**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHESECURITIES EXCHANGE ACT OF 1934**

**Forthe fiscal year ended December 31, 2006**

Commission File Number:**   0-19394**

**GTSICORP.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                 |   | **54-1248422**       |
|----------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of             |   | (I.R.S. Employer     |
| incorporation or  organization)              |   | Identification  No.) |
| **3901 Stonecroft Boulevard, Chantilly, VA** |   | **20151-1010**       |
| (Address of  principal executive offices)    |   | (Zip Code)           |

 

**703-502-2000**

(Registrant’s telephonenumber, including area code)

Securities registeredpursuant to Section 12(b) of the Act:   

| **Title of each class**         |   | **Name of  each exchange on which registered** |
|---------------------------------|--------|------------------------------------------------|
| Common Stock,  $0.005 par value |   | NASDAQ Global  Market                          |

 

Securities registeredpursuant to Section 12(g) of the Act: **None**

Indicate by check mark ifthe registrant is a well-known seasoned issuer as defined in Rule 405 ofthe Securities Act.    YES  o   NO  x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.    YES  o   NO  x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.    YES  x   NO  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct:

| Large accelerated filer |   | o |   | Accelerated filer |   | o |   | Non-accelerated  filer |   | x |
|-------------------------|--------|---|--------|-------------------|--------|---|--------|------------------------|--------|---|

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theAct).    YES  o   NO  x

The aggregate market valueof the voting common equity held by non-affiliates computed by reference to theprice at which the common equity was last sold, as of June 30, 2006 was$45,904,489

The number of sharesoutstanding of the registrant’s common stock on February 28, 2007 was9,554,453.

**DOCUMENTSINCORPORATED BY REFERENCE**

Items 10, 11, 12, 13 and14 of Part III of this Form 10-K are incorporated by referenceto GTSI’s proxy statement filed with the Securities and Exchange Commission inconnection with the Annual Meeting of Stockholders scheduled to be held on May 3,2007.

 

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**CONTENTS**

|               | ** ** | ** ** | ** ** | ** **                                                                                                         | ** ** | **Page** | ** ** |
|---------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I   |       | Item 1.    |       | Business                                                                                                           |       |     | 1          |   |   |
|          |       | Item 1A.   |       | Risk Factors                                                                                                       |       |     | 11         |   |   |
|          |       | Item 1B.   |       | Unresolved Staff Comments                                                                                          |       |     | 17         |   |   |
|          |       | Item 2.    |       | Properties                                                                                                         |       |     | 17         |   |   |
|          |       | Item 3.    |       | Legal Proceedings                                                                                                  |       |     | 17         |   |   |
|          |       | Item 4.    |       | Submission of Matters to a Vote of Security Holders                                                                |       |     | 17         |   |   |
| PART II  |       | Item 5.    |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       |     | 18         |   |   |
|          |       | Item  6.   |       | Selected  Financial Data                                                                                           |       |     | 21         |   |   |
|          |       | Item 7.    |       | Management’s Discussion and Analysis of Financial  Condition and  Results of Operations                       |       |     | 23         |   |   |
|          |       | Item 7A.   |       | Quantitative and Qualitative Disclosures About Market  Risk                                                        |       |     | 35         |   |   |
|          |       | Item 8.    |       | Financial Statements and Supplementary Data                                                                        |       |     | 36         |   |   |
|          |       | Item 9.    |       | Changes in and Disagreements With Accountants on  Accounting and Financial Disclosure                              |       |     | 62         |   |   |
|          |       | Item 9A.   |       | Controls and Procedures                                                                                            |       |     | 62         |   |   |
|          |       | Item  9B.  |       | Other  Information                                                                                                 |       |     | 62         |   |   |
| PART III |       | Item 10.   |       | Directors, Executives Officers and Corporate  Governance                                                           |       |     | 63         |   |   |
|          |       | Item 11.   |       | Executive Compensation                                                                                             |       |     | 63         |   |   |
|          |       | Item 12.   |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |       |     | 63         |   |   |
|          |       | Item 13.   |       | Certain Relationships and Related Transactions, and  Director Independence                                         |       |     | 63         |   |   |
|          |       | Item 14.   |       | Principal Accounting Fees and Services                                                                             |       |     | 63         |   |   |
| PART IV  |       | Item 15.   |       | Exhibits, Financial Statement Schedules                                                                            |       |     | 64         |   |   |
|          |       |       |       | Signatures                                                                                                         |       |     | 65         |   |   |
| Schedule II   |       |       |       | Valuation and Qualifying Accounts                                                                                  |       |     | 66         |   |   |
|          |       |       |       | Exhibit Index                                                                                                 |       |     | 67         |   |   |

 

 

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***Disclosure Regarding Forward-Looking Statements***

*Readers are cautioned that this Annual Report on Form 10-Kcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, (“Exchange Act”) relating to our operationsthat are based on our current expectations, estimates and projections. Wordssuch as “expect,” “believe,” “anticipate,” “plan,” “intend” and similarexpressions are used to identify these forward-looking statements. Thesestatements are not guarantees of future performance and involve risks,uncertainties and assumptions that are difficult to predict. Our actual resultsmay differ materially from what is expressed or projected in theseforward-looking statements. The reasons for this include the factors discussedin Item 1A, Risk Factors, of this Annual Report on Form 10-K. Wespecifically disclaim any obligation to update these forward-lookingstatements. These forward-looking statements should not be relied on asrepresenting our estimates or views as of any subsequent date.*

**PART I**

**ITEM 1.**                BUSINESS

**Overview**

Founded in 1983, GTSI Corp. is a Delaware corporationwith more than 20 years of experience focused exclusively on selling IT productsand solutions to U.S. Federal, state and local governments and to primecontractors who are working directly on government contracts. We use the terms “GTSI,”“we,” “our,” and “us” to refer to GTSI Corp. and its subsidiaries. During thisperiod, our customers have come to rely on GTSI to translate businesschallenges into practical technology solutions for today’s governments. “GTSI”is a registered service mark of GTSI Corp. All other trademarks and servicemarks are proprietary to their respective owners.

We sell todepartments and agencies of the U.S. Federal Government, as well as state andlocal governments, and prime contractors. Our total sales were $850 million,$882 million and $1.1 billion for the years ended December 31, 2006, 2005and 2004, respectively. Weoffer a competitive mix of logistical and procurement support to our customers.The approximate percentage of our sales by customer type for the yearsended December 31 was:

| ** **                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal  Government          |       |     | 72         | %        |       |     | 71         | % |   |   | 75 | % |   |
| Prime Contractors            |       |     | 20         | %        |       |     | 21         | % |   |   | 20 | % |   |
| State and Local  Governments |       |     | 8          | %        |       |     | 8          | % |   |   | 5 | % |   |
| Total                        |       |     | 100        | %        |       |     | 100        | % |   |   | 100 | % |   |

 

Additional information related to net (loss) income,total assets, significant customers and long-lived assets is provided in theconsolidated financial statements and the accompanying notes to theconsolidated financial statements appearing in Part II, Item 8 of thisAnnual Report on Form 10-K.

The information technology (“IT”) solutions we offerto our customers are predominantly product-based, but many also have a servicesoffering. Product-based components are identified and purchased by governmentprocurement officers under standard government contracts, which range fromsingle agency contracts to those which are available to the entire U.S. FederalGovernment or state government community (such as U.S. Communities). We arewell-positioned to fulfill the requirement of having an appropriate contractvehicle as we hold a contracts portfolio that includes nearly four dozen such contracts,and many major Federal agency-specific contracts.

To fulfill productdemand, GTSI maintains an approximately 142,000 square-feet distribution andintegration center in Northern Virginia, adjacent to Washington DullesInternational Airport. We use this proximity in concert with close systemsrelationships with our customers and vendors to assure timely delivery for ourcustomers’ mission-critical applications. We leverage our distribution andintegration 

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centerand matching logistics expertise to offer a wide variety of managed fulfillmentand value added services such as:

·       Hardwareintegration;

·       Customerimage propagation;

·       Automatedsystem diagnostics and data capture;

·       Customerasset tagging; and

·       Complexconfigurations of various IT solutions, such as Voice over Internet Protocol.

Both our distribution and integration operations areISO 9001:2000 certified.

To help our customersacquire, manage and refresh this technology in a strategic andapplication-appropriate manner, GTSI has created a mix of financial servicescapable of managing the entire technology lifecycle. GTSI offers leasearrangements to allow government agencies to acquire access to technology as anevenly distributed operating expense, rather than the much more budget-sensitiveand discontinuous capital expense. This is especially important to agencieswhose budget planning requirements span many forward-looking years, but whosetechnology needs cannot be accurately planned on the same timeline. It alsoappropriately helps agencies keep their information management resourcesfocused on the flow and security of agency information, rather than ownershipof the technology itself.

**Business Strategy**

GTSI is committed to and focused on providinginfrastructure technology solutions to the government customer. We believethere are significant opportunities to increase profitability through ourexisting business, and to expand on our relatively low market share within thegrowing government IT market.

GTSI continues to evolveas a provider of value-added infrastructure solutions that include bothproducts and services to our government and system integrator customers. Wehave been successful in providing technical assistance to support complex,multi-vendor solutions and in priming as well as subcontracting with otherservice providers. While the larger infrastructure solutions sales transactionsrepresent a small percentage of our total transactions, they represent themajority of our margin and profits. Going forward, we will continue to focus onthese larger, more profitable transactions, and drive processes and changes tomake the delivery of the smaller transactions more profitable. In addition, wewill continue to take other action to create and maintain a profitable company.Specifically, we plan to:

*Continue Focusingon the Government IT Market*

Because of our historicalfocus on government, GTSI has developed the expertise and established thepartner and customer relationships necessary to be a leader in this market. Asa result, our marketing and sales force are effective at reaching and servicingthe government market, which consists of government IT executives includingchief information officers, procurement and contracting officers, informationresource managers, as well as systems integrators, value-added resellers, andprime contractors.

*Leverage TechnologyLifecycle Management (TLM)*

GTSI has the ability toprovide TLM services for our government customers. TLM involves most aspects ofthe technology management process, including assessing and identifyingtechnology needs, acquisition of those technologies, integration andimplementation, ongoing services, asset disposal and financial services. Thisapproach provides a service that differentiates us in the marketplace. Coupledwith support services, technology refresh, and asset disposal, we offer ourcustomers a cost effective way to manage technology infrastructure.

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*Retain and ObtainGovernment Contracts and Utilize Flexible Contract Vehicles*

GTSI holds a wide range ofgovernment contracts, including multi-million dollar, multi-year contracts withthe Department of Defense (“DoD”) and various civilian agencies, as well asseveral multiple award schedules and blanket purchasing agreements with avariety of DoD and civilian agencies. In addition, we also serve as asubcontractor, providing products and services to other companies holdinggovernment contracts. GTSI intends to continue identifying and pursuingcontract vehicles that best leverage our broad selection of solutions, services,integration and distribution capabilities and partner relationships.

*Provide aHigh-Quality Centralized Source for Procuring IT Products and Services*

In addition to offering afull line of computer hardware, software and peripheral products, GTSI offersits customers pre- and post-sale technical support and assistance in theselection, configuration, installation and maintenance of the products andsystems that we sell. Furthermore, by offering a range of IT solutions andproducts, we offer our customers the convenience, flexibility and cost savingsof obtaining infrastructure technology solutions from a centralized source. Inour interactions with our customers, our employees focus on providing highquality customer services associated with the order, delivery, installation andrepair of the products we sell. In addition to our heritage product offerings,we now offer service solutions to meet our customer needs in networking andtelecommunications, storage and continuity of operations solutions, enterprisesoftware deployment, and managed logistics support.

**Customers**

GTSI’ssales are predominantly generated from multiple agencies and departments of theU.S. Federal Government, either directly or ultimately through primecontractors. Our sales from the U.S. Federal Government (both directly andindirectly) accounted for approximately 92%, 92%, and 95% of our sales during2006, 2005 and 2004, respectively. U.S. Federal Government sales were earnedfrom numerous agencies and departments as approximated below:

| ** **                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Department of  Defense             |       |     | 39         | %        |       |     | 35         | % |   |   | 37 | % |   |
| Civilian Agencies  and Departments |       |     | 39         | %        |       |     | 42         | % |   |   | 42 | % |   |
| Prime Contractors                  |       |     | 22         | %        |       |     | 23         | % |   |   | 21 | % |   |
| Total                              |       |     | 100        | %        |       |     | 100        | % |   |   | 100 | % |   |

 

**Contracts**

GTSI achieves its salesthrough federal, state and local government contracts and open marketprocurements. Our contracts with the U.S. Federal Government include a GeneralServices Administration (“GSA”) Schedule contract, IndefiniteDelivery/Indefinite Quantity (“IDIQ”) contracts and Blanket Purchase Agreements(“BPAs”). We pursue formal government bids for IDIQ contracts and BPAs.Substantially all of these bids are awarded on a “best value” to the governmentbasis (which, depending on the bid, can be a combination of price, technicalexpertise, past performance on other government contracts and other factors).We seek to use our vendor contacts, purchasing power, distribution strength andprocurement expertise to compete successfully on these bids. These majorprocurements may equal millions of dollars in total sales, span multiple yearsand provide a purchasing vehicle for many government agencies. In some cases,various government agencies levy an administrative fee on purchases made bydepartments outside of the agency that awarded the contract. These fees arecollected by GTSI and remitted to the respective agency on a contract specifiedpayment schedule. Items offered under our contracts include platform solutions,peripherals, maintenance, training and services. All 

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of ourcontracts allow for the addition of products and professional services undercertain circumstances. Additional details regarding our platform solutions andperipherals are provided in the Solutions, Services, and Products subheading inthis Business section.

