to; service billing calculations and revenue recognition related to service activity, financial reporting and close function to appropriately apply generally accepted accounting principles ensuring the adequacy of amounts and completeness of disclosures in the consolidated financial statements, computer applications used for financial reporting and payroll process. These material weaknesses continued to exist as of the end of the first three quarters of 2006. In the fourth quarter of 2006, we completed the implementation and testing of the remedial measures put in place to address these material weaknesses. The remediation plans included the following: Actions Relating to Maintaining Effective Control Over The Accrual of Service Billing Calculations and Service Revenue Recognition. 26 Our remediation work focused on service parts, service contracts, service invoicing and subcontracting processes to improve their internal controls over financial reporting. The service revenue and expense recognition processes and procedures were assessed and remediation plans were implemented during the 3rd quarter of 2006. Contract and engagement approval procedures were put in place in order to verify that terms are established and agreed upon prior to work being performed. Procedures were put in place to give adequate ownership, accountability, and timely processing of transactions related to service parts inventory. Reporting mechanisms and procedures were put in place to ensure that time is submitted, approved, and billed in a timely manner and recorded in the correct period for both Pomeroy employees and subcontractors. The Company completed the remediation and testing during the fourth quarter. Actions Relating to Maintaining Effective Control Over Financial Close and Reporting Process. During the third quarter we developed and implemented several new accounting policies and procedures. During the fourth quarter of 2006 we developed and implemented more accounting policies. We have developed and implemented more structured and meaningful general ledger account reconciliations that now reflect reconciling items that will lead to more timely resolution and proper account classifications. A detailed finance organization training plan on financial controls, policies and procedures, account reconciliations, GAAP and SEC disclosure checklists was implemented during the second quarter of 2006. During the third quarter, the Company fully documented its Financial Close and Reporting Process. All financial close and reporting controls were fully remediated and tested in the fourth quarter. Actions Related to Maintaining Effective Control Over Computer Applications Used in Financial Reporting. The Company has developed and implemented controls over system changes and upgrades. In addition, the Company has addressed the necessary changes to resolve the application issues associated with improper system access rights by developing and implementing an IT Security Access Policy. A Segregation of Duties Framework was implemented in the fourth quarter to ensure conflicts within key applications had been remediated or mitigated. These controls were fully remediated and tested in the fourth quarter. Actions Related to Maintaining Effective Controls Over the Payroll Process. We have implemented new payroll policies and procedures for timely notification of terminated employees. The Company implemented additional procedures, including automated monitoring controls, that will hold one-up managers accountable and responsible for timely notifications of terminated employees. These controls were fully remediated and tested in the fourth quarter. In connection with this testing, and in connection with the evaluation described in the above paragraph ("Evaluation of Disclosure Controls and Procedures"), management has concluded that all of the material weaknesses have been remediated as of January 5, 2007. Management considers the remediation of these material weaknesses during our quarter ended January 5, 2007 to represent a change that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The Company's independent registered public accounting firm, BDO Seidman, LLP, has issued an audit report on management's assessment of the effectiveness of the Company's internal control over financial reporting as of January 5, 2007, which follows. 27 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Pomeroy IT Solutions, Inc. Hebron, Kentucky We have audited management's assessment, included in the accompanying Item 9A, Controls and Procedures, that Pomeroy IT Solutions, Inc. maintained effective internal control over financial reporting as of January 5, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria)". Pomeroy IT Solutions, Inc. management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Pomeroy IT Solutions, Inc. maintained effective internal control over financial reporting as of January 5, 2007, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, Pomeroy IT Solutions, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 5, 2007, based on the COSO criteria. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Pomeroy IT Solutions, Inc. as of January 5, 2007, and the related consolidated statement of income, equity, and cash flows for the year ended January 5, 2007 and our report dated March 16, 2007 expressed an unqualified opinion thereon. /s/ BDO Seidman, LLP Chicago, Illinois March 16, 2007 28 ITEM 9B. OTHER INFORMATION None PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Item 201(d) disclosure will be incorporated by reference in the definitive Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information required by Part III is omitted from this report because we intend to file a definitive Proxy Statement pursuant to Regulation 14A (the "Proxy Statement") no later than 120 days after the end of the fiscal year covered by this report, and certain information to be included therein is incorporated herein by reference. 29

PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as a part of this report: ----------------------------------------------------------------------------------------------------------- 2006 Form 10-K Page ----------- 1. Financial Statements: Reports of Independent Registered Public Accounting Firm F-1 to F-2 Consolidated Balance Sheets, January 5, 2007 and January 5, 2006 F-3 to F-4 For each of the three fiscal years in the period ended January 5, 2007: Consolidated Statements of Operations F-5 Consolidated Statements of Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 to F-26 2 Financial Statement Schedule None Filed Herewith 7(page #) or Incorporated 3. Exhibits by Reference to: ----------- ---------------- 3(i)(a)1 Certificate of Incorporation of Pomeroy Computer Exhibit 3(i)(a)(1) of Resources, dated February, 1992 Company's Form 10-Q filed Aug. 11, 2000 Certificate of Amendment to Certificate of Incorporation, Exhibit 3(i)(a)(2) of 3(i)(a)2 dated July 1997 Company's Form 10-Q filed Aug. 11, 2000 3(i)(a)3 Certificate of Designations of Series A Junior Exhibit 3(i)(a)(3) of Participating Preferred Stock of Pomeroy Computer Company's Form 10-Q Resources, Inc. February 1998 filed Aug. 11, 2000 3(i)(a)4 Certificate of Amendment to Certificate of Incorporation, Exhibit 3(i)(a)(4) of dated August 2000 Company's Form 10-Q filed Aug. 11, 2000 ----------------------------------------------------------------------------------------------------------- 30 ----------------------------------------------------------------------------------------------------------- 3(i)(a)5 Certificate of Amendment to Certificate of Incorporation Exhibit 3(I)(a)5 of for Pomeroy Computer Resources, Inc., dated June 19, 2003 Company's Form 10-Q filed August 19, 2003 (3)(i)(a)6 Certificate of Amendment to Certificate of Incorporation Exhibit 3(I)(a)6 of for Pomeroy Computer Resources Sales Company, Inc., Company's Form 10-Q dated June 19, 2003 filed August 19, 2003 3(ii) Bylaws of the Company Exhibit 3(a) of Company's Form S-1 filed Feb. 14, 1992 4 Rights Agreement between the Company and The Fifth Exhibit 4 of Third Bank, as Rights Agent dated as of February 23,1998 Company's Form 8-K filed February 23, 1998 10(i) Material Agreements (b)(1) Agreement for Wholesale Financing (Security Exhibit 10(i)(b)(1) of Agreement) between IBM Credit Corporation and Company's Form 10-K the Company dated April 2, 1992 filed April 7, 1994 (b)(2) Addendum to Agreement for Wholesale Financing Exhibit 10(i)(b)(2) of between IBM Credit Corporation and the Company Company's Form 10-K dated July 7, 1993 filed April 7, 1994 (e)(1) IBM Agreement for authorized Dealers and Industry Company's Form S-1 Remarketers with the Company, dated September 3, 1991 filed Feb. 14. 1992 (e)(2) Schedule of Substantially Exhibit 10(i)(e)(2) of Identical IBM Agreements for Authorized Dealers Company's Form S-1 And Industry Remarketers filed Feb. 14, 1992 ----------------------------------------------------------------------------------------------------------- 31 ----------------------------------------------------------------------------------------------------------- (mm)(10) Asset purchase agreement by, between and among Exhibit 10(I)(mm)(10) Pomeroy Select Integration Solutions, Inc. and Verity of Company's Form Solutions, LLC and John R. Blackburn, dated August 30, 2002 10-Q filed May 20, 2002 (mm)(11) Covenant not to compete agreement between John R. Blackburn Exhibit 10(I)(mm)(11) of and Pomeroy Select Integration Solutions, Inc. the Company's Form 10-Q filed May 20, 2002 (mm)(15) The Credit Facilities Agreement dated June 28, 2004 by, Exhibit 10(i)(mm)(i) of between, and among Pomeroy IT Solutions, Inc. (formerly the Company's Form known as, Pomeroy Computer Resources, Inc.), 10-Q filed August 16, 2004 Pomeroy Select Integration Solutions, Inc., Pomeroy Select Advisory Services, LLC (formerly, prior to conversion, Pomeroy Select Advisory Services, Inc.), Pomeroy IT Solutions Sales Company, Inc. (formerly known as, Pomeroy Computer Resources Sales Company, Inc.), Pomeroy Computer Resources Holding Company, Inc., Pomeroy Computer Resources Operations, LLP, PCR Holdings, Inc. (formerly known as, Technology Integration Financial Services, Inc.), PCR Properties, LLC (formerly, prior to conversion, PCR Properties, Inc., and prior to such conversion, formerly known as, T.I.F.S. Advisory Services, Inc.), TheLinc, LLC, Val Tech Computer Systems, Inc., Micrologic Business Systems of K.C., LLC, Pomeroy Acquisition Sub, Inc. (collectively, and separately referred to as, "Borrower"), and GE Commercial Distribution Finance Corporation ("GECDF"), as Administrative Agent, and GECDF and the other lenders listed on Exhibit 3 of the Agreement and the signature pages hereto (and their respective successors and permitted assigns), as "Lenders". ----------------------------------------------------------------------------------------------------------- 32 ----------------------------------------------------------------------------------------------------------- (nn)(1) Stock purchase agreement by, between and among Exhibit (nn)(1) of the James Hollander, trustee, Raymond Hays, trustee, Company's Form 10-Q David Yoka, trustee and Matthew Cussigh and filed May 20, 2003 Pomeroy Computer Resources, Inc. (nn)(2) Asset purchase agreement by, between and among Exhibit (nn)(2) of the Pomeroy IT Solutions, Inc., Pomeroy Select Integration Company's Form 10-K Solutions, Inc., eServe Solutions Group, LLC, Tim filed March 19, 2004 Baldwin and Pat Sherman. (nn)(3) Agreement and plan of merger by and between Pomeroy Acquisition Sub, Inc., a wholly owned Exhibit 10 (I) of the Company's subsidiary of Pomeroy, and Alternative Resources Form 10-Q filed May 17, 2004 Corporation, dated May 11, 2004 (nn)(4) Lockup and Purchase Agreement by and between Exhibit 10 (ii) of the Pomeroy IT Solutions, Inc., a Delaware corporation Company's Form 10-Q ("Parent"), and Wynnchurch Capital Partners, L.P. filed May 17, 2004 ("Wynnchurch US"), a Delaware limited partnership, Wynnchurch Capital Partners Canada, L.P. ("Wynnchurch Canada"), an Alberta, Canada limited partnership and Wynnchurch Capital, Ltd., a Delaware corporation (Wynnchurch US, Wynnchurch Canada and Wynnchurch Capital, Ltd. are collectively "Wynnchurch"), dated May 11, 2004. 10(ii) Material ordinary course of business contracts that require filing (D)(1) Lease Agreement by and between Pomeroy Exhibit 10(ii)(D)(1) of Investments, LLC and Pomeroy Select Integration Form 10K Filed Solutions, Inc. , dated September 12, 2005 April 14, 2006 (D)(2) Aircraft Lease Agreement by and between Suntrust Exhibit 10(ii)(D)(2) of Leasing Corporation and Pomeroy IT Solutions Sales Form 10K Filed Company, Inc and Pomeroy Select Integration April 14, 2006 Solutions, Inc., dated December 28, 2005 (D)(3) Third Amendment to Lease Agreement by and between Exhibit 10(ii)(D)(3) of Pomeroy Investment, LLC and Pomeroy IT Solutions, Inc. Form 10K Filed April 14, 2006 (o)(1) Consulting Agreement by and between Pomeroy IT Exhibit 10 (ii) (A) of Solutions, Inc. and David B. Pomeroy, effective the Company's Form January 5, 2005 8-K filed February 3, 2005 10 (iii) Material Employee Benefit and Other Agreements (d) The Company Savings 401(k) Plan, Exhibit 10(iii)(d) of effective July 1, 1991 Company's Form S-1 filed Feb. 14, 1992 (f) The Company's 2002 Amended and Restated Stock Exhibit B to the Incentive Plan Company's Definitive Proxy Statement filed May 4, 2004 ----------------------------------------------------------------------------------------------------------- 33 ----------------------------------------------------------------------------------------------------------- (g) The Company's 2002 Amended and Restated Outside Exhibit A to the Directors Stock Option Plan Company's Definitive Proxy Statement filed May 5, 2005 (j)(2) Incentive Deferred Compensation Agreement between Exhibit 10.4 of the Company and Stephen E. Pomeroy dated Company's Form S-3 November 13, 1996 filed January 3, 1997 (j)(8) Amended and restated employment agreement by and Exhibit 10(iii)(j)(7) between Pomeroy IT Solutions, Inc. fka Pomeroy of the Company's Computer Resources, Inc. and Stephen E. Pomeroy, Form 10-Q filed dated November 3, 2003 November 19, 2003 ----------------------------------------------------------------------------------------------------------- 34 ----------------------------------------------------------------------------------------------------------- (j)(9) First Amendment to Amended and restated Exhibit 10(iii)(J)(9) employment agreement by and between Pomeroy IT of the Company's Solutions, Inc. and Stephen E. Pomeroy, dated January 6, 2004. Form 10-Q filed May 17, 2004 (j)(10) Second Amendment to Amended and Restated Exhibit 10(iii)(A) of Employment Agreement dated October, 13, 2005 by the Company's and between the Company and Stephen E. Pomeroy. Form 8-K filed October 13, 2005 (j)(11) Third Amendment to Amended and Restated Exhibit 10(iii)(A) of Employment Agreement, effective as of October 1, the Company's 2006 between Pomeroy IT Solutions, Inc and Stephen Form 8-K filed E. Pomeroy, executed on October 13, 2006. October 19, 2006 (k) The Company's 1998 Employee Stock Purchase Exhibit 4.3 of Plan, Effective April 1, 1999 Company's Form S-8 filed March 23, 1999 (n)(2) 2002 Amended and Restated Stock Incentive Plan of Exhibit B of the Pomeroy IT Solutions, Inc. Company's Definitive Proxy, Schedule 14A, filed May 4, 2004 (o)(1) Employment Agreement of Kevin G. Gregory Exhibit 10(iii)(o)(1) of Company's Form 10K filed April 14, 2006 (p)(1) Employment Agreement of Keith Blachowiak Exhibit 10(iii)(A) of the Company's Form 8-K filed February 13, 2006 11 Computation of Per Share Earnings See Note 2 of Notes to Consolidated Financial Statements 14 Code of Ethics 21 Subsidiaries of the Company 23.1 Consent of BDO Seidman, LLP Consent of Crowe Chizek and Company LLC 31.1 Section 302 CEO Certification 31.2 Section 302 CFO Certification 32.1 Section 906 CEO Certification 32.2 Section 906 CFO Certification

35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: /s/ Kevin G. Gregory ----------------------------------------- Kevin G. Gregory Senior Vice President and Chief Financial Officer Dated: March 21, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature and Title Date ------------------- ---- By: /s/ David B. Pomeroy March 21, 2007 ------------------------------------- David B. Pomeroy, II Director By: /s/ Stephen E. Pomeroy March 21, 2007 ------------------------------------- Stephen E. Pomeroy, Director By: /s/ Kevin G. Gregory March 21, 2007 ------------------------------------- Kevin G. Gregory, Director By: /s/ James H. Smith III March 21, 2007 ------------------------------------- James H. Smith III, Director By: /s/ Ronald E. Krieg March 21, 2007 ------------------------------------- Ronald E. Krieg, Director By: /s/ Debra E. Tibey March 21, 2007 ------------------------------------- Debra E. Tibey, Director By: /s/ William H. Lomicka March 21, 2007 ------------------------------------- William H. Lomicka, Director By: /s/ Kenneth R. Waters March 21, 2007 ------------------------------------- Kenneth R. Waters, Director By: /s/ Vincent D. Rinaldi March 21, 2007 ------------------------------------- Vincent D. Rinaldi, Director By: /s/ David G. Boucher March 21, 2007 ------------------------------------- David G. Boucher, Director 36 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Pomeroy IT Solutions, Inc. Hebron, Kentucky We have audited the accompanying consolidated balance sheet of Pomeroy IT Solutions, Inc. as of January 5, 2007 and the related consolidated statements of income, stockholders' equity, and cash flows for the year ended January 5, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pomeroy IT Solutions, Inc. at January 5, 2007 and the results of its operations and its cash flows for the year ended January 5, 2007, in conformity with accounting principles generally accepted in the United States of America. As disclosed in Note 2 to the consolidated financial statements, effective January 1, 2006, the Company adopted the fair value method of accounting provisions of Statement of Financial Accounting Standard No. 123 (revised 2004), "Share Based Payment." We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Pomeroy IT Solutions, Inc. internal control over financial reporting as of January 5, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 16, 2007 expressed an unqualified opinion thereon. /s/ BDO Seidman, LLP Chicago, Illinois March 16, 2007 F. 1 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders Pomeroy IT Solutions, Inc. We have audited the accompanying consolidated balance sheet of Pomeroy IT Solutions, Inc. and subsidiaries as of January 5, 2006, and the related consolidated statements of operations, equity and cash flows for each of the two years in the period ended January 5, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pomeroy IT Solutions, Inc. and subsidiaries as of January 5, 2006, and the results of their operations and their cash flows for each of the two years in the period ended January 5, 2006, in conformity with U.S. generally accepted accounting principles. Crowe Chizek and Company LLC /s/ Crowe Chizek and Company LLC Louisville, Kentucky April 14, 2006 F. 2

POMEROY IT SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS (in thousands) January 5, January 5, 2007 2006 ----------- ----------- ASSETS Current Assets: Cash and cash equivalents $ 13,562 $ 1,486 Certificates of deposit 1,076 3,629 Accounts receivable: Trade, less allowance of $4,390 and $4,355 at January 5, 2007 and 2006, respectively 136,055 130,814 Vendor receivables, less allowance of $155 and $100 at January 5, 2007 and 2006, respectively 8,095 4,952 Net investment in leases 1,587 1,912 Other 1,016 2,894 ----------- ----------- Total receivables 146,753 140,572 ----------- ----------- Inventories 16,274 13,665 Other 10,370 11,730 ----------- ----------- Total current assets 188,035 171,082 ----------- ----------- Equipment and leasehold improvements: Furniture, fixtures and equipment 22,540 32,770 Leasehold Improvements 8,459 6,796 ----------- ----------- Total 30,999 39,566 Less accumulated depreciation 18,406 24,685 ----------- ----------- Net equipment and leasehold improvements 12,659 14,881 ----------- ----------- Net investment in leases, net of current portion 42 995 Goodwill 98,314 101,048 Intangible assets, net 2,634 3,007 Other assets 3,403 4,132 ----------- ----------- Total assets $ 305,021 $ 295,145 =========== ===========

