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 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) trade and vendor receivable allowances, (3) valuation of long-lived assets, (4) income taxes, (5) contingencies and accruals and (6) stock based compensation.

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Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, which superseded SAB 101, Revenue Recognition in Financial Statements.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, pursuant to the guidelines of Emerging Issues Task Force 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent", 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.

The Company sells certain third party warranties and service agreements. As the Company is not obligated to perform these services, revenue is recognized at the time of the sale, net of the related payments to the third party service provider, pursuant to the guidelines of EITF 99-19.

When the Company provides a combination of products and services to customers, the arrangement is evaluated under EITF 00-21, which addresses certain aspects of accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. For substantially all products and services we provide to customers (a) the product or service has stand-alone value, (b) fair value of the undelivered item can be estimated and (c) delivery or performance of the undelivered items is considered probable and in the control of the vendor. In most instances, the quoted price for each element is equal to the fair value as the Company almost always is required to competitive bid each component of multiple-element arrangements. Total proceeds are allocated to the multiple deliverables based on the relative fair value of each item.

Pomeroy provides certain services on a time and materials basis. Revenue related to these services is recognized at the time the related services and materials are provided. The Company also has certain fixed price contracts for which the proportional performance method is applied. If the arrangement involves an unspecified number of actions over a given period of time, an equal amount of revenue is recognized in fixed intervals, typically using the straight-line method over the contract's life to recognize the service revenue.

Pomeroy enters into fixed price maintenance contracts with its customers. The Company provides fixed price maintenance and support services covering specific computer equipment to its customers. Pomeroy's fixed price contracts may include labor and or parts and a contract's life can cover a period from three months to multiple years. These service contracts are a pre-determined arrangement with contractual values and start and end dates. These fixed-price service contracts are invoiced upfront but the revenue is deferred and recognized ratably over the life of the contract. Pomeroy's associated actual expenses, labor and material, are recognized as incurred.

The Company reports revenues and costs net of any taxes collected from customers. When the Company collects taxes from customers, the taxes are included in accounts payable and accrued liabilities until remitted to the taxing authorities.

Trade and vendor receivable allowances
Pomeroy maintains allowances for doubtful accounts on both trade and vendor receivables for estimated losses resulting from the inability of its customers or vendors to make required payments. 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. 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.

Factors considered are account aging, historical bad debt experience, and current economic trends. The analysis is performed on both trade and vendor receivable portfolios. A separate allowance account is maintained based on each analysis.

Valuation of long-lived assets
Long-lived assets, including property and equipment 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 for long lived assets other than goodwill, 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. During the fourth quarter of fiscal 2008, the Company recorded an intangible asset impairment charge of $0.7 million.

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 recorded in fiscal 2007, a $15.0 million non-cash valuation reserve to reduce the carrying amount of recorded deferred tax assets after management's review determined that the deferred tax assets may not be recovered from future taxable income in the near future. In fiscal 2008, the valuation reserve was increased by an additional $6.6 million for deferred tax assets which management has determined may not be recovered from future taxable income in the near future. The Company considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for this valuation allowance. The valuation allowance recorded in fiscal 2008 and 2007 increased the net loss for these fiscal years.

The Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, and an interpretation of FASB Statement No. 109 ("FIN 48") on January 6, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109 and prescribes a recognition threshold of more-likely-than-not to be sustained upon examination. The Company includes interest and penalties related to gross unrecognized tax benefits within the provision for income taxes.

Contingencies and Accruals
The Company is subject to the possibility of various loss contingencies and accruals arising in the ordinary course of business. The Company accrues an estimated loss contingency when probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information available to determine if such accruals should be adjusted and if new accruals are required.

In accordance with FASB Technical Bulletin No. 90-1 (as amended) "Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts," the Company recognizes a loss on a contract and records a liability when the loss is known and certain. The loss is calculated by using the estimated contract revenues less estimated direct employee and product costs over the remaining term of the contract or until an established contract exit date. During the fourth quarter of fiscal 2007, the Company recorded a $2.4 million loss for 2 of the Company's contracts received in fiscal 2007, which the projected margins had not been realized.

Stock based compensation plans
The Company has equity plans intended to provide an equity interest in the Company to key management personnel and thereby provide additional incentives for such persons to devote themselves to the maximum extent practicable to the businesses of the Company. The Company adopted Statement of Financial Accounting Standards No. 123(R) (SFAS 123R) ("Stock Based Payment") 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 based on the fair value of the equity instruments and recognize this cost over the period during which the employee is required to provide the services.

The Company uses the simplified method to calculate the expected life of stock awards as permitted under the SEC Staff Accounting Bulletin 107 due to limited historical information available to reliably calculate expected option terms. 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 Bill rates at the time of grant. 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 is based on the historical volatility of the Company's stock price for the expected life of the option.

For further information on the Company's equity compensation plan see Note 15 of Notes to Consolidated Financial Statements.