*General ServicesAdministration*

GTSI holds a GSA designated Schedule 70 contract forthe sale of IT products and services. Schedule 70 contracts are multi-awardschedule contracts managed by the GSA IT Acquisition Center. In March 2002,the U.S. Federal Government formally exercised its first of three five-yearoptions to extend the GTSI contract through March 31, 2007. This schedulehas since been extended through October 1, 2007 while GTSI is innegotiations on a new GSA Schedule contract. GSA contracts provide all governmentagencies, certain international organizations, authorized prime contractors,and state and local governments with an efficient and cost-effective means forbuying commercial information technology products and services. GSA purchasersmay place unlimited orders for products under GSA contracts.

Our GSA contract containsprice reduction clauses requiring that we pass on to government customerscertain reduced prices we may receive from our vendors, but prohibits us frompassing on price increases that exceed 10% for a period of one year. Tomitigate the potentially adverse impact of any such price increase, we requiresubstantially all of our vendors who supply our GSA contract to provide us withsupply and price protection.

*IndefiniteDelivery/Indefinite Quantity*

GTSI holds a number of IDIQ vehicles, through whichthe government allocates funds for future purchases, without specifying the thepurchase dates or quantity. IDIQ contracts offer greater flexibility than GSAcontracts because they allow products to be added quickly and allow contractorsmore pricing flexibility. There are three types of IDIQ contracts:government-wide acquisition contracts (“GWAC”), multi-agency contracts (“MAC”),and single agency contracts. A GWAC is a task-order or delivery-order contractfor information technology established by a single Federal agency forgovernment-wide use upon approval by the Office of Management and Budget, whileMACs accept orders from the same agency, and from other agencies under theauthority of the Economy Act.

The products are soldunder the contract at a fixed price; however, the government typicallynegotiates a lower price for large quantity or high value orders.

*Task OrderContracts*

GTSI has also entered intoa number of Task Order contracts with Government agencies. Task Order contractsspecify the period of performance, including the number of option periods, andspecify the total minimum and maximum quantity of supplies or services theGovernment will acquire under the contract. Task Order contracts allow agenciesto enter into contracts before their specific service/product requirements areknown. The contract statement of work is a general description of the serviceor product the contractor will be obligated to produce on demand. And after thecontract award, the Government buyer will issue, when needed, task orders withspecific, detailed requirements.

*Blanket PurchaseAgreements*

Individual GSA ordering agencies may enter intoGSA-authorized BPAs with GSA contract holders. BPAs are similar to second-tiercontracts under a contractor’s GSA contract. BPAs enable agencies to obtainbetter pricing based on volume ordering and they decrease an agency’sadministrative costs by streamlining the ordering process.

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GTSI maintains severalFederal Supply Schedule BPAs that are authorized under our GSA Schedule 70contract. GSA authorized BPAs incorporate many terms, conditions and productsoffered on GSA Schedule contracts, often at prices lower than those availableon the GSA schedules. We normally enter into separate agreements with vendorsto offer reduced BPA prices to the government. Our BPAs are agency specific andallow us to focus specific vendor relationships on specific customers. Subjectto an award of a new GSA Schedule 70 contract, GTSI may have to work with ourcustomers to modify our BPAs currently under our GSA Schedule 70 contract. Weexpect our customers will work with us, but there can be no assurances.

*State and Local*

In 2003, GTSI was awarded U.S. Communities, amulti-state contract available to cities, counties, special districts (airport,water, etc.), state agencies, schools and large non-profits such as hospitalsand clinics. In addition, GSA now allows state and local government agencies toutilize GSA Schedules. Multi-state contracts enable individual states toutilize the buying power of multiple states, which results in lower costs basedon volume purchasing. The U.S. Communities contract expires on April 1,2008.

The products are sold under the contract at a fixedprice; however, governments typically negotiate a lower price for largequantity or high value orders. In addition, these contracts include anadministrative fee calculated on the product price. We collect this fee andremit it on a quarterly basis to the contract’s administering agency.

State and localcontracting vehicles generally fall into two categories: individual competitiveprocurements for specific IT solutions or state and locally-based IDIQcontracts. State and local procurements typically require formal responses froma prospective bidder. Each state maintains a separate code of procurementregulations that must be understood. Compliance is required to successfullymarket and sell to individual states. GTSI currently maintains several stateand local IT contracts, regularly submits written bids to state and localgovernments and is on a number of state and local government bid lists.

*Open Market*

While open market is not acontract vehicle, GTSI has processes and procedures in-place to utilize openmarket pricing, separate and apart from GSA Schedules, IDIQs and BPAs. We alsosell to prime contractors to the government, including systems integrators,through open market procurements. Certain contract vehicles allow a smallpercentage of open market pricing to be included to supplement contractrestrictions in the area of Professional Services. For example on SEWP III,when the 20% limit on Professional Services does not fully accommodate aspecific solution, permission can be requested from the Contracting Officer toallow up to an additional 5% using open market pricing.

**IntegrationServices**

GTSI’s certified experts operate in our own ISO9001:2000 facility to upgrade, install, test, and configure systems to agencytechnology standards. Each project is assigned a dedicated manager to overseelogistics support and fulfillment of services to streamline deployment, reducedowntime, manage costs, and consolidate resources.

GTSI integration engineers and consultants have provenexperience in leading integration platforms. Our knowledge of our Governmentcustomers, coupled with strong industry and technology expertise, help mitigatethe risks involved in integrating new technologies.

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Integration Services include:

·       Complexassembly for hardware and software

·       Designverification and QA testing

·       Integrationaudit and documentation

·       Logisticsand deployment planning

·       Imageloads

·       Rackand stack

·       Custompackaging

·       Asset management tools andservices

**Solutions,Services, and Products**

GTSI continuously monitorsand evaluates existing and emerging technologies and trends to ensure that weoffer our customers the most appropriate technology for their demandingapplications. GTSI provides our customers IT infrastructure solutions andservices custom to their specific needs.

*TechnologyLifecycle Management*

GTSI’s TLM methodologycombines professional and financial services with strong industry partnershipsinto a comprehensive framework for managing each phase of IT infrastructure. Byproactively planning for each phase with a long term approach, funding andmanagement of IT programs can be better aligned with business goals andrealization of benefits. GTSI TLM helps customers reduce total cost ofownership and risk, while increasing flexibility and efficiencies.

*Solutions*

In 2006 wecontinued our realignment of marketing emphasis around a focused number oftechnology areas in which our government customers have consistentlydemonstrated strategic interest, and which provide us with the greatestopportunity for sustained return on investment. This emphasis revolves aroundrepeatable solutions designed to address mission-critical challenges common tomany government agencies. We have in development solutions and capabilitiesthat align with our customers’ primary business and technology objectives, aswell as emerging technologies. Our current portfolio of solutions are:

·       StorageConsolidation

·       ServerConsolidation

·       UnifiedCommunications

·       MobileEvidence Capture

·       NetworkSecurity

Each GTSI solutioncontains elements of our Technology Lifecycle Management approach which startswith understanding customer drivers and requirements through customerenvironment assessments. The ensuing action plan is built around a customarchitecture, engineering, procurement, and deployment model which draws uponour experience in the market place and certified technology experts. Eachsolution includes an integration and implementation plan, along with support,warranty, and maintenance service level agreements. It is this combination ofproviding hardware and software, consulting and engineering expertise, assetmanagement, and ongoing support that best help our customers meet criticalbudget and business requirements and reduce the number of resources required todo so.

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*Services*

GTSI Service components include engineering andproject management resources that carry certifications in leading vendortechnologies and methodologies, including Project Management Institute andEarned Value Management standards. These specialized resources plan, design,engineer, integrate, deploy, and support complex, scalable IT infrastructuresolutions with a TLM approach. GTSI supports a wide range of integratedsolutions in areas such as enterprise software, mobility solutions, networkinfrastructure, data management and enterprise computing, asset management, andcyber and physical security. Our experienced and certified specialists include:Solutions Enterprise Architects, Project and Program Managers, Systems Analystsand Engineers and Security Consultants.

Customer focusedsolutions implemented through the TLM methodology include any or all of thesecore services:

·       Needsanalysis and environment assessment

·       Professionalservices - including project planning and management, engineering,implementation, and training

·       Systemsintegration, configuration, and light assembly

·       Assetmanagement

·       Logisticsplanning and deployment

·       Financialservices to evenly distribute cash flow requirements for technology refreshesand buying cycles

·       Support services—warranty,maintenance, custom service plans

*Financial Services*

GTSI Financial Services isa dedicated team of finance professionals who apply their understanding ofgovernment policies and regulations into creating a procurement strategy thathelps customers gain quicker access to the technology that meets their needs. GTSIFinancial Services provides flexible financing options for the entiretechnology lifecycle, using an agency’s operating and maintenance budget as amore flexible and predictable means than a capital expenditure.

*Support Service—Warranty,Maintenance, and Support*

As part of the TLM methodology, taking a proactiveapproach to IT infrastructure support helps increase productivity, improvetechnological efficiencies, and extend the life of IT assets. GTSI SupportServices help overcome day-to-day technology challenges and allow agencies tostay focused on key business objectives.

GTSI Support Services provides a portfolio ofrenewable, post-implementation services that improve the productivity of ITinfrastructure, ensure rapid problem resolution and replacement of parts, andreduce total cost of ownership through decreased downtime and proactivesupport.

GTSI’s TechnicalSupport Services provide options for custom service level agreements (SLA’s)for up to five years. Our Advanced Support Services provide proactivemonitoring and management of systems, as well as incident notification andresolution. Services include:

·       Global advanced replacementof parts

·       Multi-vendor first-callsupport

·       On-site support

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·       Consolidated co-terminoussupport contracts

·       Software updates andupgrades

·       Improved reliability andavailability; minimized operational expenses

*Hardware andSoftware*

GTSI has strong strategic relationships with globalhardware and software industry leaders. We are dedicated to developing emergingcapabilities and solutions with new vendors as technology develops anddelivering these capabilities and solutions through our services andmethodologies.

We provide our government customers with the equipmentand applications necessary for their custom architecture. These assets includemobile, network, security, and storage devices along with the software toeffectively run these systems. For example, GTSI provides servers and high-endcomputing products that fit into a storage and server consolidation solutionand networking devices in support of a core network upgrade or unifiedcommunications engagement.

GTSI helps customers make optimal use of thesetechnology components by providing the assessments, recommendations,implementation, and integration services that accompany these hardware andsoftware assets.

Thefollowing table indicates, for the years ended December 31 (dollars inmillions), the approximate sales by product category and related percentages oftotal sales.

| ** **                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Hardware                             |       | $        | 647.4      |     | 76.2       | %        | $          | 706.7 |   | 80.1 | % | $ | 833.4 |   | 77.5 | % |
| Software                             |       | 110.6    |       | 13.0     | %          | 117.8    |       | 13.4 | % | 155.7 |   | 14.5 | % |
| Resold  third-party service products |       | 36.7     |       | 4.3      | %          | 37.2     |       | 4.2 | % | 66.6 |   | 6.2 | % |
| Services                             |       | 55.5     |       | 6.5      | %          | 20.3     |       | 2.3 | % | 19.7 |   | 1.8 | % |
| Total                                |       | $        | 850.2      |     | 100.0      | %        | $          | 882.0 |   | 100.0 | % | $ | 1,075.4 |   | 100.0 | % |

 

**Strategic PartnerRelationships**

GTSI maintains strong relationships with a core set ofstrategic partners. These partners are industry leaders and are established inthe government market.  GTSI facilitatesbusiness to government customers on behalf of partners through our TLMmethodology, while our partners enable GTSI to deliver technology solutions toour customers.

Additionally, we establish and grow alliances withemerging and specialized technology companies to comprehensively addresscustomer needs in a custom solutions environment. Our major strategic partnersinclude: Sun, Cisco, Microsoft, Hewlett Packard and Panasonic.

GTSI brings ourpartners several advantages in the government market:

·       Gatewayto the complex government market through a significant number of diversecontract vehicles

·       Accessto the government customer through GTSI’s proactive sales force providingsolutions, services, and products

·       Lowercost overhead associated with government contractor compliance and procurementregulations

·       Reductionof costs related to co-op marketing and various administrative programs

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The terms of agreements with our vendors vary, buttypically permit us to purchase products to combine with integration andprofessional services for transactions with government customers. Virtuallynone of our agreements require us to purchase any specified quantity ofproduct. GTSI usually requires our partners to provide us with supply and priceprotection for the duration of specifically signed government contracts. Otherthan supply agreements under term government contracts, our vendor agreementsare typically terminable by GTSI or the vendor on short notice, at will orimmediately upon default by either party, and may contain limitations on vendorliability. These vendor agreements also generally permit GTSI to returnprevious product purchases at no charge within certain time limits for arestocking fee or in exchange for other products of such vendor.

Our strategic partners mayprovide us with various forms of marketing and sales assistance, includingsales incentives, market development funds, cooperative advertising and salesevents. They typically provide funding to offset all or part of the costs ofsuch efforts. Partners may also provide sell-through and other sales incentivesin connection with certain product promotions.