F. 3

POMEROY IT SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) January 5, January 5, 2007 2006 ----------- ------------ LIABILITIES AND EQUITY Current Liabilities: Short-term borrowings $ - $ 15,304 Accounts payable: Floor plan financing 17,226 15,451 Trade 57,149 31,187 ----------- ------------ Total accounts payable 74,375 46,638 ----------- ------------ Deferred revenue 2,604 3,444 Employee compensation and benefits 8,642 8,454 Accrued restructuring and severance charges 1,286 2,192 Other current liabilities 10,590 11,028 ----------- ------------ Total current liabilities 97,497 87,060 ----------- ------------ Accrued restructuring and severance charges. 2,313 3,599 Equity: Preferred stock, $.01 par value; authorized 2,000 shares, (no shares issued or outstanding). - - Common stock, $.01 par value; authorized 20,000 shares, ( 13,476 and 13,400 shares issued at January 5, 2007 and 2006, respectively) 137 135 Paid in capital. 89,992 89,126 Unearned compensation - (1,198) Accumulated other comprehensive income 15 24 Retained earnings 126,664 125,521 ----------- ------------ 216,808 213,608 Less treasury stock, at cost ( 1,130 and 810 shares at January 5, 2007 and 2006, respectively) 11,597 9,122 ----------- ------------ Total equity 205,211 204,486 ----------- ------------ Total liabilities and equity $ 305,021 $ 295,145 =========== ============

F. 4

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands,except per share data) Fiscal Years Ended ---------------------------------------- January 5, January 5, January 5, 2007 2006 2005 ------------ ------------ ------------ Net product and service revenues: Product $ 373,232 $ 483,431 $ 545,115 Service 258,400 231,318 197,175 ------------ ------------ ------------ Total revenues 631,632 714,749 742,290 ------------ ------------ ------------ Cost of product and service revenues: Product 343,689 447,383 504,018 Service 195,907 175,636 143,136 ------------ ------------ ------------ Total cost of revenues 539,596 623,019 647,154 ------------ ------------ ------------ Gross profit 92,036 91,730 95,136 ------------ ------------ ------------ Operating expenses: Selling, general and administrative 80,973 86,010 72,346 Depreciation and amortization 4,894 5,568 4,393 Goodwill charge 3,472 16,000 - ------------ ------------ ------------ Total operating expenses 89,339 107,578 76,739 ------------ ------------ ------------ Income (loss) from operations 2,697 (15,848) 18,397 ------------ ------------ ------------ Interest income (582) (193) (310) Interest expense 1,149 1,028 561 ------------ ------------ ------------ Interest, net 567 835 251 ------------ ------------ ------------ Income (loss) before income tax 2,130 (16,683) 18,146 Income tax expense (benefit) 987 (6,021) 7,213 ------------ ------------ ------------ Net income (loss) $ 1,143 $ (10,662) $ 10,933 ============ ============ ============ Weighted average shares outstanding: Basic 12,570 12,554 12,253 ============ ============ ============ Diluted (1) 12,659 12,554 12,442 ============ ============ ============ Earnings (loss) per common share: Basic $ 0.09 $ (0.85) $ 0.89 ============ ============ ============ Diluted (1) $ 0.09 $ (0.85) $ 0.88 ============ ============ ============

(1) Dilutive loss per common share for the year ended January 5, 2006 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. See accompanying notes to consolidated financial statements. F. 5

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF EQUITY Accum- (Dollars in thousands) ulated Other Compre- Compre- hensive hensive Common Paid-in Unearned Retained Treasury Income Income Total Stock Capital Compensation Earnings Stock (Loss) (Loss) Equity ------- --------- -------------- ---------- ---------- --------- --------- --------- Balances at January 6, 2004 $ 130 $ 82,696 $ - $ 125,250 $ (8,279) $ - $ - $199,797 Net income 10,933 10,933 10,933 Cumulative translation adjustment (78) (78) (78) Treasury stock purchased (467) (467) Stock options exercised and related tax benefit 2 2,139 2,141 40,018 common shares issued for employee stock purchase plan 396 396 --------- Comprehensive income $ 10,855 ------- --------- -------------- ---------- ---------- --------- ========= --------- Balances at January 5, 2005 132 85,231 - 136,183 (8,746) (78) 212,722 Net loss (10,662) (10,662) (10,662) Cumulative translation adjustment 102 102 102 Treasury stock purchased (376) (376) Restricted stock issued 1 1,265 (1,266) - Restricted stock earned 68 68 Stock options exercised and related tax benefit 2 2,461 2,463 19,688 common shares issued for employee stock purchase plan 169 169 --------- Comprehensive loss $(10,560) ------- --------- -------------- ---------- ---------- --------- ========= --------- Balances at January 5, 2006 135 89,126 (1,198) 125,521 (9,122) 24 204,486 Net income 1,143 1,143 1,143 Cumulative translation adjustment (9) (9) (9) Treasury stock purchased (2,475) (2,475) Reclassification of unearned compensation (1,198) 1,198 - Restricted stock issued 1 (1) - Stock options exercised and related tax benefit 1 190 191 46,100 common shares issued for employee stock purchase plan 304 304 Equity compensation expense 1,571 1,571 --------- Comprehensive income $ 1,134 ------- --------- -------------- ---------- ---------- --------- ========= --------- Balances at January 5, 2007 $ 137 $ 89,992 $ - $ 126,664 $ (11,597) $ 15 $205,211 ======= ========= ============== ========== ========== ========= =========

See accompanying notes to consolidated financial statements. F. 6

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Fiscal Years Ended January 5, ------------------------------------------- Cash Flows from Operating Activities: 2007 2006 2005 ------------- ------------- ------------- Net income (loss) $ 1,143 $ (10,662) $ 10,933 Adjustments to reconcile net income (loss) to net cash flows from (used in) operating activities: Depreciation and amortization 4,926 5,597 4,393 Stock option, restricted stock compensation and Employee Purchase Plan expense 1,571 68 - Restructuring and severance charges 133 2,305 2,423 Goodwill charge 3,472 16,000 - Provision for doubtful accounts 1,690 2,000 - Amortization of earned income (66) (161) (148) Deferred income taxes 153 (4,038) 2,763 Loss on disposal of fixed assets 287 15 222 Changes in working capital accounts, net of effects of acquisitions: Accounts receivable (8,215) 9,186 (13,896) Inventories (2,609) 1,882 (5,697) Other current assets 1,818 (2,585) (2,216) Net investment in leases 1,417 2,949 1,657 Floor plan financing 1,775 (3,943) 2,821 Trade payables 25,962 (21,479) 7,533 Deferred revenue (840) (46) (498) Income tax payable (148) 95 156 Other, net (2,368) (1,611) (4,665) ------------- ------------- ------------- Net operating activities 30,101 (4,428) 5,781 ------------- ------------- ------------- Cash Flows from Investing Activities: Capital expenditures (2,261) (3,454) (2,350) Proceeds from sale of fixed assets - 6 20 Proceeds from redemption of certificate of deposits 2,682 - - Purchases of certificate of deposits (129) (81) (530) Payment for covenant not-to-compete (285) - - Acquisitions of businesses (738) (1,256) (16,441) ------------- ------------- ------------- Net investing activities (731) (4,785) (19,301) ------------- ------------- ------------- Cash Flows from Financing Activities: Payments of acquisition notes payable - (662) (31,385) Net payments of short-term borrowings (15,304) (4,849) 20,153 Proceeds from exercise of stock options 174 2,194 1,840 Excess tax benefit related to exercise of stock options 16 - - Purchase of treasury stock (2,475) (376) (467) Proceeds from issuance of common shares for employee stock purchase plan 304 169 396 ------------- ------------- ------------- Net financing activities (17,285) (3,524) (9,463) ------------- ------------- ------------- Effect of exchange rate changes on cash and cash equivalents (9) 102 (78) ------------- ------------- ------------- Increase (decrease) in cash and cash equivalents 12,076 (12,635) (23,061) Cash and cash equivalents: Beginning of year 1,486 14,121 37,182 ------------- ------------- ------------- End of year $ 13,562 $ 1,486 $ 14,121 ============= ============= =============