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

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

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

The fair value of certain of the Company's financial instruments, including cash and cash equivalents, certificates of deposit, accounts receivable and accounts payable, approximates the carrying value due to the relatively short maturity of such instruments.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. SFAS 159 became effective for the Company in fiscal 2008. The Company determined there was no impact from the adoption of SFAS 159 on the consolidated financial statements.

In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141(R), "Business Combinations" which replaces SFAS No. 141, "Business Combinations." This Statement retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting (formerly referred to as purchase method) is to be used for all business combinations and that an acquirer is identified for each business combination. This Statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as of the date that the acquirer achieves control. This Statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values. This Statement requires the acquirer to recognize acquisition-related costs and restructuring costs separately from the business combination as period expense. This Statement is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company will implement SFAS No. 141(R) for any business combinations occurring at or subsequent to January 5, 2009.

In April 2008, the FASB issued FASB Staff Positions (FSP) FAS 142-3, "Determination of the Useful Life of Intangible Assets". This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, "Goodwill and Other Intangible Assets". The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and other generally accepted accounting principles in the United States of America. This FSP is effective for fiscal years beginning after December 15, 2008 and, therefore, is effective for the Company in fiscal year 2009. The Company does not expect the adoption of this FSP to have a material impact on its consolidated financial statements.

In May 2008, the FASB issued FASB No. 162, "The Hierarchy of Generally Accepted Accounting Principles". This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States of America. This statement became effective November 15, 2008 without material impact to the Company's consolidated financial statements.

In June 2008, the FASB issued FSP No. EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities." FSP EITF 03-6-1 concludes that non-vested shares with non-forfeitable dividend rights are considered participating securities and, thus, subject to the two-class method pursuant to SFAS 128, "Earnings per Share", when computing basic and diluted EPS. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, including interim periods within those years. The adoption of this FSP is not expected to have a material impact on the Company's consolidated financial statements.

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

(in thousands)
Financial Results                                      For the Fiscal Years
                                         % of                          % of                         % of
                          2008         Revenues         2007         Revenues        2006         Revenues
Net revenues:
Product                 $ 340,003           60.1 %   $  386,605           65.9 %   $ 373,232           62.9 %
Service                   225,827           39.9 %      200,302           34.1 %     219,749           37.1 %
Total net revenues        565,830          100.0 %      586,907          100.0 %     592,981          100.0 %

Gross profit
Product                    34,561            6.1 %       34,249            5.8 %      30,930            5.2 %
Service                    35,197            6.2 %       24,399            4.2 %      35,612            6.0 %
Total gross profit         69,758           12.3 %       58,648           10.0 %      66,542           11.2 %

Gross profit %
Product %                    10.2 %                         8.9 %                        8.3 %
Service %                    15.6 %                        12.2 %                       16.2 %

Operating expenses:
Selling, general and
administrative             74,995           13.3 %       66,280           11.3 %      54,871            9.2 %
Depreciation and
amortization                4,086            0.7 %        4,687            0.8 %       4,894            0.8 %
Goodwill and
intangible asset
impairment                    711            0.1 %       98,314           16.7 %       3,472            0.6 %
Total operating
expenses                   79,792           14.1 %      169,281           28.8 %      63,237           10.6 %

Income (loss) from
operations                (10,034 )         -1.8 %     (110,633 )        -18.8 %       3,305            0.6 %

Other income
(expense):
Interest income               231            0.0 %          908            0.2 %         582            0.1 %
Interest expense           (1,062 )         -0.2 %       (1,091 )         -0.2 %      (1,757 )         -0.3 %
Other expense                (166 )          0.0 %            -            0.0 %           -            0.0 %
Other income
(expense), net               (997 )         -0.2 %         (183 )          0.0 %      (1,175 )         -0.2 %

Income (loss) before
income tax                (11,031 )         -2.0 %     (110,816 )        -18.9 %       2,130            0.4 %
Income tax expense          2,125            0.4 %        1,417            0.2 %         987            0.2 %

Net income (loss)       $ (13,156 )         -2.4 %   $ (112,233 )        -19.1 %   $   1,143            0.2 %

FISCAL YEAR 2008 COMPARED TO FISCAL YEAR 2007

Total Net Revenues: Total net revenues decreased $21.1 million or 3.6% in fiscal 2008, compared to fiscal 2007. For fiscal 2008 and fiscal 2007, the net revenues were $565.8 million and $586.9 million, respectively.

Product revenues were $340.0 million in fiscal 2008, a decrease of $46.6 million or 12.1% from fiscal 2007. This decrease was primarily due to continued delays in product purchases and deployments in several financial services and manufacturing industry accounts as a result of the challenging economic environment.