**InventoryManagement**

We purchase products for resale both directly frommanufacturers and indirectly through distributors and other sources. During2006, we purchased approximately 73% of the products we sold directly frommanufacturers and the remaining amount from distributors and other sources. Ourdistribution process is highly automated with a real-time shipment tracking andstatus system. All product picking is performed using bar-coded labels, UPC barcodes and radio frequency scanning. We implemented an RFID Solution in January 2005,which enables us to apply RFID tags to case and pallet-load shipments that meetpublished DoD requirements. We have dedicated teams to perform cycle counts,process customer returns and receive products.

We generally ship productsby UPS, FedEx, and other commercial delivery services and, where applicable,invoice customers for shipping charges.

**Marketing and Sales**

Our marketing department develops and manages ourbranding and positioning activities, which span all print, electronic and livemedia within our target market. These activities inform our governmentcustomers and prospects of our capabilities and the GTSI value proposition,helping us acquire new customers and retain existing business relationships.Many of these activities are funded by our strategic partners in exchange forthe market entry that GTSI relationships and expertise offer in selling to thegovernment.

Our marketing activities include sponsorship of majortrade shows, private customer-education events, display advertising in printand broadcast media, corporate and solutions-focused collateral, the GTSI.come-commerce Web site, targeted e-mail marketing, outbound telemarketing, andsales-related incentive programs.

We recognize that the size and diversity of thegovernment market make it imperative for us to identify and understand theneeds of our customers. Through years of intensive effort, GTSI has compiledand maintained a proprietary database that contains an extensive list of agencyprocurement and contracting officers, information resource managers, seniorpolicy makers, technology influencers, end-users, systems integrators, valueadded resellers and prime contractors. We use this database to target ourmarketing efforts and perform data mining for various market research purposes.

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Our sales organization isfocused on understanding the current and emerging needs of our customers and toprovide comprehensive solutions that include products and services to meetthose needs. Our sales organization continues to provide deep coverage forexisting customers while expanding sales coverage to focus on new accounts andnew solution offerings to current customers.

**Competition**

The government IT market is highly competitive, andsubject to rapid change. GTSI competes with a number of competitors, includingtraditional hardware and software manufacturers and resellers, systemsintegrators, commercial computer retail chains and distributors andincreasingly infrastructure solutions providers.

We believe that theprincipal competitive factors in the government IT market are:

·       Price(for highly commoditized technology);

·       Expertisein government procurement processes (where standardized contracts exist);

·       Existingcustomer and vendor relationships (for which there is traditionally a highbarrier to entry);

·       Technicalexpertise;

·       Logisticalcapability; and

·       Customerservice and support.

In recent years, competition within the traditionalreseller portion of our business has consolidated and intensified. Pricingpressure in particular has been and remains intense. We believe that price competition will continue to increase in2007, as consolidation continues and competitors rationalize their completesupply chain. This competition may require us in some cases to reduce prices,increase advertising expenditures or undertake other actions to retain ourstrategic position. Decreasing prices require us to sell a greater number ofproducts to achieve the same level of sales and gross margin. If this trendcontinues and we are unable to attract new customers and sell increasedquantities of products or modify our strategy, our future sales and grossmargins may be adversely affected.

Scaleand scope are important dimensions in the government technology supply chain. Anumber of competitors to our system integration business are much largerthan GTSI, and have far greater financial, marketing and technologicalresources. This difference in scale could in some cases produce a materialimpact on the promotional and sales support requirements of our business. Webelieve we have a competitive advantage over certain of our competitors becauseof our strong brand among government customers, our extensive contractportfolio and our wide variety of vendors.

**Backlog**

We identify an order asbacklog as soon as we receive and accept a written customer purchase order.Backlog fluctuates significantly from quarter to quarter because of theseasonality of the U.S. Federal Government ordering patterns and changes ininventory availability of various products. Our total backlog includes ordersthat have not shipped or delivered (“unshipped backlog”) as well as orders thathave shipped or delivered but cannot be recognized as revenue at the end of thereporting period, since title passes to our customers when the orders reach thedestination. Total backlog as of December 31, 2006 was $131 million comparedto $134.7 million as of December 31, 2005. Unshipped backlog as of December 31,2006 was approximately $115.6 million, compared to $126.0 million as of December 31,2005.

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**Employees**

At February 28, 2007we had 719 employees, including 411 in sales, marketing and professionalservices; 102 in operations; and 206 in finance, IT, contracts and legal, andother support functions. None of our employees are represented by a labor unionand we have experienced no labor-related work stoppages.

**AvailableInformation**

GTSI is traded on theNASDAQ Global Market under the symbol GTSI (See Item 5 of this Annual Report onForm 10-K). Our annual reports on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K, proxystatements for our annual stockholders’ meeting, and amendments to thosereports filed or furnished pursuant to Section 13(a) or 15(d) ofthe Exchange Act are made available free of charge on our web site at www.GTSI.comas soon as reasonably practicable after we electronically file such materialwith, or furnish it to, the Securities and Exchange Commission. All of GTSI’scurrent required Exchange Act filings with the SEC, as well as press releasesand other investor relations’ information, may be obtained free of charge byrequest to: Investor Relations, GTSI Corp., 3901 Stonecroft Boulevard,Chantilly, VA 20151-1010. Telephone (703) 502-2540.

**ITEM 1A.**        RISKFACTORS

There are many factorsthat affect our business and results of operations, some of which are beyondour control. The following is a description of some important factors that maycause actual results to differ materially from those in forward-lookingstatements and from historical trends.

***We rely on a smallnumber of large transactions for significant portions of our sales and grossmargins, and our operating results and cash flows may decline significantly ifwe fail to secure additional large transactions.***

We rely on U.S. FederalGovernment agencies and departments to provide a substantial portion of oursales either directly or through prime contractors with which we work. We havederived, and believe that we will continue to derive, a significant portion ofour sales from a limited number of projects and transactions with the U.S.Federal Government. For the year ended December 31, 2006, approximately92% of our sales came from the federal government. The completion orcancellation of a large project or a significant reduction in scope wouldsignificantly reduce our gross margins. In addition, if we fail to secure anequal number of large transactions in the future, our results will benegatively impacted. Any dispute, failure to exercise an extension, or contractnot renewed as a result of a re-compete could have a material adverse impact onour future operating results and gross margins.

***We continue toshift our business model from a reseller of products to a high-end solutionsprovider and this new model has certain risks, including increased competition,which may impact future results.***

We continue to evolve our business from one whichresells commodity IT products to one which provides value-added solutions toour government customers. A number of risks are inherent in this strategy. Wemay not be able to successfully maintain workforce which has the technicalskills to provide more complex technology to customers. Services and solutionsrequire different internal accounting, tracking, and project managementprocedures, and there is no assurance we will be able implement and maintainthose necessary procedures. We are now competing against organizations whichhave greater experience and past performance in selling solutions to governmentcustomers.  Some of these competitorsalso have significantly greater financial, technical and marketing resources,generate greater sales and have greater name recognition than we do.Additionally, efforts spent on evolving to a high-end solutions business modelmay detract from operating results.

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We believe ourability to continue to compete also depends in part on a number of competitivefactors, including:

·       expertisein government procurement processes where standardized contracts exist;

·       existingcustomer and vendor relationships (for which there is traditionally a highbarrier to entry);

·       technicalexpertise;

·       logisticalcapability;

·       theability of our clients or competitors to hire and retain project managers andother senior technical staff;

·       theprice at which others offer comparable technical solutions; and

·       theextent of our competitors’ responsiveness to client needs.

If we are unable tocompete effectively we could experience greater operating losses and our marketshare may decline, adversely affecting our results of operations and financialcondition. We also will need to continue to develop additional internaltechnical capabilities to identify, develop, market and sell more complexsolutions, and there is no assurance we will be successful in these endeavors.

***Any issue thatcompromises our relationship with agencies of the U.S. Federal Government wouldcause serious harm to our business.***

Our sales arehighly dependent on the government’s demand for IT products. Direct andindirect sales to numerous agencies and departments of the U.S. FederalGovernment accounted for 92%, 92% and 95% of our sales in 2006, 2005 and 2004,respectively. We believe that U.S. Federal Government contracts will continueto be a source of the majority of our sales for the foreseeable future. Forthis reason, any issue that compromises our relationship with agencies of theU.S. Federal Government would cause serious harm to our business. A materialdecline in overall sales to the U.S. Federal Government as a whole, or tocertain key agencies thereof, could have a materially adverse effect on ourresults of operations. Among the key factors in maintaining our relationshipswith U.S. Federal Government agencies are:

·       ourperformance on individual contracts and delivery orders;

·       thestrength of our professional reputation;

·       therelationships of our key executives with customer personnel; and

·       ourcompliance with complex procurement laws and regulations related to theformation, administration and performance of U.S. Federal Government contracts.

To the extent that our performance does not meetcustomer expectations, or our reputation or relationships deteriorate, thiswould cause a negative effect on our sales, profitability and cash flow.Noncompliance with government procurement regulations or contract provisionscould result in substantial monetary fines or damages, suspension or debarmentfrom doing business with the U.S. Federal Government, and civil or criminalliability.

Substantially all of ourgovernment contracts are terminable at any time at the government’s convenienceor upon default. If a government customer terminates one of our contracts forconvenience, we may recover, at most, only our incurred or committed costs,settlement expense, and profit on work completed prior to the termination. Upontermination of a government contract for default, the government reserves theright to recover the excess costs of procuring the specified goods and servicesfrom a different contractor although GTSI would reserve the right to appeal.The effect of unexpected contract terminations would negatively impact ourfinancial results.

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***Adverse changes inU.S. Federal Government fiscal spending could have a negative effect on oursales, gross margin, and cash flow.***

Changes in U.S.Federal Government spending policies or budget priorities could directly affectour financial performance. Among the factors that could materially harm ourbusiness are:

·       asignificant decline in spending by the U.S. Federal Government in general or byspecific departments or agencies in particular;

·       changesin the structure, composition and/or buying patterns of the U.S. FederalGovernment;

·       theadoption of new laws or regulations changing procurement practices; or

·       delaysin the payment of our invoices by government payment offices.

These or other factors couldcause U.S. Federal Government agencies and departments to reduce theirpurchases under contracts, to exercise their right to terminate contracts, ornot to exercise options to renew contracts, any of which would cause us to losefuture revenue.

***If we fail tocomply with any material provision or covenant of our Credit Facility, we maynot be able to continue to operate our business.***

The covenants ofour Credit Facility impose certain operating restrictions and financial andreporting covenants on us. These restrictions and conditions may affect ourability to operate our business and may limit our ability to take advantage ofpotential business opportunities as they arise. These covenants require us,among other restrictions, to:

·       maintaina minimum availability  of $5 million asreported on  the Borrowing BaseCertificate dated the last day of the month;

·       providequarterly EBITDA numbers that comply with schedules set forth in the creditagreement;

·       notexceed a maximum of $4 million in capital expenditures during the fiscal year;

During 2006, the Company signed two amendments to thecredit agreement to change the reporting requirements and the minimum EBITDAcovenants. The Company was in compliance with all financial covenants as setforth in the Credit Agreement as of December 31, 2006. On March 30, 2007, theCompany and its lenders executed an amendment to this Credit Agreement, whichremoved the minimum EBITDA covenant at March 31, 2007 and revised the minimumEBITDA covenant for future measurement periods.

While the Company believes that we will remain incompliance with all of the financial and reporting covenants under the Credit Agreement,including the minimum EBITDA covenant based on the recent amendment, there canbe no assurance that we will do so. A breach of any of the covenants orrestrictions in the Credit Agreement could result in an event of default underthe Credit Agreement. Such a default could result in the lenders discontinuinglending or declaring all outstanding borrowings to be due and payable. If anyof these events occur, we would need to find additional or alternativefinancing, if available, to refinance any such accelerated obligations. Therecan be no assurance that such financing would be available.

***Infrastructure failures could have a material adverseeffect on our business.***

We are highly dependent onour infrastructure to process orders, track inventory, ship products in atimely manner, prepare invoices to our customers, recognize revenue andotherwise carry on our business in the ordinary course.  In 2005, GTSI implemented a new supply chainmanagement system , the GTSI Enterprise Management System (“GEMS”), withsoftware provided by a third party. During 2005 and 2006, a significant numberof enhancements and additional reporting capabilities were added which enabledmanagement to make better decisions based on the information available. As of December 31,

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2006,core processes were stabilized with many active programs underway to continueto improve core processes, but we cannot be assured that additional failureswill not occur in the future.

***We have materialweaknesses in our internal control over financial reporting which could have amaterial adverse effect on our business and a negative impact on our stockprice.***

We are currently in theprocess of implementing remediation measures to correct previously disclosedmaterial weaknesses, and we can provide no assurance that we will be successfulin these efforts or that the remediation measures will result in our havingadequate internal control over financial reporting in the future. In addition,we cannot assure you that we will not in the future identify furtherdeficiencies or weaknesses in our internal control over financial reporting. Ifwe are unable to adequately remediate our material weaknesses and maintain aneffective system of internal control, our ability to timely and accuratelyreport financial results may continue to be adversely affected, which couldhave a material adverse effect on our ability to operate our business. Anyfailure to file periodic reports on a timely basis could have manyconsequences, including: potential delisting from NASDAQ, which wouldsignificantly impair the ability of our investors to buy and sell shares; lackof the timely disclosure to the market of our financial results; actions by theSEC against us for failure to comply with applicable Federal securities laws; andan event of default under the Credit Agreement with our lenders which wouldcancel our Credit Agreement and cause all outstanding loan obligations tobecome immediately due and payable. In addition, we may incur substantial costsin connection with these remediation measures and the implementation of suchmeasures may distract management from its ordinary business functions.