See accompanying notes to consolidated financial statements. F. 7 POMEROY IT SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FISCAL YEARS ENDED JANUARY 5, 2007, JANUARY 5, 2006 AND JANUARY 5, 2005 1. Company Description Pomeroy IT Solutions, Inc. is a Delaware corporation organized in February 1992. Pomeroy IT Solutions, Inc., collectively with its subsidiaries, ("Pomeroy" or the "Company") is a provider of enterprise-wide information technology ("IT") solutions that leverage its portfolio of professional services to create long-term relationships. The Company's target markets include Fortune 1000, small and medium business ("SMB") and public sector customers. These customers fall into government and education, financial services, health care and other sectors. The Company's customers are located throughout the United States with an emphasis in the Southeast and Midwest regions. 2. Summary of Significant Accounting Policies Principles of Consolidation - The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Fiscal Year - The Company's fiscal year is a 12 month period ending January 5. References to fiscal 2006, 2005 and 2004 are for the fiscal years ended January 5, 2007, January 5, 2006 and January 5, 2005, respectively. Cash and Cash Equivalents - Cash and cash equivalents include highly liquid, temporary cash investments having original maturity dates of three months or less. Goodwill - Goodwill is reviewed for impairment annually or more frequently if certain conditions exist. Events or changes in facts and circumstances that Pomeroy considers as impairment indicators include consistent underperformance of operating results, net book value compared to market capitalization, and significant adverse economic and industry trends. When the Company determines that one or more impairment indicators are present, Pomeroy compares its reporting unit's carrying value to its fair value. During fiscal 2005, the Company re-aligned the structure of its internal organization such that management and the board of directors now review operating results on a consolidated basis. As a result, the Company now has one reporting unit for goodwill testing. In fiscal 2004, the Company had two reporting units for goodwill testing which were a products reporting unit and a services reporting unit. The Company has adopted January 5 as the valuation date for the annual testing. An impairment loss, if required, would be reported in the Company's results of operations at the date it is determined. The Company has completed its annual goodwill impairment test for the year ended January 5, 2007. The goodwill impairment analysis indicated there was no goodwill impairment for the year ended January 5, 2007 as the fair value of the reporting unit exceeded the carrying value of the reporting unit by approximately 5%. The Company considered various factors in determining the fair value of the reporting unit including discounted cash flows from projected earnings, values for comparable companies and the market price of the Company's common stock. The Company will continue to monitor closely for any impairment indicators such as underperformance of projected earnings, net book value compared to market capitalization, declining stock price and significant adverse economic and industry trends. In the event the Company does not achieve projected results the Company could incur a goodwill impairment charge in the future. Other Intangible Assets - The Company's other intangible assets consist only of intangibles with definitive lives that are being amortized using straight-line and accelerated methods over periods up to fifteen years. Other intangible assets are reviewed for impairment in accordance with Statement of Financial Accounting Standards (SFAS) 144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". Impairment indicators include those listed above for goodwill, as well as significant changes to the asset since acquisition, including the extent that the Company may use the asset. When the Company determines that one or more impairment indicators are present, Pomeroy compares the carrying amount of the asset to the net future undiscounted cash flows that the asset is expected to generate. If the carrying amount of the asset is greater than the net future undiscounted cash flows that the asset is expected to generate, Pomeroy would recognize an impairment loss to the extent the carrying value of the asset exceeds its fair value. An impairment loss, if required, would be reported in the Company's results of operations. Equipment and Leasehold Improvements - Equipment and leasehold improvements are stated at cost. Depreciation on equipment is computed using the straight-line method over estimated useful lives ranging from three to seven years. Depreciation on leasehold improvements is computed using the straight-line method over estimated useful lives or the term of the lease, whichever is less, ranging from two to ten years. Depreciation expense associated with equipment and leasehold improvements is classified under operating expenses. Depreciation expense associated with operating leases is classified under cost of revenues. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements that significantly F. 8 extend the lives of assets are capitalized. Expenditures related to the acquisition or development of computer software to be utilized by the Company are capitalized or expensed in accordance with Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Company reviews equipment and leasehold improvements for potential impairment in accordance with SFAS 144. Upon sale or retirement of depreciable property, the cost and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in the results of operations. The Company leases various property, plant and equipment. Leased property is accounted for under Statement of Financial Accounting Standards (SFAS) 13, ''Accounting for Leases''. Operating leases and the related payments are expensed ratably over the rental period. Leases that include escalating lease payments are straight-lined over the non-cancelable base lease period in accordance with SFAS 13. Income Taxes - Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Vendor Rebates - The most significant component of vendor receivables is vendor rebates. Vendor rebate programs are developed by original equipment manufacturers ("OEM') allowing them to modify product pricing on a case by case basis (generally determined by individual customers) to maintain their competitive edge on specific transactions. The Company will contact the OEM to request a rebate, for a specific transaction, and if approved, the OEM will provide the Company with a document authorizing a rebate to be paid to the Company at a later date when a claim is filed. At the time the Company records product sales, cost of sales is reduced by the amount of the rebate. Rebate programs involve complex sets of rules varying by manufacturer. As a result of the rules and complexity of applying the rules to each item sold, claims are often rejected and require multiple submissions before credit is given. Pomeroy maintains an allowance for doubtful accounts on vendor receivables for estimated losses resulting from the inability of its vendors to make required payments. The determination of a proper allowance for vendor receivables is based on an ongoing analysis as to the recoverability of the Company's vendor receivable portfolio based primarily on account aging. Primary reasons for claims being disallowed and corresponding re-files include serial number issues (missing, incomplete, transposed, data base match-up discrepancies, etc.), pricing issues (dispute in calculation of rebate amounts) and other missing or incomplete documentation (bid letters, customer information, etc.). Manufacturer Market Development Funds - Several OEM's offer market development funds, cooperative advertising and other promotional programs to distribution channel partners. The Company utilizes these programs to fund some of its advertising and promotional programs. The Company recognizes these anticipated funds as vendor receivables when it has completed its obligation to perform under the specific arrangement. The anticipated funds to be received from manufacturers are offset directly against the expense, thereby reducing selling, general and administrative expenses. Warranty Receivables - The Company performs warranty service work on behalf of the OEM on customer product. Any labor cost or replacement parts needed to repair the product is reimbursable to the Company by the OEM. It is the Company's responsibility to file and collect these claims. The Company records the vendor receivables when it has completed its obligation to perform under the specific arrangement. Any OEM reimbursement for warranty labor cost incurred is recognized as revenue when the service is provided. Inventories - Inventories are stated at the lower of cost or market and consists primarily of purchased equipment and service parts. Cost is determined by the average cost method. Certain overhead costs are capitalized as a component of inventory. The inventory reserve is determined by management based on the Company's aged inventory and specific identification. Periodically, management reviews inventory and adjusts the reserve based on current circumstances. The following table summarizes the activity in the inventory reserve account for fiscal years 2006, 2005 and 2004: F. 9

(in thousands) Inventory Reserve ------------------- Balance January 6, 2004 $ 234 Activity 120 ------------------- Balance January 5, 2005 354 ------------------- Activity (33) ------------------- Balance January 5, 2006 321 Activity 81 ------------------- Balance January 5, 2007 $ 402 ===================

Translation of Foreign Currencies - Assets and liabilities of the Company's Canadian operations are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the weighted average rates of exchange prevailing during the period. The related foreign currency translation adjustments are reflected as accumulated other comprehensive income (loss) in stockholders' equity Revenue Recognition - In December 2003, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition", which superseded SAB 101, "Revenue Recognition in Financial Statements". SAB 104 updated certain interpretive guidance included in SAB 101, including the SAB 101 guidance related to multiple element revenue arrangements, to reflect the issuance by the Emerging Issues Task Force ("EITF") of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables". Generally, the Company, in accordance with SAB 104, recognizes revenue on the sale of products when the products are shipped, persuasive evidence of an arrangement exists, delivery has occurred, collection of the relevant receivable is probable and the sales price is fixed or determinable. Generally the Company, in accordance with the requirements of SAB 104, determines if revenue should be reported based on (a) the gross amount billed to a customer because it has earned revenue from the sale of the goods or services or (b) the net amount retained (that is, the amount billed to the customer less the amount paid to a supplier) because it has earned a commission or fee by determining if the Company performs as an agent or broker without assuming the risks and rewards of ownership of the goods, in that case sales would be reported on a net basis. When the Company provides a combination of products and services to customers, the arrangement is evaluated under Emerging Issues Task Force Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables," or EITF 00-21, which addresses certain aspects of accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. The application of the appropriate accounting guidance to our revenue requires judgment and is dependent upon the specific transaction and whether the sale includes items such as configuration, training, installation, service, or a combination of these items. Service revenue is recognized when the applicable services are provided or for service contracts, ratably over the lives of the contracts. Stock-Based Compensation - Prior to January 6, 2006, the Company accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees". Accordingly, compensation cost for stock options was measured as the excess, if any, of the quoted market price of the Company's common stock at the date of grant over the amount an employee must pay to acquire the stock. The Company previously adopted SFAS No. 123 for disclosure purposes and for non-employee stock options. The Company adopted Statement of Financial Accounting Standards No. 123(R) (SFAS 123R) effective January 6, 2006. SFAS 123R requires the Company to measure the cost of employee services received in exchange for an award of equity instruments and recognize this cost over the period during which the employee is required to provide the services. The Company has adopted SFAS 123R using the modified prospective method and, therefore, results for periods prior to January 6, 2006 have not been restated. Under the modified prospective method, SFAS 123(R) applies to new awards and to awards that were outstanding as of January 5, 2006 that are subsequently vested, modified, repurchased or cancelled. Compensation expense recognized during 2006 includes the portion vesting during the period for (1) all share-based payments granted prior to, but not yet vested as of January 5, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and (2) all share-based payments granted subsequent to January 5, 2006, based on the grant-date fair value estimated using the Black-Scholes option-pricing model. As a result of adopting SFAS 123(R), the Company recognized approximately $1.5 million of additional compensation expense for the year ended January 5, 2007, which resulted in a corresponding decrease in net income and a corresponding decrease of $0.12 per share to both basic and diluted earnings per share. In addition, cash flows related to F. 10 excess tax benefits from the exercise of options totaling $16 thousand are classified as a financing activity whereas under APB 25 such excess tax benefits would have been classified as cash flows from operations in the Company's consolidated statement of cash flows. The table below illustrates the effect of stock compensation expense on the periods presented as if the Company had always applied the fair value method:

(in thousands, except per share amounts) Fiscal 2005 Fiscal 2004 ------------- ------------- Net income (loss) before stock compensation expense $ (10,662) $ 10,933 Stock compensation expense 2,789 2,475 ------------- ------------- Pro forma net income (loss) $ (13,451) $ 8,458 ============= ============= Basic earnings per common share: Net income (loss) before stock compensation expense $ (0.85) $ 0.89 Stock compensation expense (0.22) (0.20) ------------- ------------- Pro forma net income (loss) $ (1.07) $ 0.69 ============= ============= Diluted earnings per common share: Net income (loss) before stock compensation expense $ (0.85) $ 0.88 Stock compensation expense (0.22) (0.20) ------------- ------------- Pro forma net income (loss) $ (1.07) $ 0.68 ============= =============