Service revenues were $225.8 million in fiscal 2008, an increase of $25.5 million or 12.7% from fiscal 2007. The Company groups services sales into Technical Staffing and Infrastructure services. Technical Staffing Services support clients' project requirements, ensures regulatory and customer compliance requirements and fulfills interim and permanent staffing requirements of the staffing projects. Infrastructure Services help clients optimize the various elements of distributed computing environments. Encompassing the complete IT lifecycle, these services include desktop and mobile computing, server and network environments.

                                                 (in millions)
              Service Revenue             Fiscal 2008       Fiscal 2007
              Technical Staffing        $       106.2     $        87.2
              Infrastructure Services           119.6             113.1
              Total Service Revenue     $       225.8     $       200.3

Technical Staffing revenue increased $19.0 million in fiscal 2008. This increase is due to a shift in the mix of business from vendor managed services in which our revenue is fee-based to more gross revenue for services provided by a combination of employees and subcontractors. As previously disclosed, we elected not to renew a technical services contract with a major customer in June 2008 because the proposed terms would have been unprofitable for the Company. As a result of the loss of this business, we expect a decline of approximately $80 million in technical staffing revenue in fiscal 2009. Technical Staffing revenue accounted for approximately 47.0% of total service revenues, compared to 43.5% in fiscal 2007.

Infrastructure Service revenues increased $6.5 million in fiscal 2008, primarily due to new long-term service engagements started at the beginning of 2008 offset by a decline in short-term project engagements. Infrastructure Service revenues accounted for approximately 53.0% of total service revenues in fiscal 2008, compared to 56.5% in fiscal 2007.

Gross Profit: Gross profit was $69.8 million in fiscal 2008, compared to $58.6 million in fiscal 2007. Gross profit margin, as a percentage of revenue, was 12.3% in fiscal 2008, compared to 10.0% in fiscal 2007.

Product gross profit was $34.6 million in fiscal 2008, compared to $34.2 million in fiscal 2007. Product gross profit margin as a percentage of product revenues increased to 10.2% in fiscal 2008, compared to 8.9% in fiscal 2007. This increase is due primarily to the improvements as a result of increased rebates from improved tracking of OEM partner promotional initiatives and targeting more profitable growth segments such as networking, server, storage and peripherals.

Service gross profit was $35.2 million in fiscal 2008, compared to $24.4 million in fiscal 2007. Service gross profit margins were 15.6% in fiscal 2008, compared to 12.2% in fiscal 2007.

                                                   (in millions)
             Service Gross Profit           Fiscal 2008       Fiscal 2007
             Technical Staffing           $        11.7     $        11.9
             Infrastructure Services               23.5              12.5
             Total Service Gross Profit   $        35.2     $        24.4

Gross profit from Technical Staffing Services was $11.7 million for fiscal 2008, compared to $11.9 million for fiscal 2007. Gross profit margin decreased to 11.1% in fiscal 2008 from 13.7% in fiscal 2007. This decrease in gross margin is primarily the result of a shift in the mix of business from vendor managed services in which our revenue is fee-based to more gross revenue for services provided by a combination of employees and subcontractors. Given the non-renewal of the technical services contract with a major customer in June 2008, we expect a decline in technical staffing gross margin of approximately $6.2 million in fiscal 2009.

Gross profit from Infrastructure Services was $23.5 million for fiscal 2008 compared to $12.5 million for fiscal 2007 due to the increase in revenue related to new service engagements started at the beginning of 2008. Gross profit margin increased to 19.6% in fiscal 2008 from 11.0% in fiscal 2007. This increase in gross profit margin is primarily the result of increased utilization and productivity of infrastructure services technical resources offset by unprofitable customer contracts during the first quarter of 2008 that were exited during the second quarter of 2008.

Operating Expenses: Total operating expenses were $79.8 million in fiscal 2008, compared to $169.3 million in fiscal 2007, a decrease of $89.5 million. The decrease is primarily the result of the following:

· In fiscal 2007, the Company recorded a goodwill impairment charge of $98.3 million.

· In fiscal 2007, the Company recorded $3.5 million for bad debt expense compared to $1.1 million in fiscal 2008. The bad debt allowance reflects the Company's history of charge-offs and the current composition of its accounts receivable portfolio.

· In fiscal 2007, the Company recorded a charge of $2.1 million to write-off certain software and to reflect a change in the remaining useful life of other existing software due to the initiation of a project to replace its enterprise reporting system.

· In fiscal 2007, the Company recorded charges of $0.3 million for non-recoverable transition costs on loss contracts, and $3.0 million for the resolution of certain outstanding lawsuits and payments of earn-out compensation.

· In fiscal 2007, the Company recorded costs of $1.2 million primarily related to a contested Proxy solicitation.

The decreases from fiscal 2007 operating expenses as set forth above were offset by an increase in operating expenses in fiscal 2008 of the following:

· In fiscal 2008, the Company recorded an accrued loss of $6.3 million on an operating lease for an aircraft because the Company determined the business . . .