***If we fail to align costs with our sales levels, netlosses will continue.***

Our profitability is a function of our ability togenerate sales, improve our efficiency, and control costs. We plan ouroperating expense levels based primarily on forecasted sales levels. Theseexpenses and the impact of long-term commitments are relatively fixed in theshort-term. A short fall in sales could lead to operating results being belowexpectations because we may not be able to quickly reduce our fixed expenses inresponse to short term business changes. In response to sales short fallsduring the year ended December 31, 2005, we announced reduction inworkforce actions in February 2006 resulting in the elimination of over 70employee positions. Significant risks associated with reductions in workforceinclude decreases in employee morale and the failure to meet operationaltargets due to the loss of employees.

During the year ended December 31, 2006 weincurred significant costs due to restatement related efforts, refinancingfees, and the impairment of our deferred tax asset. In addition, expensesrelated to our accounting and finance department increased, and are expected tocontinue in 2007, related to the remediation of previously disclosed materialweaknesses in internal control over financial reporting and the on-goingremediation of significant deficiencies and material weaknesses in internal control.

If we are unable tocontrol our costs or generate sales to cover the costs required to run ourbusiness and correct our material weaknesses in internal control over financialreporting, our net losses will continue and our business could be adverselyaffected.

***Compliance withchanging regulations of corporate governance and public disclosure may resultinadditional expenses.***

Changing laws, regulationsand standards relating to corporate governance and public disclosure, includingthe Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ National Marketrules, are creating uncertainty for companies such as ours. These new orchanged laws, regulations and standards are complex and subject to varyinginterpretations. These new or changed laws could result in higher costsnecessitated by ongoing revisions to disclosure and governance practices. As aresult, our efforts to comply with evolving laws, regulations and standardshave resulted in, and are likely to continue to result in, 

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increasedselling, general and administrative expense and a diversion of management’stime and attention from revenue-generating activities to compliance activities.In particular, our efforts to comply with Section 404 of theSarbanes-Oxley Act of 2002 require the commitment of significant financial andmanagerial resources. Further, our Board members, Chief Executive Officer andChief Financial Officer could face an increased risk of personal liability inconnection with the performance of their duties. As a result, we may havedifficulty attracting and retaining qualified Board members and executiveofficers, which could harm our business.

***Our quarterlysales, operating results and cash flows are volatile, which makes our futurefinancial results difficult to forecast.***

Our sales,operating results and cash flows have been, and are expected to continue to be,subject to significant fluctuations from quarter to quarter due to a number offactors including:

·       Theseasonality of our business due to the U.S. Federal Government’s buying andfunding patterns;

·       Fluctuationsin our gross margins due to variations in the mix of products sold and excessor obsolete inventory charges;

·       Thenumber, size and scope of orders from our customers;

·       Demandfor our services generated by strategic partnerships and certain primecontractors;

·       Availabilityof price protection, purchase discounts and rebate programs from vendors;

·       Contractualterms and degree of completion of projects; and

·       Changesin our sales cycles as we move towards solution selling

Our recent level ofproduct gross margins may not be sustainable. In addition, changes in servicesgross margin may result from various factors such as changes in the mix betweentechnical support services and advanced services, as well as the timing ofservice contract initiations and renewals. As a consequence, sales volumes andoperating results for future periods are difficult to predict and, therefore,prior results are not necessarily indicative of results to be expected infuture periods.

***Because wesometimes work with third parties, any failure by these third parties tosatisfactorily perform their obligations could hurt our reputation, operatingresults and competitiveness.***

We offer certain of ourservices to our customers through various third-party service providers engagedto perform these services on our behalf. In addition, we outsource parts of ouroperations to third-parties and may continue to explore opportunities tooutsource others. In these engagements, we may engage subcontractors or we mayact as subcontractor to the prime contractor of an engagement. If these thirdparties fail to maintain adequate levels of support, do not provide highquality services or cease or reduce operations, our business, operations,customer relations and sales may be negatively impacted and we may be requiredto pursue replacement third-party relationships, which we may not be able toobtain on as favorable terms or at all. In addition, the inability to negotiateterms of a contract with a third party, the refusal or inability of these thirdparties to permit continued use of their services by us, or the termination bythe client or prime contractor of our services or the services of a keysubcontractor would harm our operating results.

***We may not qualify as a small business for newcontract awards.***

GTSI maintains a “small business” status under its GSASchedule contract, ITES contract and several BPAs it held in 2006 based uponGTSI’s size status at the time of the contracts’ original award dates. As aresult, GTSI enjoys a number of benefits, including being able to compete forsmall business orders, 

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qualifying as a smallbusiness subcontractor, bidding pursuant to small purchase procedures directedto non-manufacturer small business, and offering government agencies an avenueto meet their internal small business purchase goals.

A company’s size statusunder a contract is based on the North American Industry Classification System(“NAICS”) Code referenced in the subject contract’s solicitation. Depending onthe NAICS Code referenced in a solicitation, GTSI may or may not qualify as asmall business for new contract awards; further, new Federal AcquisitionRegulations effective June 30, 2007 will require a small businesscontractor to recertify their size status prior to an extension for a contractwith a term of longer than five years, and in other specific circumstances. GTSIwill not be renewing its existing GSA Schedule Contract, and has not yet beenawarded a new GSA Schedule Contract. Also, we anticipate that GTSI will not qualify as a small businessunder a new GSA Schedule 70 contract.

***Any potentialfuture acquisitions, strategic investments or mergers may subject us tosignificant risks, any of which could harm our business.***

Our long-termstrategy may include identifying and acquiring, investing in or merging withsuitable candidates on acceptable terms. In particular, over time, we mayacquire, make investments in, or merge with providers of product offerings thatcomplement our business. Currently, our financing agreement prohibits anyacquisitions without our lender’s prior consent. Acquisitions would involve anumber of risks and present financial, managerial and operational challenges,including:

·       diversionof management attention from running our existing business;

·       possibleadditional material weaknesses in internal control over financial reporting;

·       increasedexpenses including legal, administrative and compensation expenses related tonewly hired employees;

·       increasedcosts to integrate the technology, personnel, customer base and businesspractices of the acquired company with our own;

·       potentialexposure to material liabilities not discovered in the due diligence process;

·       potentialadverse effects on our reported operating results due to possible write-down ofgoodwill and other intangible assets associated with acquisitions; and

·       acquisitionfinancing may not be available on reasonable terms or at all.

Any acquired business,technology, service or product could significantly under-perform relative toour expectations, and we may not achieve the benefits we expect from ouracquisitions. For all these reasons, our pursuit of an acquisition, investmentor merger could cause our actual results to differ materially from thoseanticipated.

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**ITEM 1B.**    UNRESOLVEDSTAFF COMMENTS

Not applicable.

**ITEM 2.**             PROPERTIES

GTSI’s primary business is conducted from itscorporate headquarters complex and distribution center located in NorthernVirginia. We do not own any real property. Our headquarters complex is locatedin office space of approximately 130,000 square feet in Chantilly, Virginiaunder long-term leases with varying expiration dates through 2008. GTSI’sprimary distribution and integration operations are located in a facility ofapproximately 142,000 square-feet in Chantilly, Virginia under a lease expiringin December 2011.

As a result of ourworkforce realignment activities taken in 2006, we currently have facilities inexcess of our needs. In 2007, we plan to sublease one facility. We believe the facilities we are retaining are in good condition andsuitable to meet our current needs for the conduct of our business. Foradditional information regarding our obligations under leases, see Note 14 ofthe consolidated financial statements in Part II, Item 8 of this Form 10-K.

**ITEM 3.**                LEGALPROCEEDINGS

In 2006, the Supreme Courtof Virginia rejected a Petition for a Rehearing filed by Ichiban, a formersubcontractor seeking to appeal the dismissal of a lawsuit against GTSI it hadfiled in 2003. The Company is aggressively working to collect the awardedattorneys’ fees and costs from Ichiban; however, in accordance with SFAS No. 5,*Accounting for Contingencies*, no amountsfor this gain contingency were accrued as of December 31, 2006.

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of securityholders during the fourth quarter of 2006.

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**PART II**

**ITEM 5.**                MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

The Annual Meeting ofStockholders is scheduled to be held at 8:30 a.m. on May 3, 2007, atthe Company’s headquarters located at 3901 Stonecroft Boulevard in Chantilly,Virginia.

**Price Range ofCommon Stock**

GTSI’s common stock is traded on the NASDAQ GlobalMarket under the symbol GTSI. As of February 28, 2007, there were327 stockholders of record of the Company’s common stock. The following stockprices are the high and low sales prices of GTSI’s common stock during thecalendar quarters indicated.

| **Quarter** | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------|------------|------------|------------|----------|------------|----------|------------|
| ** **  | ** ** | **High**   | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First       |       | $          | 7.93       |     | $          | 6.12     |       | $ | 11.13 |   | $ | 9.46 |   |
| Second      |       | $          | 7.00       |     | $          | 4.86     |       | $ | 10.10 |   | $ | 7.80 |   |
| Third       |       | $          | 10.04      |     | $          | 6.44     |       | $ | 8.49 |   | $ | 6.75 |   |
| Fourth      |       | $          | 10.22      |     | $          | 8.20     |       | $ | 8.80 |   | $ | 7.00 |   |

 

GTSI’s transfer agent isAmerican Stock Transfer & Trust Company, 59 Maiden Lane, New York, NY10038; telephone 1-866-668-6550.

**Dividends**

The Company has never paidany cash dividends and does not anticipate paying cash dividends on its commonstock in the foreseeable future. GTSI’s Credit Facility discussed in Note 7 toGTSI’s consolidated financial statements, included in Part II, Item 8 ofthis Annual Report on Form 10-K prohibits the payment of dividends.

**Issuer Purchases ofEquity Securities**

GTSI’s common stockpurchase program was announced in February 2000. GTSI’s Board of Directorsauthorized GTSI to repurchase its common stock for an aggregate purchase priceup to $5.25 million. In January 2002 and April 2005, GTSI’s Board ofDirectors authorized additional purchases to increase the aggregate purchaseamount to $10 million. This purchase program, as increased, is the only stockpurchase program currently in effect and there have been no repurchase programsthat have expired during the period covered by this report. There were nocommon stock repurchases in 2006. GTSI’s Credit Facility restricts the purchase of GTSI’s stock by GTSI.

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**Equity CompensationPlans**

Thefollowing table summarizes information regarding GTSI’s equity compensationplans as of December 31, 2006.

| ** **                                               | ** ** | ** **                                     | ** ** | ** **                      | ** ** | **Number of Shares**        | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------|------------|---------------------------------------|------------|
| ** **                                               | ** ** | ** **                                     | ** ** | **Weighted Average**       | ** ** | **Remaining Available for** | ** ** |
| ** **                                               | ** ** | **Number of Shares to be** | ** ** | **Exercise Price of** | ** ** | **Future Issuance Under**   | ** ** |
| ** **                                               | ** ** | **Issued upon Exercise of**     | ** ** | **Outstanding**                 | ** ** | **Equity Compensation**          | ** ** |
| ** **                                               | ** ** | **Outstanding Options**                   | ** ** | **Options**                     | ** ** | **Plans (excluding shares** | ** ** |
| **Plan Category**                                   | ** ** | ** **                                     | ** ** | **(a)**                         | ** ** | **(b)**                               | ** ** | **reflected in column (a))** | ** ** |
| Equity  compensation plans approved by stockholders      |       |                                           | 2,046,433  |                            |       |                                  | $          | 7.62 |   |   |   | 278,755 |   |   |
| Equity compensation  plans not approved by stockholders* |       |                                           | 128,000    |                            |       |                                  | $          | 8.63 |   |   |   | N/A |   |   |
| Total                                                    |       |                                           | 2,174,433  |                            |       |                                  | $          | 7.68 |   |   |   | 278,755 |   |   |
|                                                          |            |                                                |            |                                 |            |                                       |            |  |  |  |  |  |  |  |  |  |

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*******                   **Representsshares issuable under options granted from time to time to persons notpreviously employed by the Company, as an inducement essential to such personsentering into employment agreements with the Company.

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**PERFORMANCE GRAPH**

The following graph isfurnished pursuant to SEC regulations. It compares the annual percentage changein the cumulative total return on Common Stock with the cumulative total returnof the NASDAQ Composite Index and a Peer Index of companies with the samefour-digit standard industrial classification (SIC) code as the Company (SICCode 5045—Computers and Peripheral Equipment and Software) for the period commencingJanuary 1, 2001 and ending December 31, 2006. The stock priceperformance shown on the graph below is not necessarily indicative of futureprice performance.

| ** **   | ** ** | **Dec. 31,  2001** | ** ** | **Dec. 31,  2002** | ** ** | **Dec. 31,  2003** | ** ** | **Dec. 31,  2004** | ** ** | **Dec. 31,  2005** | ** ** | **Dec. 31,  2006** | ** ** |
|--------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| GTSI Corp.   |       | 100.00                  |       | 142.03                  |       | 146.26                  |       | 110.98                  |       | 73.92                   |       | 97.49                   |       |
| Peer Index   |       | 100.00                  |       | 65.71                   |       | 93.48                   |       | 111.31                  |       | 103.05                  |       | 115.23                  |       |
| NASDAQ Index |       | 100.00                  |       | 69.75                   |       | 104.88                  |       | 113.70                  |       | 116.19                  |       | 128.12                  |       |

                                                                                                                                                                                                                                         

**COMPARES 5-YEARCUMULATIVE TOTAL RETURNAMONG GTSI CORP., NASDAQ MARKET INDEX ANDSIC CODE INDEX**

**ASSUMES $100 INVESTED ON DEC. 31,2001ASSUMES DIVIDEND REINVESTEDFISCAL YEAR ENDED DEC. 31, 2006**

 

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**ITEM6.**                SELECTED FINANCIALDATA

The following selectedconsolidated financial data is qualified in its entirety by reference to, andshould be read in conjunction with, the audited consolidated financialstatements and related notes and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations. The statement of operations dataset forth below for the three years ended December 31, 2006, 2005 and 2004and the balance sheet data as of December 31, 2006 and 2005 has beenderived from GTSI’s audited consolidated financial statements which areincluded in Part II, Item 8 of this Annual Report on Form 10-K.The statement of operations data for the year ended December 31, 2003 and2002 and the balance sheet data as of December 31, 2004, 2003 and 2002 isderived from audited consolidated financial statements of GTSI and not includedherein.