No stock-based compensation was capitalized into inventory or fixed assets. The approximate unamortized stock option compensation as of January 5, 2007, which will be recorded as expense in future periods, is $665 thousand. The weighted average time over which this expense will be recorded is approximately 22.9 months. The Company estimates the fair value of each option on the date of grant using the Black-Scholes option pricing model. The Company has elected the simplified method to calculate the expected life of stock awards as permitted under SFAS 123R. This method calculates an expected term based on the midpoint between the vesting date and the end of the contractual term of the stock award. The risk free interest rate is based on the yield curve for U.S. Treasury constant maturities with an equivalent remaining term approximately 3 years. The dividend yield is based on the Company's current dividend yield as the best estimate of projected dividend yield for periods within the expected life of the options. The expected volatility in 2006 is based on the historical volatility of the Company's stock price for the expected life of the option. The fair value of options at the date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:

Fiscal 2006 Fiscal 2005 Fiscal 2004 ------------ ------------ ------------ Expected life (years) 3.7 3.3 3.3 Risk free interest rate 4.7% 4.3% 3.3% Volatility 52% 49% 24% Dividend yield 0% 0% 0%

Information related to all stock options for fiscal 2006 is shown in the table below:

Weighted- Weighted-Average Average Exercise Remaining Contractual Shares Price Term Outstanding at January 6, 2006 2,926,503 $ 13.31 Granted 321,250 $ 9.00 Forfeitures (994,072) $ 13.51 Exercised (29,167) $ 5.98 ---------- Outstanding at January 5, 2007 2,224,514 $ 12.70 2.64 years ========== Exercisable at January 5, 2007 1,943,319 $ 12.89 2.49 years ==========

F. 11 Information related to unvested stock options for fiscal 2006 is shown in the table below:

Weighted-Average Weighted-Average Grant-Date Fair Remaining Contractual Shares Value Term Outstanding unvested stock options at January 6, 2006 416,794 $ 4.63 Granted 321,250 $ 3.26 Vested (353,316) $ 3.68 Forfeitures (103,533) $ 4.54 --------- Outstanding unvested stock options at January 5, 2007 281,195 $ 4.32 3.68 years =========

Earnings (Loss) per Common Share - The computation of basic earnings (loss) per common share is based upon the weighted average number of common shares outstanding during the period. Diluted earnings per common share is based upon the weighted average number of common shares outstanding during the period plus, in periods in which they have a dilutive effect, the effect of common shares contingently issuable, primarily from stock options and unearned restricted stock. The following is a reconciliation of the number of common shares used in the basic and diluted EPS computations:

(in thousands, except per Fiscal Years --------------------------------------------------------------------- share data) 2006 2005 2004 --------------------- ---------------------- ---------------------- Per Share Per Share Per Share Shares Amount Shares Amount Shares Amount --------- ---------- --------- ----------- --------- ----------- Basic EPS 12,570 $ 0.09 12,554 $ (0.85) 12,253 $ 0.89 --------- ---------- --------- ----------- --------- ----------- Effect of dilutive stock options and unvested restricted shares 89 - 114 - 189 (0.01) --------- ---------- --------- ----------- --------- ----------- Diluted EPS 12,659 $ 0.09 12,668 $ (0.85) 12,442 $ 0.88 ========= ========== ========= =========== ========= ===========

*For fiscal 2005, no contingently issuable shares have been included as the effect of these shares are anti-dilutive. Use of Estimates in Financial Statements - In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Accounting estimates in these financial statements include allowances for trade accounts receivable and vendor accounts receivable. Pomeroy maintains allowances for doubtful accounts on both vendor and trade receivables for estimated losses resulting from the inability of its customers or vendors to make required payments. The determination of a proper allowance for vendor receivables is based on an ongoing analysis as to the recoverability of the Company's vendor receivable portfolio based primarily on account aging. The determination of a proper allowance for trade receivables is based on an ongoing analysis as to the credit quality and recoverability of the Company's trade receivable portfolio. Factors considered are F. 12 account aging, historical bad debt experience, current economic trends and others. The analysis is performed on both vendor and trade receivable portfolios. A separate allowance account is maintained based on each analysis. Actual results could differ from those estimates. Contingencies and Accruals - We are subject to the possibility of various loss contingencies and accruals arising in the ordinary course of business. We accrue an estimated loss contingency when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. Reclassifications - Certain reclassifications of prior years' amounts have been made to conform to the current year presentation. Fair Value Disclosures - The Company has financial instruments consisting primarily of cash and cash equivalents and short-term borrowings. The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates. The Company has no financial instruments with off-balance sheet risk. Comprehensive Income (Loss) - For fiscal 2006, 2005 and 2004, the only component of comprehensive income (loss) other than net income (loss) is foreign currency translation adjustments. Derivative Instruments and Hedging Activities - The Company does not currently have any derivative instruments or hedging activities. Recent Accounting Pronouncements - In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, "Accounting for Income Taxes" ("FASB No. 109"). FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company is currently in the process of determining the impact, if any, that the adoption of FIN 48 will have on the consolidated financial statements. In September 2006, the SEC issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB No. 108"), to address diversity in practice in quantifying financial statement misstatements. SAB No. 108 requires the Company to quantify misstatements based on their impact on each of its financial statements and related disclosures. SAB No. 108 is effective as of the end of the Company's 2006 fiscal year, allowing a one-time transitional cumulative effect adjustment to retained earnings as of January 6, 2006 for errors that were not previously deemed material, but are material under the guidance in SAB No. 108. The Company determined there was no impact on its financial statements by adopting SAB No. 108. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective as of the beginning of the Company's 2008 fiscal year. The Company is currently evaluating the impact of adopting SFAS No. 157 on its financial statements. 3. Accounts Receivable Trade accounts receivable represent amounts billed or billable to customers. Past due receivables are determined based on contractual terms. The Company generally does not charge interest on its trade receivables. The allowance for doubtful receivables is determined by management based on the Company's historical losses, specific customer circumstances and general economic conditions. Periodically, management reviews accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables against the allowance when all attempts to collect the receivable have failed. The following table summarizes the activity in the allowance for doubtful accounts for fiscal years 2006, 2005 and 2004: F. 13

Vendor and (in thousands) Trade Other -------- ----------- Balance January 6, 2004 $ 2,556 $ 100 Accounts written-off (1,826) - Recoveries 732 - -------- ----------- Balance January 5, 2005 1,462 100 Provision 2,000 - Other 833 - Accounts written-off (160) Recoveries 220 - -------- ----------- Balance January 5, 2006 4,355 100 Provision 1,635 55 Accounts written-off (1,640) Recoveries 40 - -------- ----------- Balance January 5, 2007 $ 4,390 $ 155 ======== ===========

During fiscal 2005, the Company recorded an increase in trade receivables allowance of $2.0 million. Also, in fiscal 2005, other adjustments of $0.8 million include ARC purchase price adjustments and reclassification of balance sheet accounts and therefore did not impact 2005 results of operations. 4. Net Investment in Leases The Company's net investment in leases principally includes sales-type and operating leases. Leases consist principally of notebook and desktop personal computers, communication products and high-powered servers with terms generally from one to three years. Unearned income is amortized under the effective interest method. The following table summarizes the components of the net investment in sales-type leases as of end of fiscal years 2006 and 2005:

(in thousands) 2006 2005 ------- ------- Minimum lease payments receivable $1,169 $2,438 ------- ------- Estimated residual value 489 564 Unearned income (29) (95) ------- ------- Total $1,629 $2,907 ======= =======

The future minimum lease payments for the net investment in leases are as follows:

(in thousands) Fiscal Year ----------------------------- 2007 1,130 2008 39 -------- Total minimum lease payments $ 1,169 ========

F. 14 5. Goodwill and Other Intangible Assets Intangible assets with definite lives are amortized over their estimated useful lives. The following table provides a summary of the Company's intangible assets with definite lives as of January 5, 2007 and January 5, 2006: Intangible assets consist of the following:

(in thousands) Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount 1/5/2007 1/5/2007 1/5/2007 1/5/2006 1/5/2006 1/5/2006 --------- ------------- --------- --------- ------------- --------- Amortized intangible assets: Covenants not-to-compete $ 2,309 $ 1,971 $ 338 $ 2,024 $ 1,859 $ 165 Customer lists 2,877 1,418 $ 1,459 2,877 1,061 1,816 Other intangibles 1,268 431 $ 837 1,268 242 1,026 --------- ------------- --------- --------- ------------- --------- Total amortized intangibles $ 6,454 $ 3,820 $ 2,634 $ 6,169 $ 3,162 $ 3,007 ========= ============= ========= ========= ============= =========

Amortized intangible assets are being amortized straight-line over periods ranging from 1 to 15 years for covenants not-to-compete and 7 years for other intangibles. Customer lists are primarily being amortized utilizing the sum-up-the-year digits method. Customer lists are being amortized from 7 to 15 years. For the year ended January 5, 2007, amortization expense related to intangible assets was $658 thousand. For the year ended January 5, 2006, amortization expense related to intangible assets was $763 thousand. For the year ended January 5, 2005, amortization expense related to intangible assets was $364 thousand. Projected future amortization expense related to intangible assets with definite lives are as follows: (in thousands) Fiscal years:

2007 617 2008 554 2009 450 2010 381 2011 270 2012+ 362 -------- Total $ 2,634 ========