Our(loss) income from operations, net (loss) income and (loss) earnings per sharefor the years ended December 31, 2006, 2005 and 2004 were materiallyaffected by certain items, which affects the comparability of the informationpresented with other years’ results. Cost of sales for the year ended December 31,2006 included the positive effects of the derecognition of aged accruedpayables of $5.8 million, in accordance with FAS 140; a change in estimate ofvendor rebates of $1.1 million; and a change in estimate of vendor payableamounts of $4.0 million, all as discussed in Note 1 to the consolidatedfinancial statements. Cost of sales for the year ended December 31, 2005included the positive effects of a change in estimate of vendor payable amountsof $1.6 million which was offset by a $5.6 million charge recorded in cost ofsales to write-down inventory to its market value as discussed in Note 1 to theconsolidated financial statements. Cost of sales for the year ended December 31,2004 included the positive effects of the derecognition of aged accruedpayables of $10.1 million and a change in estimate of vendor payable amounts of$2.5 million as discussed in Note 1 to the consolidated financial statements.This resulted in an increase of $12.6 million to gross margin for the yearended December 31, 2004. As a result of these items, loss from operationsand net loss for the years ended December 31, 2006 and 2005 was $10.9million lower and $4.0 million higher, respectively, and income from operationsand net income for the year ended December 31, 2004 increased by $12.6million and $12.1 million, respectively. All notes referenced are in Item 8 of thisAnnual Report on Form 10-K.

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**Statement of Operations Data:**

| ** **                                           | ** ** | **For the years ended December 31,**                               | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                           | ** ** | **(in thousands, except per share data)** | ** ** |
| SALES                                                |       | $                                                                  | 850,189    |   | $ | 882,012 |   | $ | 1,075,437 |   | $ | 951,511 |   | $ | 934,730 |   |
| COST OF SALES                                        |       | 739,337                                                            |       | 782,210 |   | 953,345 |   | 853,354 |   | 857,105 |   |
| GROSS MARGIN                                         |       | 110,852                                                            |       | 99,802 |   | 122,092 |   | 98,157 |   | 77,625 |   |
| SELLING,  GENERAL & ADMINISTRATIVE EXPENSES |       | 119,662                                                            |       | 119,371 |   | 110,015 |   | 89,206 |   | 66,499 |   |
| IMPAIRMENT CHARGE                                    |       | —                                                             |       | 981 |   | — |   | 5,972 |   | — |   |
| TOTAL OPERATING EXPENSES                             |       | 119,662                                                            |       | 120,352 |   | 110,015 |   | 95,178 |   | 66,499 |   |
| (LOSS) INCOME FROM OPERATIONS                        |       | $                                                                  | (8,810     | ) | $ | (20,550 | ) | $ | 12,077 |   | $ | 2,979 |   | $ | 11,126 |   |
| INTEREST AND OTHER INCOME, NET                       |       | 5,686                                                              |       | 3,651 |   | 4,916 |   | 2,937 |   | 4,520 |   |
| (LOSS) INCOME BEFORE INCOME TAXES                    |       | (3,124                                                             | )          | (16,899 | ) | 16,993 |   | 5,916 |   | 15,646 |   |
| INCOME TAX BENEFIT (PROVISION)                       |       | 110                                                                |       | 3,226 |   | (6,858 | ) | (2,598 | ) | (6,113 | ) |
| NET (LOSS) INCOME                                    |       | $                                                                  | (3,014     | ) | $ | (13,673 | ) | $ | 10,135 |   | $ | 3,318 |   | $ | 9,533 |   |
| (LOSS) EARNINGS  PER SHARE                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                |       | $                                                                  | (0.32      | ) | $ | (1.49 | ) | $ | 1.17 |   | $ | 0.40 |   | $ | 1.15 |   |
| Diluted                                              |       | $                                                                  | (0.32      | ) | $ | (1.49 | ) | $ | 1.05 |   | $ | 0.36 |   | $ | 1.04 |   |
| WEIGHTED AVERAGE  COMMON SHARES OUTSTANDING          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                |       | 9,371                                                              |       | 9,166 |   | 8,664 |   | 8,343 |   | 8,302 |   |
| Diluted                                              |       | 9,371                                                              |       | 9,166 |   | 9,618 |   | 9,308 |   | 9,156 |   |

 

**Balance Sheet Data:**

| ** **                                       | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                       | ** ** | **(in thousands)**               | ** ** |
| Working capital                                  |       | $                                     | 70,197     |   | $ | 60,208 |   | $ | 79,014 |   | $ | 65,306 |   | $ | 62,836 |   |
| Total assets                                     |       | 330,681                               |       | 345,907 |   | 313,908 |   | 279,487 |   | 224,918 |   |
| Borrowings under  credit facility                |       | 30,912                                |       | 48,014 |   | 1,168 |   | 12,813 |   | 7,539 |   |
| Long-term  liabilities, including long-term debt |       | 33,888                                |       | 19,072 |   | 13,099 |   | 5,606 |   | 1,640 |   |
| Total liabilities                                |       | 253,998                               |       | 267,740 |   | 221,493 |   | 201,135 |   | 149,427 |   |
| Stockholders’ equity                        |       | 76,683                                |       | 78,167 |   | 92,415 |   | 78,352 |   | 75,491 |   |
|                                                  |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussionand analysis is provided to increase the understanding of, and should be readin conjunction with, our audited consolidated financial statements and notesincluded in Part II, Item 8 of this Annual Report on Form 10-K.Historical results and percentage relationships among any amounts in theconsolidated financial statements are not necessarily indicative of trends inoperating results for any future period. We use the terms “GTSI,” “we,” “our,”and “us” to refer to GTSI Corp. and its subsidiaries.

**Overview**

GTSIhas more than 20 years of experience in selling IT products and solutionsprimarily to U.S. Federal Government customers. We believe our keydifferentiators to be our strong brand among government customers, extensivecontract portfolio, close relationships with wide variety of vendors, and moveto a technology lifecycle management approach.

Currently, the vastmajority of the IT solutions we offer to our customers have a strong productcomponent, and many are entirely product-based. We connect IT’s leading vendors, products andservices inside the core technology areas most critical to government successby partnering with global IT leaders such as Panasonic, HP, Cisco, Sun Microsystemsand Microsoft. In our traditional reseller capacity, we providegovernment with products for workgroup computing, such as workstations anddesktops; mobility computing and communications, such as wireless-equippednotebooks and PDAs; core computing, such as servers, high-end computing, andstorage systems; networking products; and a wide range of peripherals.

During 2006, we focused onapplication areas in which our government customers have consistentlydemonstrated the greatest immediate strategic interest, and which provide uswith the greatest opportunity for sustained return on investment. We directedour attention to government solutions, including unified communications,network security, mobile evidence capture, storage consolidation, and serverconsolidation.

To help our customersacquire, manage and refresh this technology in a strategic andapplication-appropriate manner, GTSI has created a mix of professional andfinancial services capable of managing and funding the entire technologylifecycle. GTSI has grown the professional services organization to handle theincrease in engineering, maintenance, and management services supporting oursolutions. Additionally, GTSI offers leasing arrangements to allow governmentagencies to acquire access to technology as an evenly distributed operatingexpense, rather than the much more budget-sensitive and discontinuous capitalexpenses. This model is in high demand from our customers, and we believe itrepresents a distinctive advantage. We expect to continue our expansion ofsales from leasing arrangements for IT products and solutions in 2007.

Asdiscussed in more detail below:

·       Oursales decreased approximately $31.8 million, or 3.6%, from 2005 to 2006;

·       Grossmargin increased $11.1 million and gross margin as a percentage of salesincreased 1.7 percentage points from 2005 to 2006;

·       In2006, we recognized a $5.8 million extinguishment of a liability, in accordancewith FAS 140, and changes in estimates related to vendor payable amounts andvendor rebates of $4.0 million and $1.1 million, respectively. Theseadjustments positively impacted gross margin and net loss by $10.9;

·       2006expenses were impacted by approximately $9.0 million of non-recurring chargesrelated to refinancing our debt included in interest and other income, andseverance and restatement fees included in selling, general & administrativeexpenses;

·       Ournet loss for the year ended December 31, 2006 was $3.0 million;

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·       Cashused in operations totaled $17.2 million for the year ended December 31,2006;

Our business experiencessignificant fluctuations in our quarterly sales, operating (loss) income andnet (loss) income as a result of the buying patterns of the federal government,our primary customer. Additionally, our 2006 results were positively affectedby the derecognition of $5.8 million in aged accrued payables. We recorded thislegal release from these vendor obligations as an offset to cost of sales,which increased our gross margin by $5.8 million and decreased our loss fromoperations and net loss by $5.8  million,or a decrease of $0.62 per share. Our 2006 results were also positivelyaffected by a change in estimate of vendor rebates of $1.1 million and a changein estimate of vendor payable amounts of $4.0 million. As a result of theseitems, loss from operations and net loss were $10.9 million (or $1.16 per share)lower and gross margin as a percentage of sales increased 1.3 percentage pointsfor the year ended December 31, 2006. For additional details, see thefurther MD&A discussion below, and refer to Note 1 of the consolidatedfinancial statements included in Part II, Item 8 of this Form 10-K.

We have put in place amulti-element plan to move the business from lower margin product sales tohigher margin solutions sales. In the first element of our plan, we are continually identifying and eliminatingcertain redundancies within the Company and have terminated activities whichhave failed to yield adequate profitability, including one reduction inworkforce totaling over 70 full time positions and realigning functionsthroughout the Company to increase margin improvement through cost reductions. Otherelements of our plan, which will progress throughout 2007, include the improvedexecution of the current business and the delivery of high value solutions. Webelieve there are significant opportunities to increase our relatively lowmarket share within the growing government IT market as we pursue a distinctivebusiness model combining the concepts of a value added provider of complex ITsolutions with a traditional reseller.

**Critical Accounting Estimates and Policies**

The discussion andanalysis of our financial condition and results of operations is based on ourconsolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of thesefinancial statements requires management to make estimates, judgments andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenue and expenses duringthe reporting period. Actual results may differ from these estimates underdifferent assumptions or conditions. Critical accounting estimates are definedas those that are reflective of significant judgments and uncertainties, andpotentially result in materially different results under different assumptionsand conditions. We have included below our policies that are both important toour financial condition and operating results, and require management’s mostsubjective and complex judgments in determining the underlying estimates andassumptions.

The following list ofcritical accounting estimates and policies is not intended to be acomprehensive list of all of our accounting policies. Our significantaccounting policies are more fully described in Note 1 to our consolidatedfinancial statements in Item 8 of this Annual Report on Form 10-K. Accountingpolicies and estimates that management believes are most important to ourfinancial condition and require management’s significant judgments andestimates pertain to revenue recognition, transfer of receivables, valuation ofinventory, capitalized internal use software, accounts payable and incometaxes. We have discussed the application of these critical accounting estimatesand policies with the Audit Committee of our Board of Directors.

*Revenue Recognition*

We recognize revenue whenpersuasive evidence of a sale arrangement exists, delivery has occurred orservices have been rendered, the sales price is fixed or determinable, andcollectibility is reasonably assured. The majority of our sales relates tophysical products and is generally recognized when title and 

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risk ofloss to the products sold passes to the customer. Based on our standardshipping terms, title generally passes upon the customer’s receipt of theproducts. This requires us to analyze sales near the end of reporting periodsto estimate the amount of products in transit to the customer that cannot berecognized as revenue. Many of our sales of physical products are shipped toour customers directly from our vendor partners. The accurate recording ofrevenue for these transactions relies upon the accuracy of shipment dates wereceive from our vendors and is subject to additional estimates and judgmentsby management.

When a customer ordercontains multiple items such as hardware, software, and services that aredelivered at varying times, significant judgment is required to determinewhether the delivered items can be considered separate units of accounting andif so, how the price should be allocated among the deliverable elements andwhen to recognize revenue for each element. We also offer lease and otherfinancing arrangements to customers to acquire technology. These arrangementstypically have terms from two to four years and are generally accounted for assales-type leases under Financial Accounting Standards Board (“FASB”) Statementof Financial Accounting Standards (“FAS”) No. 13, Accounting for Leases, (“FAS13”).

Certain of our service andsolution agreements require the evaluation of pattern of performance. Revenueson professional service contracts are generally recognized using theproportional-performance basis of accounting. For some professional servicesengagements the completed-performance method is used when there arecustomer-specified subjective acceptance criteria.

At the time of sale, werecord an estimate for product returns based on historical experience.Management reviews the assumptions regarding the lag time and volume of salesreturns at least on a quarterly basis, and changes in the estimates arerecorded in the period in which they occur.

In accordance with EITFIssue No. 02-16, *Accounting by a Customer(Including a Reseller) for Certain Consideration Received from a Vendor,*we record vendor rebates received under our vendor incentive programs pursuantto a binding arrangement as a reduction of cost of sales based on a systematicand rational allocation that results in progress by the Company toward earningthe rebate provided the amounts are probable and reasonably estimable. If therebate is not probable and reasonably estimable, it is recognized as the milestonesare achieved. In the first quarter of 2006, we determined that rebates underone vendor program were both probable and reasonably estimable and thus beganto record rebates under this program as purchases occured during each programperiod. Accrued vendor rebates recorded at December 31, 2006 related tothis vendor positively impacted gross margin by $1.1 million.

*Financing Receivables*

We enter into complexagreements with our customers to provide IT solutions with payment terms generallyspread over a two to four year period. Usually we monetize these future revenuestreams by selling such receivables to third party financial institutions. Wehave master service agreements with multiple lenders each with varying terms.These agreements, as well as the individual transaction agreements, requiresignificant analysis to determine whether the transfer of the receivable shouldbe accounted for as a sale or a secured borrowing with pledge of collateralbased on Financial Accounting Standards Board (“FASB”) Statement of AccountingStandards (“FAS”) No. 140, Accounting for Transfer Servicing of FinancialAssets and Extinguishments of Liabilities, (“FAS 140”)  criteria that requires GTSI to effectivelysurrender control over the asset. The technical accounting and legalrequirements involved are complex and subject to interpretation. Significantjudgment is required to determine whether we have effectively surrenderedcontrol over the asset. If certain criteria are met and control is surrendered,the transaction is recorded as a sale and the gain on the sale is recognized inlease-related income. If the transfer does not meet the criteria for a sale,the transaction is reported as a secured borrowing with pledge of collateral.The collateral remains on our balance sheet and income on the transfer isrecognized over the term of the agreement. Differing conclusions in thesestatements could impact total assets, total 

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liabilities,lease-related income, interest expense and earnings (loss) per share on ourconsolidated financial statements.

Management determined thatcertain transferred receivables previously accounted for as sales of financialassets did not meet the criteria for a sale and accordingly restated its 2005,2004 and 2003 financial statements to reflect the financing receivable andrelated financed lease debt as assets and liabilities and to recognize theincome on certain financing receivables over the life of the related agreement.Following the restatement,income on certain transferred receivables is being recognized over the term ofthe respective lease agreements, along with interest expense on financed leasedebt. In addition, thetransferred receivables together with related liabilities are reported in our balancesheets following the restatement.

*Stock-Based Compensation*

Effective January 1,2006, we adopted FAS No. 123 (revised 2004), *Share BasedPayment,* (“FAS 123R”) which requires the measurement and recognitionof compensation expense for all share-based payments on estimated fair values.We adopted this standard using the modified prospective transition method.Prior to January 1, 2006, we accounted for stock-based compensation underthe recognition and measurement provisions of APB Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB 25”). SeeNote 8 under Part II, Item 8 of this Form 10-K for moreinformation.

During the year ended December 31,2005, our Board of Directors approved the acceleration of the vesting ofunvested stock options with an exercise price higher than $8.09, the marketvalue on the date of the acceleration, previously awarded to employees,officers and directors under GTSI’s stock option plans. This action affectedunvested options to purchase an aggregate of 515 thousand shares of commonstock at exercise prices per share between $8.23 and $13.67. The vesting ofthese options was accelerated to avoid recognizing compensation expense infuture financial statements upon the adoption of FAS 123R. As of December 31,2006, there was a total of $3.2 million of unrecognized compensation costrelated to non-vested stock-based awards. That cost is expected to berecognized over a weighted-average period of 3.1 years.

*Inventory*

Our inventory is stated atthe lower of average cost or market value. We reduce the value of our inventoryfor excess and obsolete inventory based on assumptions about future demand andmarket conditions. Our estimates of future product demand may prove to beinaccurate, in which case we may have understated or overstated the provisionrequired for excess or obsolete inventory. In the future, if there were ahigher incidence of inventory obsolescence because of rapidly changingtechnology and customer requirements, we would be required to increase ourexpense to write-down inventory to market value and our gross margin could beadversely affected.

*Capitalized Internal Use Software*

Significant judgment isrequired to determine what expenditures qualify for capitalization of internaluse software. Subsequent additions, modifications or upgrades to internal-usesoftware are capitalized only to the extent that they allow the software toperform a task that it previously did not perform. Capitalized internal usesoftware is required tobe tested for recoverability whenever events or changes in circumstancesindicate that their carrying amount may not be recoverable. If thecarrying value exceeds the undiscountedcash flows expected to result from the use and eventual disposition of theasset, an impairment charge is recognized for the amount by which the carryingvalue exceeds fair market value.

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*Accounts Payable*

We purchase significantamounts of inventory each year and record an estimate of the payable based on purchasesas of the balance sheet date and the historic rate of purchase price variances,which is analyzed and adjusted on a quarterly basis. For products shippeddirectly from our vendors to our customers, management makes significantestimates regarding the payable for shipped goods. As invoices are received, werecord adjustments for purchase price variances. Changes in our estimate of thepayable balance may be caused by changes in price between the order date andthe receipt date related to volume discounts, changes in market rates, orspecial pricing promotions offered by our vendors.

*Income Taxes*

Determining our effectivetax rate, provision for tax expense, deferred tax assets and liabilities andthe related valuation allowance involves judgments and estimates. Deferredincome taxes result from temporary differences between the tax basis of assetsand liabilities and the basis reported in our consolidated financialstatements. Deferred tax liabilities and assets are determined based on thedifference between financial statement and tax basis of assets and liabilitiesusing enacted rates expected to be in effect during the year in which thedifferences reverse. Valuation allowances are provided against assets,including net operating losses, if it is anticipated that the asset is not morelikely than not to be realized through future taxable earnings orimplementation of tax planning strategies. We record reserves for uncertain taxpositions, which management believes are adequate. We have a valuationallowance against the full amount of our net deferred tax assets, because inthe opinion of management, it is not more likely than not that these deferredtax assets will be realized. Our effective tax rate in a given period could beimpacted if we determine the allowance is or is not required, or if we were requiredto pay amounts in excess of established reserves. See Note 12 of theconsolidated financial statements in Item 8 of this Form 10-K.

**Historical Resultsof Operations**

Thefollowing table illustrates the percentage of sales represented by items in ourconsolidated statements of operations for the years ended December 31:

| ** **                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Sales                                |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Cost of sales                        |       | 87.0     | %          | 88.7     | %          | 88.7     | %          |
| Gross margin                         |       | 13.0     | %          | 11.3     | %          | 11.3     | %          |
| Operating  expenses:                 |       |     |       |     |       |     |       |
| Selling, general, and administrative |       | 14.0     | %          | 13.5     | %          | 10.2     | %          |
| Impairment charge                    |       | —   |       | 0.1      | %          | —   |       |
| Total operating  expenses            |       | 14.0     | %          | 13.6     | %          | 10.2     | %          |
| (Loss) income  from operations       |       | (1.0     | )%         | (2.3     | )%         | 1.1      | %          |
| Interest and  other income, net      |       | 0.7      | %          | 0.4      | %          | 0.5      | %          |
| (Loss) income  before taxes          |       | (0.3     | )%         | (1.9     | )%         | 1.6      | %          |
| Income tax  benefit (provision)      |       | —   |       | 0.3      | %          | (0.7     | )%         |
| Net (loss) income                    |       | (0.3     | )%         | (1.6     | )%         | 0.9      | %          |

 

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Thefollowing table indicates, for the years ended December 31, theapproximate sales by vendor and product category along with related percentagesof total sales (dollars in millions).

| **Sales by Vendor** | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Panasonic                     |       | $          | 170.9      |     | 20.1       | %        | 179.7      |     | 20.4       | % | $ | 188.0 |   | 17.5 | % |
| Cisco                         |       | 163.5      |       | 19.2     | %          | 115.1    |       | 13.0     | %          | 135.7 |   | 12.6 | % |
| Sun Microsystems              |       | 73.8       |       | 8.7      | %          | 102.7    |       | 11.6     | %          | 131.8 |   | 12.3 | % |
| HP                            |       | 78.2       |       | 9.2      | %          | 85.9     |       | 9.7      | %          | 153.4 |   | 14.3 | % |
| Microsoft                     |       | 28.3       |       | 3.3      | %          | 27.0     |       | 3.1      | %          | 13.0 |   | 1.2 | % |
| Others, net of  reserves      |       | 335.5      |       | 39.5     | %          | 371.6    |       | 42.1     | %          | 453.5 |   | 42.2 | % |
| Total                         |       | $          | 850.2      |     | 100        | %        | $          | 882.0    |       | 100.0 | % | $ | 1,075.4 |   | 100.0 | % |
|                               |            |            |            |          |            |          |            |          |            |  |  |  |  |  |  |  |  |  |

 

| ** **                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Hardware                             |       | $        | 647.4      |     | 76.2       | %        | $          | 706.7 |   | 80.1 | % | $ | 833.4 |   | 77.5 | % |
| Software                             |       | 110.6    |       | 13.0     | %          | 117.8    |       | 13.4 | % | 155.7 |   | 14.5 | % |
| Resold  third-party service products |       | 36.7     |       | 4.3      | %          | 37.2     |       | 4.2 | % | 66.6 |   | 6.2 | % |
| Services                             |       | 55.5     |       | 6.5      | %          | 20.3     |       | 2.3 | % | 19.7 |   | 1.8 | % |
| Total                                |       | $        | 850.2      |     | 100.0      | %        | $          | 882.0 |   | 100 | % | $ | 1,075.4 |   | 100.0 | % |

 

**Year Ended December 31,2006 Compared with Year Ended December 31, 2005**

*Sales*

Sales consist of revenue from products delivered andservices sold or rendered, net of customer returns and credits. Sales decreased$31.8 million, or 3.6%, from $882.0 million in 2005 to $850.2 million in2006. The decrease in sales is primarily due to weak performance and staffturnover early in 2006 associated with certain sales teams, resulting in lowerthan expected bookings. This decline was partially offset by an increase inservices sales.

An analysis of sales by type indicates the $59.3million decrease in hardware sales was the predominant driver of the overallsales decline of $31.8 million year over year. Decreased hardware sales werepartially offset by the $35.2 million increase in services sales and the $0.5million decrease in resold third party product sales year over year. Ourservices sales increased 173.4% year over year to $55.5 million for the yearended December 31, 2006 from $20.3 million for the year ended December 31,2005. The increases in services sales is consistent with our plan to become ahigh-end solutions provider. We achieved record sales with our U.S. Communitiescontract, which was renewed in April 2006 for an additional two years. Asa result, management anticipates our sales to state and local governments willcontinue to increase as a percentage of our total sales.

Although we offer ourcustomers access to products from hundreds of vendors, 61% of our total salesin 2006 were products from our top five vendors, and Panasonic remains our topvendor in 2006 with product sales of $170.9 million. Although total salesdecreased by $31.8 million in 2006, as compared with 2005, sales from our top fivevendors increase by $4.3 million, which reflects our continued focused vendorstrategy. Sales of Cisco products increased by $48.4 million, or 42.0%, andsales of Microsoft products increased $1.3 million, or 4.8%, year over year. Salesfrom Panasonic, Sun Microsystems and HP decreased by $8.8 million, $28.9million and $7.7 million, respectively year over year. Our sixth largest vendorin 2005 was Network Appliances. Sales of Network Appliances products totaled$18.3 million, $30.8 million and $13.0 million for the years ended 2006, 2005and 2004, respectively.

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*Gross Margin*

Gross margin increased $11.1 million during 2006 ascompared to the prior year and gross margin as a percentage of sales increased1.7 percentage points to 13.0% for 2006. During the year ended December 31, 2006, gross margin waspositively impacted by the extinguishment of a vendor liability for $5.8million, in accordance with FAS 140, as well as a change in estimate related tovendor rebates of $1.1 million. Gross margin for the year ended December 31,2005 included a $5.6 million charge for excess and obsolete inventory. Grossmargin was also positively impacted in 2006 and 2005 by $4.0 million and $1.6million, respectively, for a change in estimate of amounts payable to vendors. Asa result of these items, gross margin for the years ended December 31,2006 and 2005 was $10.9 million higher and $4.0 million lower, respectively. Grossmargin was further positively impacted by product mix, with increases tohigher-margin professional services revenue, focused vendor strategies andcentralized pricing initiatives implemented by management.

Gross margin wasnegatively impacted by a decline in vendor incentive funds of $6.0 million,which is recorded as a reduction of cost of sales. Vendor incentive fundsdecreased due to decreased sales period over period and changes in vendorincentive fund programs.

*Selling, General &Administrative Expenses (“SG&A”)*

SG&A expenses for 2006 decreased $0.7 million, or0.6% as compared to the prior year. SG&A expenses as a percentage of salesincreased to 14.1% for 2006 from 13.6% in the prior year. SG&A decreasesresulted from reductions in workforce, as a result of our initative to exit failing or non-strategic activities, andincluded over 70 full time positions. Reductions in workforce resultedin a $5.5 million decrease in net salary expense in 2006, including a $2.3million decrease in gross salary expense and a $3.3 million increase insalaries allocated to billable labor. Reductions in workforce also resulted ina $1.0 million decrease in training expense.