The changes in the net carrying amount of goodwill for the years ended January 5, 2007 and 2006 are as follows:

(in thousands) Consolidated -------------- Net carrying amount as of 1/6/05 $ 109,913 -------------- Goodwill recorded during fiscal 2005 7,135 Goodwill charge (16,000) -------------- Net carrying amount as of 1/5/06 101,048 Goodwill recorded during fiscal 2006 738 Goodwill charge (3,472) -------------- Net carrying amount as of 1/5/07 $ 98,314 ==============

Pursuant to the provisions of SFAS 142, the Company performs its goodwill impairment testing on an annual basis. During fiscal 2005, the Company realigned its reporting structure and for fiscal 2005 and 2006, is testing its goodwill based on one reporting unit. In prior years, the Company's goodwill impairment testing was based on two reporting units. F. 15 Historically, the Company had performed its annual goodwill impairment test based on the year end valuation date of its fiscal year and reflects the results of that testing in its annual consolidated financial statements included in its Annual Report on Form 10-K. As part of its goodwill impairment testing, the Company reviews various factors, such as the market price of the Company's common stock, discounted cash flows from projected earnings and values for comparable companies to determine whether impairment exists. For the year ended January 5, 2006, the Company determined there was an impairment. The primary factor leading to the impairment is the Company's declining stock price in the fourth quarter of 2005. The second step of the goodwill impairment test was not completed prior to the issuance of the fiscal 2005 financial statements. Therefore, the Company recognized a charge of $16 million as a reasonable estimate of the impairment loss in its fiscal 2005 financial statements. During the third quarter of fiscal 2006, the Company completed the second step of the goodwill analysis as required under SFAS 142. The second step of the goodwill impairment test used to measure the amount of the impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. As a result, in the step two analysis, the Company allocated the fair value of the reporting unit determined in step one to all of the assets and liabilities of the Company (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill. The implied value of the goodwill calculated in the step two analysis was approximately $97.5 million compared to goodwill initially carried on the balance sheet of approximately $117.0 million as of January 5, 2006, indicating a goodwill impairment of approximately $19.5 million. As discussed above, an initial estimated impairment of $16 million was recorded for the year ended January 5, 2006. As a result of completing the step two analysis in the third quarter of fiscal 2006, an additional impairment of approximately $3.5 million was recorded for the three and nine months ended October 5, 2006. Upon completion of the step two analysis, the amount attributable to unrecognized intangible assets such as customer lists and trade name was determined to be greater than the initial estimates, resulting in a lower implied fair value of goodwill which resulted in an adjustment of the estimated goodwill impairment charge during the third quarter of fiscal 2006. In fiscal 2006, the Company recognized a charge of $3.5 million, as an adjustment to the estimated impairment loss based on the completion of the measurement of the impairment loss. The Company has completed its annual goodwill impairment test for the year ended January 5, 2007. The goodwill impairment analysis indicated there was no goodwill impairment for the year ended January 5, 2007 as the fair value of the reporting unit exceeded the carrying value of the reporting unit by approximately 5%. The Company considered various factors in determining the fair value of the reporting unit including discounted cash flows from projected earnings, values for comparable companies and the market price of the Company's common stock. The Company will continue to monitor closely for any impairment indicators such as underperformance of projected earnings, net book value compared to market capitalization, declining stock price and significant adverse economic and industry trends. In the event the Company does not achieve projected results, the Company could incur a goodwill impairment charge in the future. During fiscal 2006, the Company recorded $0.7 million of goodwill associated primarily with earn-out payments made in conjunction with prior acquisitions. During fiscal 2005, the Company recorded $7.1 million of goodwill of which $6.7 million was associated with purchase price adjustments related to the acquired assets and liabilities of Alternative Resources Corporation ("ARC") and the remaining amount was related to earn-out payments made in conjunction with prior acquisitions. The earn-out payments are based on predetermined financial performance benchmarks and are for terms of one to two additional years. 6. Borrowing Arrangements A significant part of Pomeroy's inventories are financed by floor plan arrangements with third parties. At January 5, 2007, these lines of credit totaled $78.5 million, including $75.0 million with GE Commercial Distribution Finance ("GECDF") and $3.5 million with IBM Credit Corporation ("ICC"). Borrowings under the GECDF floor plan arrangements are made on thirty-day notes. Borrowings under the ICC floor plan arrangements are made on fifteen-day notes. All such borrowings are secured by the related inventory. Financing on substantially all of the arrangements is interest free. 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. F. 16 The Company has a $165 million Syndicated Credit Facility Agreement with GECDF. The credit facility has a three-year term and its components include a maximum of $75 million for inventory financing and a revolving line of credit, collateralized primarily by accounts receivable, of up to $110 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 million. Under the agreement, the credit facility provides a letter of credit facility of $5 million. Under the credit facility, the interest rate is based on the London InterBank Offering Rate ("LIBOR") and a pricing grid. As of January 5, 2007 the adjusted LIBOR rate was 7.57%. This credit facility expires June 28, 2007. At January 5, 2007 the Company did not have a balance outstanding under the credit facility and the amount available was $56.5 million. At January 5, 2006, the Company had a balance outstanding under the credit facility of $15.3 million. The weighted average interest rate on the bank revolving credit agreements was 5.46% and 7.31% in fiscal 2005 and 2006, respectively. 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, the Company is subject to various financial covenants. As of January 5, 2007 Pomeroy was in compliance with those financial covenants. Pomeroy believes that the anticipated cash flow from operations and current financing arrangements will be sufficient to satisfy Pomeroy's capital requirements for the next twelve months. The Company's credit facility expires June 28, 2007. The Company intends to negotiate a new credit facility with terms sufficient for its financing needs and does not anticipate any problems securing a new credit facility before June 28, 2007. However if the Company is unable to negotiate a new credit facility, it could adversely effect the Company's ability to operate. At January 5, 2007 and 2006 the Company had several outstanding letters of credit issued to worker's compensation insurance providers totaling $1.4 million and $1.1 million, respectively, that have various expiration dates through December 2007. The outstanding letters of credit reduce the amount available under the credit facility. During 2006 and 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 are restricted under Pomeroy's current credit facility. Under such credit facility, cash dividends and stock redemptions are limited to $5 million annually. 7. Restructuring and Severance Charges During fiscal 2006 and fiscal 2005, the Company recorded severance charges totaling $0.1 million and $0.9 million, respectively, resulting primarily from a re-alignment of the structure of the Company's organization. Severance payments will continue to be made through January 2007. Additionally, during fiscal 2005, the Company recorded restructuring charges aggregating $1.4 million due to unrecoverable assets related to the Company's former wholly-owned subsidiary, Technology Integration Financial Services, Inc. ("TIFS"). Substantially all of the assets of TIFS were sold in fiscal 2002. During fiscal 2004, in connection with certain strategic initiatives, the Company recorded restructuring and severance charges aggregating $1.0 million. The restructuring and severance charges are associated with legacy Pomeroy costs of facilities and processes that have or will become duplicative or redundant as ARC operations are integrated into the Company. These costs consist of facility closing and involuntary employee termination costs of $576 thousand and $400 thousand, respectively. These costs are accounted for under FAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," and were included as a charge to the results of operations for the year ended January 5, 2005. Any subsequent changes to the estimates of executing the currently approved plans of restructuring will be reflected in current results of operations. The Company also recorded during fiscal 2004 a charge for severance in the amount of $1.4 million related to the resignation of David B. Pomeroy II as CEO of the Company. Mr. Pomeroy will continue to serve as Chairman of the Board of the Company. Mr. Pomeroy will continue to receive severance payments thru January 2009. The Company records restructuring and severance charges in selling, general and administrative expense line item on the Consolidated Statement of Operations. As of January 5, 2007, the restructuring and severance charge accrual, consisted of the following: F. 17

(in thousands) Facility Lease Severance Consolidations Investments Total ------------------------------------------------------ Accrual balance at January 6, 2004 $ - $ - $ - $ - Charges accrued 1,847 576 - 2,423 Cash payments and write-offs (440) (200) - (640) ------------------------------------------------------ Accrual balance at January 5, 2005 1,407 376 - 1,783 Charges accrued 880 - 1,425 2,305 Cash payments and write-offs (1,411) (251) (1,425) (3,087) ------------------------------------------------------ Accrual balance at January 5, 2006 876 125 - 1,001 Charges accrued 133 - 133 Cash payments and write offs (849) (125) (974) ------------------------------------------------------ Accrual balance at January 5, 2007 $ 160 $ - $ - $ 160 ======================================================

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

Facility (in thousands) Severance consolidations Total Total initial liability $ 2,682 $ 3,715 $ 6,397 Cash payments (760) (260) (1,020) --------------------------------------- Liability balance at January 5, 2005 1,922 3,455 5,377 Cash payments (1,922) (899) (2,821) Adjustments of initial liability - 2,165 2,165 --------------------------------------- Liability balance at January 5, 2006 - 4,721 4,721 Cash payments (1,296) (1,296) --------------------------------------- Liability balance at January 5, 2007 $ - $ 3,425 $ 3,425 =======================================

Additionally, as part of the acquisition of ARC, the Company acquired the remaining obligations of ARC's existing restructuring plan, which was initially recorded by ARC in fiscal 2002 and 2003. The total obligations assumed in connection with this restructuring plan was approximately $2.1 million at July 23, 2004. As of January 5, 2007 and 2006, the balance of the ARC fiscal 2002 and 2003 accrued restructuring costs recorded consisted of the following: F. 18