Decreases in SG&A expenses were partially offsetby additional costs associated with the restatement of our financial statementsfor prior periods and severance costs. As a result of restatement efforts, thefollowing expenses increased during 2006, as compared with 2005: accountingfees increased by $1.2 million, consultants expense increased $0.8 million, andlegal fees increased $0.7 million. During 2006, SG&A expenses included a$1.2 million severance expense under the transition agreement with our formerCEO and $0.6 million severance expense from other senior management.

Other increased costsincluded incentive compensation expense, which increased $4.5 million in 2006as compared with 2005, which was primarily related to the accrual for bonusesto our executive officers and other eligible employees in an effort to promoteretention and performance in 2006 and beyond. SG&A expenses increased $1.1million for stock-based compensation for our stock options upon the adoption ofFAS 123R.

*Interest and OtherIncome, Net*

Interest and other incomefor 2006 increased $2.0 million, or 55.8%, over the prior year. Interest andother income increased as a result of the sale of a specific lease and relatedreceivables creating a gain of approximately $1.3 million, as well as anincrease in lease-related income from increased lease activity in the currentyear. In addition, equity income from unconsolidated investments increased by$0.9 million in 2006 as compared with the prior year, due to net income growthfrom Eyak Technology, LLC, an equity investment. These increases were offset byincreased interest expense, due to increased fees, higher borrowings, and ahigher interest rate under our Credit Facility.

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*Income Taxes*

Our income tax benefitdecreased from $3.2 million in 2005 to $0.1 million in 2006. The taxbenefit recorded during 2006 resulted from the release of a tax contingencyreserve that is no longer probable due to the expiration of the statute oflimitations. We have provided a valuation allowance against the full amount ofthe net deferred tax assets due to our loss before income taxes of $3.1 millionat December 31, 2006. The tax benefit recorded during 2005 was due to GTSI’sloss before income taxes of $16.9 million for 2005 and consists of our taxrefund as a result of carrying back our pre-tax loss to the amounts paid in2003 and 2004, a release in the contingency reserve that was no longer probableand a true-up of 2004 items.

**Year Ended December 31,2005 Compared with Year Ended December 31, 2004**

*Sales*

Sales decreased $193.4 million, or 18.0%, from $1.1billion in 2004 to $882.0 million in 2005. The decrease in sales is dueprimarily to the difficulties with the GEMS implementation during secondquarter of 2005 and a decrease in GTSI’s share of government spending overall.During the second quarter of 2005, due to the implementation problems withGEMS, there were customer orders that could not be received into GEMS and ourability to ship products was also negatively affected. As a result of theproblems with sales bookings, we experienced high turnover on sales teams. Thiscaused reduced productivity throughout the third and fourth quarters,compounded by a workforce realignment in the fourth quarter that furtherreduced sales team personnel. An analysis of sales by type reveals year overyear decreases for all types except services, most predominantly the $128.1million decline in hardware sales to $705.3 million in 2005.

Approximately 58% of oursales in 2005 were products from our top five vendors. As detailed in thepreceding table, Panasonic was our top vendor with product sales of $179.7million in 2005. Network Appliance sales more than doubled from 2004 to $30.8million to become one of our top five vendors for the first time in 2005. Oursixth largest vendor during 2004 and 2003 was Microsoft. Sales of Microsoftproducts totaled $27.0 million, $53.7 million, and $66.5 million during theyears ended 2005, 2004 and 2003, respectively. An increasing percentage of ourtotal sales is derived from products from our top five vendors, reflecting ourfocused vendor strategy implemented during 2005.

*Gross Margin*

Gross margin decreased$22.3 million, or 18.3%, from $122.1 million in 2004. Gross margin as apercentage of sales decreased slightly from 11.4% in 2004 to 11.3% in 2005. In2005, a $5.6 million charge for excess and obsolete inventory negativelyimpacted gross margin. In addition, gross margin was positively affected in2005 and 2004 by $1.6 million and $2.5 million, respectively, for the change inestimate of amounts payable to vendors. In 2004, a $10.1 million non-cashextinguishment of aged vendor liabilities positively impacted gross margin.Gross margin excluding these adjustments was 11.7% in 2005 and 10.2% in 2004.

*Selling, General &Administrative Expenses*

Selling, general &administrative (“SG&A”) expenses for 2005 increased $9.4 million, or 8.5%from 2004. This increase was predominantly related to compensation and benefitsexpense for new employees as average headcount increased by 135 employees. Inaddition, on a per employee basis, average salaries increased approximately 7%year over year. Given the weak sales and margin performance during 2005, andthe strains on the organization associated with the GEMS implementations, weimplemented two separate reductions in our workforce, one in October 2005and one in February 2006. SG&A expenses increased 3.1 percentagepoints as a percentage of sales from 2004 to 2005. These increases werepartially offset by a $4.9 million decline in sales commissions correspondingto our decreased sales.

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*Impairment Charge*

During 2005 we decided touse a web-based customer resource management (“CRM”) software instead of theCRM module of GEMS. As a result, we tested certain asset groupings within GEMSfor recoverability and recorded an impairment loss of approximately $1.0million, net of accumulated amortization, in operating expenses to write downGEMS to its fair value as required by FAS No. 144 *Accountingfor the Impairment or Disposal of Long-Lived Assets*, (“FAS 144”).

*Interest and OtherIncome, Net*

Interest and other income,net decreased $1.3 million, or 25.7%, from 2004 to 2005. This decrease wasmainly due to increased interest expense from secured borrowings. In addition,interest expense increased from our Credit Facility borrowings due to higherinterest rates and increased borrowings as a result of working capitalmanagement issues.

*Income Taxes*

We recorded a tax benefitof $3.2 million at an effective tax rate of 19.1% for 2005 as compared to a taxprovision of $6.9 million at an effective rate of 40.4% for 2004. The decreasein our effective tax rate from 2004 to 2005 was due to a full valuationallowance on our net deferred tax assets that we recorded during the fourthquarter of 2005, and due to our loss before income taxes of $16.9 million. As aresult, our income tax benefit for 2005 consisted of our tax refund as a resultof carrying back our pre-tax loss to the amounts paid in 2003 and 2004, arelease in the contingency reserve that was no longer probable and a true-up of2004 items.

**SeasonalFluctuations**

We have historically experienced and expect tocontinue to experience significant seasonal fluctuations in our operations as aresult of the U.S. Federal Government buying and funding patterns. Theunpredictability of the factors affecting such seasonality makes our annual andquarterly financial results difficult to predict and subject to significantfluctuation. While sales to the U.S. Federal Government are usually weaker inthe first and second quarter and stronger in the third and fourth quarter, ourSG&A expenses are more level throughout the year. As such, first and secondquarter earnings are typically well below those of the third and fourthquarters. Our stock price could be adversely affected if any such financialresults fail to meet the financial community’s expectations.

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Thefollowing tables show our results of operations on a quarterly basis. Webelieve that this information includes all adjustments necessary for a fairpresentation of such quarterly information when read in conjunction with thenotes to consolidated financial statements included in Item 8 of this AnnualReport on Form 10-K. The operating results for any quarter are notnecessarily indicative of the results for any future period. This informationhas been included to provide additional insight into the seasonal nature of ourbusiness.

| ** **                                           | ** ** | **2006 (unaudited)**                                        | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **Q1**                                                           | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **(in millions except per share data)** | ** ** |
| Sales                                                |       | $                                                                | 148.3      |   | $ | 180.9 |   | $ | 241.6 |   | $ | 279.4 |   | $ | 850.2 |   |
| Cost of sales                                        |       | 130.0                                                            |       | 154.4 |   | 215.7 |   | $ | 239.2 |   | 739.3 |   |
| Gross margin(b)                                      |       | $                                                                | 18.3       |   | $ | 26.5 |   | $ | 25.9 |   | $ | 40.2 | (a) | $ | 110.9 |   |
| Selling,  general & administrative expenses |       | 29.6                                                             |       | 27.1 |   | 30.2 |   | $ | 32.8 |   | 119.7 |   |
| (Loss) income  from operations                       |       | $                                                                | (11.3      | ) | $ | (0.6 | ) | $ | (4.3 | ) | $ | 7.4 |   | $ | (8.8 | ) |
| Interest and  other income, net                      |       | 1.3                                                              |       | 1.5 |   | 0.8 |   | $ | 2.1 |   | 5.7 |   |
| (Loss) income  before taxes                          |       | $                                                                | (10.0      | ) | $ | 0.9 |   | $ | (3.5 | ) | $ | 9.5 |   | $ | (3.1 | ) |
| Income tax  benefit (provision)                      |       | —                                                           |       | — |   | 0.1 |   | $ | — |   | 0.1 |   |
| Net (loss) income(b)(c)                              |       | $                                                                | (10.0      | ) | $ | 0.9 |   | $ | (3.4 | ) | $ | 9.5 | (a) | $ | (3.0 | ) |
| Basic earnings per share                             |       | $                                                                | (1.08      | ) | $ | 0.10 |   | $ | (0.36 | ) | $ | 1.03 |   | $ | (0.32 | ) |
| Diluted earnings per  share                          |       | $                                                                | (1.08      | ) | $ | 0.10 |   | $ | (0.36 | ) | $ | 1.00 |   | $ | (0.32 | ) |

 

| ** **                                           | ** ** | **2005 (unaudited)**                                        | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **Q1**                                                           | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **(in millions except per share data)** | ** ** |
| Sales                                                |       | $                                                                | 156.6      |   | $ | 179.1 |   | $ | 267.4 |   | $ | 278.9 |   | $ | 882.0 |   |
| Cost of sales                                        |       | 139.2                                                            |       | 160.1 |   | 231.5 |   | $ | 251.4 |   | 782.2 |   |
| Gross margin(d)                                      |       | $                                                                | 17.4       |   | $ | 19.0 |   | $ | 35.9 |   | $ | 27.5 |   | $ | 99.8 |   |
| Selling,  general & administrative expenses |       | 28.1                                                             |       | 28.4 |   | 31.9 |   | $ | 32.0 |   | 120.4 |   |
| (Loss) income  from operations                       |       | $                                                                | (10.7      | ) | $ | (9.4 | ) | $ | 4.0 |   | $ | (4.5 | ) | $ | (20.6 | ) |
| Interest and  other income, net                      |       | 0.7                                                              |       | 0.5 |   | 0.7 |   | $ | 1.8 |   | 3.7 |   |
| (Loss) income  before taxes                          |       | $                                                                | (10.0      | ) | $ | (8.9 | ) | $ | 4.7 |   | $ | (2.7 | ) | $ | (16.9 | ) |
| Income tax  benefit (provision)                      |       | 3.8                                                              |       | 3.4 |   | (1.7 | ) | $ | (2.3 | ) | 3.2 |   |
| Net (loss) income(d)(e)                              |       | $                                                                | (6.2       | ) | $ | (5.5 | ) | $ | 3.0 |   | $ | (5.0 | ) | $ | (13.7 | ) |
| Basic earnings per share                             |       | $                                                                | (0.69      | ) | $ | (0.60 | ) | $ | 0.32 |   | $ | (0.53 | ) | $ | (1.49 | ) |
| Diluted earnings per  share                          |       | $                                                                | (0.69      | ) | $ | (0.60 | ) | $ | 0.31 |   | $ | (0.53 | ) | $ | (1.49 | ) |

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(a)           Gross margin and netincome for the quarter ended December 31, 2006 were positively impacted byextinguishment of a liability for $5.8 million in accordance with FAS 140 ($0.62and $0.61 per basic and diluted share) and changes in vendor rebates of $1.1million ($0.12 and $0.11 per basic and diluted share).

(b)          Gross margin and net(loss) income was positively impacted by $1.1 million in Q1, or $0.12 per basicand diluted share; $2.5 million in Q2, or $0.26 per basic and diluted share;and $0.4 million in Q4, or $0.04 per basic and diluted share, by changes inmanagement’s estimate of the amount payable for items purchased.

(c)           Net (loss) incomeincludes $0.2 million, $0.3 million, $0.3 million and $0.3 million ofcompensation expense recognized as a result of adopting SFAS No. 123(R) in thequarters ended March 31, 2006, June 30, 2006, September 30, 2006and December 31, 2006, respectively.

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(d)          Gross margin and netloss for the year ended December 31, 2005 were negatively impacted by a$5.6 million, or $0.61 per basic and diluted share, charge for excess andobsolete inventory to write-down inventory to its market value asdiscussed in Note 5 of the consolidated financial statements. Gross marginwas reduced $1.6 million in Q2, $0.4 million in Q3 and $3.6 million in Q4of 2005 for this inventory impairment. This was offset in Q4 by the positiveeffects to gross margin of $1.6 million due to a change in estimatedpayable to vendors.

(e)           During Q4 2005, theCompany recorded a valuation allowance against its net deferred tax asset,which increased net loss by $0.7 million.

The Company’s tax benefit(provision) was determined on a quarterly basis for the years endedDecember 31, 2006 and 2005 using the overall annual effective ratepursuant to APB No. 28, *Interim FinancialReporting*. GTSI’s income tax benefit in 2006 is due to the releaseof a tax contingency reserve that is no longer probable; we have provided avaluation allowance against the full amount of the net deferred tax assets asof December 31, 2006.