Facility Other (in thousands) Severance consolidations charges Total Total liability as of July 23, 2004 $ 647 $ 756 $ 696 $ 2,099 Cash payments (594) (424) (656) (1,674) -------------------------------------------------- Balance at January 5, 2005 53 332 40 425 Adjustment of initial liability - 100 - 100 Cash payments (53) (388) (15) (456) -------------------------------------------------- Balance at January 5, 2006 - 44 25 69 Cash payments - (44) (11) (55) -------------------------------------------------- Balance at January 5, 2007 $ - $ - $ 14 $ 14 ==================================================

8. Income Taxes The provision (benefit) for income taxes consists of the following:

(in thousands) Fiscal Years ----------------------- 2006 2005 2004 ----- -------- ------ Current: Federal $ 709 $ (865) $3,072 State 125 (15) 1,378 ----- -------- ------ Total current 834 (880) 4,450 ----- -------- ------ Deferred: Federal 130 (4,458) 2,440 State 23 (683) 323 ----- -------- ------ Total deferred 153 (5,141) 2,763 ----- -------- ------ Total income tax provision $ 987 $(6,021) $7,213 ===== ======== ======

The approximate tax effect of the temporary differences giving rise to the Company's deferred income tax assets (liabilities) are: F. 19

(in thousands) Fiscal Years ------------------------ 2006 2005 ----------- ----------- Deferred Tax Assets: Receivables allowances $ 1,750 $ 1,727 Deferred compensation 97 151 Non-compete agreements 483 508 Restructuring charges 1,385 1,845 State net operating losses 591 543 Federal net operating losses 4,802 4,802 Other 1,514 1,439 ----------- ----------- Total deferred tax assets 10,622 11,015 ----------- ----------- Deferred Tax Liabilities: Depreciation (3,321) (2,692) Intangibles (1,127) (1,467) Leases (812) (975) Other (553) (919) ----------- ----------- Total deferred tax liabilities (5,813) (6,053) ----------- ----------- Net deferred tax assets ( liabilities) $ 4,809 $ 4,962 =========== ===========

As of January 5, 2007, the Company's net current deferred tax assets of $2,878 are included in other current assets and the net noncurrent deferred tax assets of $1,931 are included in other assets on the balance sheet. As of January 5, 2006, the Company's net current deferred tax assets of $2,420 are included in other current assets and the net noncurrent deferred tax assets of $2,542 are included in other assets on the balance sheet. The Company recorded $9,357 of net deferred tax assets, primarily related to the tax effect of federal and state net operating loss carryforwards and restructuring charges, in connection with the acquisition of ARC in July 2004. The Company's ability to use the federal and state net operating loss carryforwards of ARC to reduce its future taxable income is subject to limitations under Section 382 of the Internal Revenue Code associated with acquired federal and state net operating loss carryforwards. The federal net operating loss carryforwards of ARC aggregate $13,721 as of January 5, 2007 of which $1,702 will expire in 2020, $8,010 in 2023 and $4,009 in 2024. The Company currently believes it will fully utilize ARC's acquired net operating loss carryforwards and, accordingly, no valuation allowance has been provided as of January 5, 2007. In addition, the recorded amounts of acquired deferred tax assets and liabilities were adjusted during fiscal 2005 upon completion of ARC's final income tax returns for the period prior to its acquisition by the Company. The Company's effective income tax rate differs from the federal statutory rate as follows:

Fiscal Years ---------------------------- 2006 2005 2004 -------- -------- -------- Tax (benefit) at federal statutory rate 34.0 % (35.0)% 35.0 % -------- -------- -------- State taxes, net of federal effect 4.9% (2.7)% 6.1 % Permanent tax differences and other (primarily meals & entertainment) 7.4 % 1.6 % (1.4)% -------- -------- -------- Effective tax rate 46.3 % (36.1)% 39.7 % ======== ======== ========

9. Operating Leases and Commitments Operating Leases- The Company leases office and warehouse space, vehicles, and certain office equipment from various lessors including a related party. See Note 13 of Notes to Consolidated Financial Statements for information regarding related parties. Lease terms vary in duration and include various option periods. The leases include certain provisions for rent escalation, renewals and purchase options, and the Company is generally responsible for taxes, insurance, repairs and maintenance. In December 2005, the Company's lease for an airplane expired and a new lease agreement was signed for a replacement airplane. This lease is treated as an operating lease for financial reporting purposes. The lease provides for monthly rental payments of $125 thousand over the three-year term of the initial lease F. 20 with four one-year renewal periods thereafter. The Company also provides a residual value guarantee. We have determined that we are not required to consolidate the lessor, the leased aircraft or the related debt in accordance with FASB Interpretation No. 46 (revised), "Consolidation of Variable Interest Entities." Future minimum lease payments under noncancelable operating leases with initial or remaining terms in excess of one year as of January 5, 2007, including the lease with the related party, are as follows:

(in thousands) Fiscal Year ----------------------------- 2007 $ 4,052 2008 3,465 2009 1,649 2010 1,661 2011 1,582 Thereafter 5,464 ------- Total minimum lease payments $17,873 =======

Rental expense was $3.6 million, $3.4 million and $3.4 million for 2006, 2005 and 2004, respectively. Employment Agreements-The Company is party to employment agreements with certain executives, which provide for compensation and certain other benefits. The agreements also provide for severance payments under certain circumstances. 10. Employee Benefit Plans The Company has a savings plan intended to qualify under sections 401(a) and 401(k) of the Internal Revenue Code. The plan covers substantially all employees of the Company. The Company makes contributions to the plan based on a participant's annual pay. Contributions made by the Company for fiscal 2006, 2005 and 2004 were approximately $188 thousand, $276 thousand and $236 thousand, respectively. The Company has a stock purchase plan (the "1998 plan") under Section 423 of the Internal Revenue Code of 1986, as amended. The 1998 plan, as amended, provides substantially all employees of the Company with an opportunity to purchase through payroll deductions up to 2,000 shares of common stock of the Company with a maximum market value of $25,000 per year. The purchase price per share is determined by whichever of two prices is lower: 85% of the closing market price of the Company's common stock in the first trading date of an offering period (grant date), or 85% of the closing market price of the Company's common stock in the last trading date of an offering period (exercise date). 600,000 shares of common stock of the Company are reserved for issuance under the 1998 plan. The Board of Directors of the Company may at any time terminate or amend the 1998 plan. The 1998 plan will terminate twenty years from the effective date unless sooner terminated. During fiscal 2006, the Company recognized approximately $70 thousand in expense related to the stock purchase plan due to it being compensatory under FAS 123R. 11. Concentrations During fiscal 2006, 2005, and 2004 approximately 38.5%, 27.7%, and 23.4%, respectively, of the Company's total net product and service revenues were derived from its top ten customers. During fiscal 2006, one customer, IBM Corporation, accounted for more than 10% of the Company's total net product and service revenues with approximately $74.5 million in revenues. The revenues generated from IBM Corporation are primarily resulting from services provided. However in fiscal 2005 and 2004 no customer accounted for more than 10% of the Company's total net product and service revenues. The loss of one or more significant customers could have a material adverse impact on the Company's operating results. We maintain cash balances which at times exceed FDIC limits. F. 21 12. Acquisitions During fiscal 2006 and fiscal 2005, the Company did not make any acquisitions. During fiscal 2004, the Company completed one acquisition. The Company and Pomeroy Acquisition Sub, Inc. ("PAS"), a wholly owned subsidiary of the Company, completed a merger with Alternative Resources Corporation ("ARC"). On May 11, 2004, the parties entered into a definitive merger agreement for PAS to acquire all of the issued and outstanding shares of capital stock of ARC. The merger was approved by ARC shareholders at a meeting held on July 22, 2004. As a result of the merger, ARC is now a wholly-owned subsidiary of the Company. The cash consideration paid at closing, including the cost of all stock, stock options and warrants purchased and the amount of ARC net debt retired, was approximately $46.1 million, which was funded from cash on hand and borrowings from the Company's existing line of credit. The following summarizes the assets purchased and liabilities assumed:

(in thousands) Cash $ 2,349 Accounts receivable 19,303 Other current assets 4,871 Property and equipment, net 193 Intangible assets 3,530 Goodwill 41,864 Other assets 7,051 ------- Assets acquired 79,161 ------- Current portion of notes payable 15,487 Accounts payable and accrued expenses 29,961 Notes payable, net of current portion 15,236 ------- Liabilities assumed 60,684 ------- Net assets acquired $18,477 =======

Additionally, during fiscal 2005, the Company recorded an additional purchase price adjustment of $6.7 million, related to additional pre-acquisition liabilities. The results of operations of ARC are included in the Company's fiscal 2004 consolidated financial statements from the date of acquisition. If the fiscal 2004 acquisition of ARC described below had occurred on January 6, 2004, the unaudited pro forma results of operations of the Company would have been as follows:

(in thousands, except per share data) For the year ended January 5, 2005 ------------------------------ Actual Pro forma ------------------------------ Net product and service revenues $ 742,290 $ 807,345 Income from operations 18,397 16,233 Net income 10,933 9,501 Earnings per common share, diluted 0.88 0.76

13. Related Party Transactions Leases- Pomeroy's principal executive offices, distribution facility, national training center, and national service operations center comprised of approximately 36,000, 161,000, 22,000, and 69,000 square feet of space, respectively, are located in Hebron, Kentucky. These facilities are leased from Pomeroy Investments, LLC ("Pomeroy Investments"), a Kentucky limited liability company controlled by David B. Pomeroy, II, Chairman of the Board, under a ten-year triple-net lease agreement, which expires in July 2015. The lease agreement provides for 2 five-year renewal options. Base rental for fiscal 2006, 2005 and 2004 was approximately $1.4 million, $1.2 million and $1.2 million, respectively. The annual rental for these properties was determined on the basis of a fair market value rental opinion provided by an independent real estate company, which was updated in 2005. In addition, the Company pays for the business use of other real estate that is owned by the former Chief Executive Officer of the Company. During fiscal year 2006 and 2005, the Company paid $25 thousand and during fiscal years 2004, the Company paid $95 thousand in connection with this real estate. The lessor of the headquarters, distribution facility and national training center does not meet the conditions to be considered a variable interest entity in accordance with FIN 46. F. 22 Investment in Lease Residuals - During fiscal 2006, 2005, and 2004, the Company sold equipment and related support services to National City Commercial Capital Corporation (formerly ILC), for lease to National City's customers, in amounts of $17.7 million, $22.3 million and $22.5 million, respectively. Also, during fiscal 2002, the Company signed an exclusive seven-year vendor agreement whereby the Company is appointed as an agent for remarketing and reselling of the leased equipment sold. 33The Company will be paid a commission on future lease transactions referred to and accepted by National City and will act as the remarketing and reselling agent for such future leased equipment. A director of the Company is CEO of National City Commercial Capital Corporation (formerly ILC). Employee Receivables - As of January 5, 2007 and 2006, employee receivables included in other accounts receivable amounted to net of $210 thousand and $766 thousand, respectively. 14. Supplemental Cash Flow Disclosures Supplemental disclosures with respect to cash flow information and non-cash investing and financing activities are as follows:

(in thousands) Fiscal Years ------------------------------- 2006 2005 2004 --------- --------- --------- Interest paid $ 1,149 $ 1,042 $ 558 ========= ========= ========= Income taxes paid $ 33 $ 1,340 $ 5,116 ========= ========= ========= Adjustment to purchase price of acquired assets and goodwill $ - $ 5,879 $ 171 ========= ========= =========

15. Treasury Stock On March 31, 2006, the Board of Directors of the Company authorized a program to repurchase up to 500,000 shares, at an aggregate price of no more than $5.0 million. The Company intends to effect such repurchases, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. The acquired shares will be held in treasury or cancelled. The Company anticipates financing the repurchase program out of working capital. This stock redemption program was approved to remain in place and in full force/effect for a period of 18 months. During fiscal 2006, the Company purchased 320,415 shares at an average price per share of $7.67 at a total cost of $2.5 million. During fiscal 2005, the Company repurchased 31,300 shares of common stock at a cost of $0.4 million under the repurchase program that expired October 11, 2005. During fiscal 2004, the Company repurchased 40,000 shares of common stock at a cost of $0.5 million under the repurchase program that expired June 1, 2004. 16. Stockholders' Equity and Stock Option Plans On March 27, 2002, the Company adopted the 2002 Non-Qualified and Incentive Stock Option Plan and it was approved by the shareholders on June 13, 2002. The plan was amended and renamed the 2002 Amended and Restated Stock Incentive Plan on March 11, 2004 and approved by the Company's shareholders on June 10, 2004. The Company's 2002 Amended and Restated Stock Incentive Plan provides certain employees of the Company with options to purchase common stock of the Company through options at an exercise price equal to the market value on the date of grant. The plan, as amended, also provides for the granting of awards of restricted stock and stock appreciation rights. The maximum aggregate number of shares which may be optioned and sold under the plan is 4,410,905, of which up to 600,000 shares may be issued in the form of restricted stock. The plan will terminate on June 13, 2012. Stock options granted under the plan are exercisable in accordance with various terms as authorized by the Compensation Committee. To the extent not exercised, options will expire not more than ten years after the date of grant. During fiscal 2006, the Company awarded 60,258 shares of restricted common stock, which vest over a 4-year period. Restricted stock awards are valued at the closing market value of the Company's common stock on the date of the grant, and the total value of the award is recognized as expense ratably over the vesting period of the employees receiving the grants Total compensation expense recognized in fiscal 2006 for vested shares was $276 thousand. During fiscal 2005, the Company awarded 123,261 shares of restricted common stock, which vest over a 4-year period. Total compensation expense recognized in fiscal 2005 for vested shares was F. 23 $68 thousand. As of January 5, 2007, the total amount of unrecognized compensation expense related to nonvested restricted stock awards was approximately $1.4 million, which is expected to be recognized over a weighted-average period of approximately 3.0 years. In fiscal 2005, the unvested portion of this restricted stock award is presented as unearned compensation in the consolidated financial statements.

Weighted Average Shares Exercise price ------- ----------------- Restricted common stock outstanding January 6, 2005 - - Granted 123,261 $ 10.27 Exercised - - Forfeitures - - ------- Restricted common stock outstanding January 5, 2006 123,261 10.27 Granted 60,258 7.81 Exercised - - Forfeitures - - ------- Restricted common stock outstanding January 5, 2007 183,519 $ 9.46 =======

On March 27, 2002, the Company adopted the 2002 Outside Directors' Stock Option Plan and it was approved by the shareholders on June 13, 2002. The plan was amended on March 11, 2004 and approved by the Company's shareholders on June 10, 2004. The Company's 2002 Outside Directors' Stock Option Plan, as amended, provides outside directors of the Company with options to purchase common stock of the Company at an exercise price equal to the market value of the shares at the date of grant. The maximum aggregate number of shares which may be optioned and sold under the plan is 281,356. The plan will terminate on March 26, 2012. Pursuant to the plan, an option to purchase 10,000 shares of common stock will automatically be granted on the first day of the initial term of a director. An additional 10,000 shares of common stock will automatically be granted to an eligible director upon the first day of each consecutive year of service on the board. Options are fully vested as of the date of grant and must be exercised within two years of the date of grant, subject to earlier termination in the event of termination of the director's service on the Board. The plan was amended again on April 11, 2006, the Board of Directors approved certain amendments to the Directors' Plan, subject to stockholder approval. The primary purposes of the amendments was to (1) add restricted stock as a type of award that may be granted under the Directors' Plan and provide that the restriction period for restricted stock awards shall be not less than 4 years, (2) provide that the annual award of common stock to a Director will be a restricted stock grant (unless the Board determines otherwise) but that the number of shares subject to the annual award is decreased from 10,000 shares to 3,300 shares, and (3) decrease the total number of shares reserved under the Directors Plan by 28,856 shares which was approved by the shareholders on June 20, 2006. During fiscal 2006, the Company awarded 19,800 shares under this plan. The following summarizes the stock option transactions under the plans for the three fiscal years ended January 5, 2007:

Weighted Average Shares Exercise price ---------- ----------------- Options outstanding January 6, 2004 2,067,518 13.41 Granted 1,173,250 13.32 Exercised (185,765) 9.91 Forfeitures (321,084) 15.62 ---------- Options outstanding January 5, 2005 2,733,919 13.34 Granted 1,012,500 13.04 Exercised (192,763) 11.38 Forfeitures (627,153) 13.73 ---------- Options outstanding January 5, 2006 2,926,503 13.31 Granted 321,250 9.00 Exercised (29,167) 5.98 Forfeitures (994,072) 13.51 ---------- Options outstanding January 5, 2007 2,224,514 $ 12.70 ==========

F. 24 The following summarizes options outstanding and exercisable at January 5, 2007:

Options Outstanding Options Exercisable ---------------------------------------------- ---------------------------- Number Weighted Avg. Number Range of Outstanding Remaining Weighted Avg. Exercisable Weighted Avg. Exercise Prices at 1/5/07 Contractual Life Exercise Price at 1/5/07 Exercise Price ---------------- ----------- ---------------- --------------- ----------- --------------- 5.66 to $8.48 222,023 3.46 $ 7.91 173,091 $ 7.98 8.49 to $11.30 459,379 2.95 $ 9.88 355,316 $ 9.94 11.31 to $14.13 639,569 2.14 $ 13.05 587,819 $ 13.07 14.14 to $16.95 816,943 2.87 $ 14.79 740,593 $ 14.75 16.96 to $19.78 86,600 0.48 $ 17.64 86,500 $ 17.64 ----------- ----------- 2,224,514 1,943,319 =========== ===========

The aggregate intrinsic value is defined as the difference between the market value of the Company's stock as of the end of the period and the exercise price of the stock options. This value for stock options outstanding and exercisable as of January 5, 2007 was $10.3 million and $9.4 million, respectively. The total intrinsic value of stock options exercised during the year ended 2006 was $60.4 thousand. As a result of the stock options exercised, the Company recorded common stock and additional paid-in-capital of $190 thousand, which includes $16 thousand of tax benefits recognized. During years ended January 5, 2007, 2006 and 2005, cash received from stock options exercised was $0.2 million, $2.2 million and $1.8 million, respectively. During fiscal 2006, the Company recorded compensation expense, net of an estimated forfeiture rate of 18.5%, related to stock options (vested portion) of $1.25 million. The weighted average fair value at date of grant for options granted during fiscal 2006, 2005 and 2004 was $3.26, $5.17 and $3.48, respectively. The unissued preferred stock carries certain voting rights and has preferences with respect to dividends and liquidation proceeds. 17. Contingencies The Company is party to various negotiations, customer bankruptcies and legal proceedings in the normal course of business. Management believes these matters will not have a material adverse effect on the Company's financial position or results of operations. 18. 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. 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 and annual external financial statement reporting purposes. During fiscal 2005, the Company realigned its management and reporting responsibilities into functional lines: Sales, Service Operations, Finance and Administrative. Management and the board of directors now review operating results on a consolidated basis. As a result the Company determined it had one operating segment and the Company now reports one reportable segment. F. 25