**Liquidity andCapital Resources**

*Cash flows for the year ended December 31,*

| ** **                             | ** ** | **2006**               | ** ** | **2005** | ** ** | **Change** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------|------------|------------|------------|
| ** **                             | ** ** | **(in millions)** | ** ** |
| Cash used in  operating activities     |       | $                      | (17.2      | )        | $          | (109.5     | )          | $ | 92.3 |   |
| Cash used in  investing activities     |       | $                      | (3.6       | )        | $          | (3.7       | )          | $ | 0.1 |   |
| Cash provided by  financing activities |       | $                      | 21.5       |     | $          | 112.8      |       | $ | (91.3 | ) |

 

Cash used in operatingactivities for the year ended December 31, 2006 was $17.2 million, an increaseof $92.3 million from 2005. This decrease was primarily due to our net loss of $3.0 millionand the decrease in merchandise inventories. During 2006, we experiencedecreased working capital needs, compared to 2005, as a result of reducedlosses and lower vendor payables at the end of 2006.

Cash provided by financingactivities of $21.5 million during 2006 was due principally to proceeds fromfinanced lease debt of $28.5 million and proceeds from long-term debt of $10.0million, which were offset by net repayments of $17.1 million under ourrevolving Credit Facility. The volume of leasing transactions increased between2005 and 2006, however the proceeds from the transfer of receivables to thirdparty financial institutions decreased $38.6 million in 2006.

*Credit Facility and Term Loan*

During 2006, we obtained a$135 million credit agreement with a group of lenders (the “Credit Facility”).This Credit Facility replaced GTSI’s former credit facility which expired on May 31,2006.

The Credit Facilityprovides access to capital through June 2, 2010 with borrowings secured bysubstantially all of the assets of the Company. Borrowing under the CreditFacility at any time is limited to the lesser of $135 million or acollateral-based borrowing base less outstanding obligations. The CreditFacility subjects GTSI to certain covenants limiting its ability to (i) incurdebt; (ii) make guarantees; (iii) make restricted payments, purchasesor investments; (iv) enter into certain transactions with affiliates; (v) acquirereal estate and (vii) enter into sale and leaseback transactions. TheCredit Facility carries an interest rate generally indexed to the prime rateplus 0.25% plus margin. As of December 31, 2006 GTSI had available creditunder the Credit Facility of $30.1 million.

During 2006, we alsoobtained a subordinated secured long-term loan of $10 million (the “Term Loan”).The debt covenants and maturity date on the Term Loan are the same as theCredit Facility. The interest rate on the Term Loan is Prime plus 5.25% perannum and is due monthly. This agreement contains a prepayment penalty which isequal to the greater of (i) all interest payable for the first twelvemonths of the agreement, less interest paid through current or (ii) 1% ofthe amount prepaid.

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*Capital Resourcesand Requirements*

Our ongoing capital requirements depend on a varietyof factors, including the extent to which we are able to fund the cash needs ofour business from operations. During 2006, we experienced continued workingcapital shortages as a result of our continued execution of our strategy toexit certain types of lower margin businesses and increased bank fees relatedto our new Credit Agreement, and relied upon our vendor credit and borrowingsunder our Credit Facility to fund our operations. We anticipate that we willcontinue to rely upon these sources to finance our operating cash needs duringthe majority of 2007. We believe that such funds should be sufficient tosatisfy our near term anticipated cash requirements for operations.

Our ongoing capitalrequirements depend on a variety of factors, including the extent to which weare able to fund the cash needs of our business from operations. We anticipatethat we will continue to rely primarily on operating cash flow, vendor creditand our credit facility to finance our operating cash needs. We believe thatsuch funds should be sufficient to satisfy our near term anticipated cashrequirements for operations. The Credit Agreement imposes financial andreporting covenants on the Company, including the meeting of a minimum EBITDAlevel during each quarterly period. During 2006, the Company signed two amendments to the Credit Agreementto change the reporting requirements and the minimum EBITDA covenants. TheCompany was in compliance with all financial covenants as set forth in theCredit Agreement as of December 31, 2006. On March 30, 2007, the Company andits lenders executed an amendment to this Credit Agreement, which removed theminimum EBITDA covenant at March 31, 2007 and revised the minimum EBITDAcovenant for future measurement periods.

While the Company believesthat we will remain in compliance with all of the financial and reportingcovenants under the Credit Agreement, including the minimum EBITDA covenantbased on the recent amendment, there can be no assurance that we will do so. Abreach of any of the covenants or restrictions in the Credit Agreement couldresult in an event of default under the Credit Agreement. Such a default couldresult in the lenders discontinuing lending or declaring all outstandingborrowings to be due and payable. If any of these events occur, we would needto find additional or alternative financing, if available, to refinance anysuch accelerated obligations. There can be no assurance that such financingwould be available.

Financed lease debtdecreased from $41.2 million at December 31, 2005 to $35.3 million at December 31,2006, bearing weighted average interest rates of 6.83% and 7.11%, respectively.These secured borrowings will be funded from the financing receivables of $40.1million and $36.2 million as of December 31, 2005 and 2006, respectively.

During 2006 and 2005, wemade capital expenditures of $3.6 million and $3.7 million, respectively, principally forcapitalized costs associated with the implementation of GEMS and the purchaseof computer software for internal use.

**Contractual Obligations**

| ** **                                  | ** ** | ** ** | ** ** | **Less Than** | ** ** | **1-3**   | ** ** | **3-5**   | ** ** | **More than** | ** ** |
|---------------------------------------------|------------|------------|------------|--------------------|------------|-----------|------------|-----------|------------|--------------------|------------|
| ***In millions of dollars*** | ** ** | **Total**  | ** ** | **1 Year**    | ** ** | **Years** | ** ** | **Years** | ** ** | **5 Years**   | ** ** |
| Operating lease  obligations                |       | $          | 8.5        |               |       | $         | 3.1        |      |       | $                  | 4.6        |   | $ | 0.8 |   |   | $ | — |   |   |
| Borrowings under  Credit Facility(a)        |       | $          | 46.3       |               |       | 46.3      |       |      | —     |               | —     |   |   | — |   |   |
| Long-term debt(a)                           |       | $          | 15.6       |               |       | 1.4       |       |      | 3.2        |               | 11.0       |   |   | — |   |   |
| Financed lease  debt                        |       | $          | 35.3       |               |       | 16.5      |       |      | 15.6       |               | 3.2        |   |   | — |   |   |
| Total contractual  obligations              |       | $          | 105.7      |               |       | $         | 67.3       |      |       | $                  | 23.4       |   | $ | 15.0 |   |   | $ | — |   |   |

 

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(a)           SeeNote 7 to the Financial Statements. The amounts included above includeperiodic interest payments. Interest payments are based on interest rates ineffect at year-end and assume the long-term debt is outstanding for the life ofthe agreement.

As of December 31,2005, the Company had an employment agreement with its former Chief ExecutiveOfficer which provided for payment of $0.7 million upon termination ofemployment. This agreement was terminated on February 15, 2006 when theCompany entered into a transition agreement with its former CEO (the “TransitionAgreement”). The Transition Agreement provides for a payment of $1.1 million tobe paid out over the next 18 months, as well as reimbursement for certainbenefits and legal fees. As a result, the Company recorded severance expense of$1.2 million in selling, general & administrative expenses during2006. The balance of the severance liability related to these severancepayments, which is included in accrued liabilities, is $644 thousand as of December 31,2006.

On February 16, 2006,GTSI entered into an employment agreement with the Company’s current Presidentand Chief Executive Officer. This agreement provides for payments of 12 monthsof base salary plus bonus equal to the previous year’s bonus payments upontermination of employment or a change in control. In addition, GTSI has changein control agreements with 15 additional executives and key employees. Thesearrangements provide for payments of as much as 18 months of total targetcompensation and continuation of benefits upon the occurrence of specifiedevents. As December 31, 2006, no accruals have been recorded for theseagreements.

As of December 31,2006, the Company had an outstanding letter of credit, scheduled to expire in June 2007,to a customer in the amount of $4.6 million to guarantee the performance by theCompany of its obligations under the contract. GTSI also provided one of itsvendors a $3.0 million letter of credit as collateral for a line of credit of$25 million.

**Off-Balance Sheet Arrangements**

We have no off-balancesheet arrangements (as defined in Regulations S-K, Item 303, paragraph(a)(4)(ii)) that have or are reasonably likely to have a material current orfuture effect on our financial condition, changes in financial condition, salesor expenses, results of operations, liquidity, capital expenditures or capitalresources.

**New Accounting Pronouncements**

*In July 2006,the FASB issued FASB Interpretation No. 48,*Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting forincome taxes by prescribing a minimum probability threshold that a tax positionmust meet before a financial statement benefit is recognized. The minimumthreshold is defined in FIN 48 as a tax position that is more likely than notto be sustained upon examination by the applicable taxing authority, includingresolution of any related appeals or litigation processes, based on thetechnical merits of the position. The tax benefit to be recognized is measuredas the largest amount of benefit that is estimated to be greater than fiftypercent likely of being realized upon ultimate settlement. FIN 48 must beapplied to all existing tax positions upon initial adoption. The cumulativeeffect of applying FIN 48 at adoption, if any, is to be reported as anadjustment to the opening balance of retained earnings/shareholder’s deficitfor the year of adoption. FIN 48 is effective for the Company on January 1,2007. We are currently evaluating the impact the adoption of FIN 48 will haveon the Company’s consolidated financial statements.

*In September 2006,the FASB issued FAS No. 157,*Fair Value Measurement, (“FAS 157”), which establishes a framework formeasuring fair value in generally accepted accounting principles, and expandsdisclosures about fair value measurements. FAS 157 is effective for interimperiods beginning after November 15, 2007. We are in the process ofevaluating the adoption of FAS 157.

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**ITEM7A.**        QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

GTSI had a $135 millionCredit Facility indexed at the Prime Rate plus 0.25% plus margin as of December 31,2006. GTSI also had a Term Loan of $10 million indexed at Prime plus 5.25% asof December 31, 2006. The Credit Facility and Term Loan expose us tomarket risk from changes in interest rates. For purposes of specific riskanalysis, we use sensitivity analysis to determine the effects that market riskexposures may have.

Our results of operationsare affected by changes in interest rates due to the impact those changes haveon borrowings under our Credit Facility and Term Loan. If interest ratesincrease, our debt service obligations on the variable rate indebtedness wouldincrease even though the amount borrowed remained the same, which would requiremore cash to service our indebtedness. As of December 31, 2006, the effectof a 5% increase in interest rates would have resulted in additional interestexpense during 2006 of $0.9 million based on our average monthly balances. Wehave not used derivative instruments to alter the interest rate characteristicsof our borrowings. As of December 31, 2006 we had $52.6 million ofvariable rate debt subject to interest.

Included in our long-termdebt are amounts related to lease transactions. We have reported these amountsin Note 4 as long-term financed lease debt. These amounts will amortizeover the period of the lease instruments with no cash affect to the Company. Thebalances of these liabilities were $18.8 million and $16.0 million at December 31,2006 and 2005, respectively. A change in interest rates would result in noadditional interest expense related to financed lease debt.

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**ITEM 8.**                FINANCIALSTATEMENTS & SUPPLEMENTARY DATA

**REPORT OF ERNST & YOUNG LLP,INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors of GTSI Corp.:

We have audited the accompanying balance sheets ofGTSI Corp. as of December 31, 2006 and 2005, and the related statements ofoperations, changes in stockholders’ equity, and cash flows for each of thethree years in the period ended December 31, 2006. Our audits alsoincluded the financial statement schedule listed in the index at Item 15(a).These financial statements and schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements and schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position of GTSICorp. at December 31, 2006 and 2005, and the results of its operations andits cash flows for each of the three years in the period ended December 31,2006, in conformity with U.S. generally accepted accounting principles. Also,in our opinion, the related financial statement schedule, when considered inrelation to the basic financial statements taken as a whole, presents fairly inall material respects the information set forth therein.

Asdiscussed in Note 1 to the financial statements, in 2006 the Companyadopted Statement of Financial Accounting Standards No. 123(R), *Share Based Payment*.

|  |   | /s/ ERNST & YOUNG LLP |
|--|--------|--------------------------------|

 

McLean, VirginiaMarch 30, 2007

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**FINANCIAL STATEMENT AND SUPPLEMENTARY DATA**GTSI CORP.CONSOLIDATED BALANCE SHEETS(In thousands, except share and per share data)

| ** **                                                                                                                                                                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                          | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                                                                          |       |                  |       |   |   |
| Current assets:                                                                                                                                                                                                     |       |                  |       |   |   |
| Cash                                                                                                                                                                                                                |       | $                     | 705        |   | $ | 27 |   |
| Accounts receivable, net                                                                                                                                                                                            |       | 222,072               |       | 226,356 |   |
| Inventory                                                                                                                                                                                                           |       | 35,691                |       | 56,819 |   |
| Deferred costs                                                                                                                                                                                                      |       | 22,188                |       | 17,069 |   |
| Other current assets                                                                                                                                                                                                |       | 9,651                 |       | 8,605 |   |
| Total current assets                                                                                                                                                                                                |       | 290,307               |       | 308,876 |   |
| Depreciable assets, net                                                                                                                                                                                             |       | 13,627                |       | 13,640 |   |
| Long-term receivables and other assets                                                                                                                                                                              |       | 26,747                |       | 23,391 |   |
| Total assets                                                                                                                                                                                                        |       | $330,681              |       | $ | 345,907 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                                                                                                |       |                  |       |   |   |
| Borrowings under credit facility                                                                                                                                                                                    |       | $                     | 30,912     |   | $ | 48,014 |   |
| Accounts payable                                                                                                                                                                                                    |       | 142,217               |       | 151,995 |   |
| Financed lease debt, current portion                                                                                                                                                                                |       | 16,546                |       | 25,187 |   |
| Accrued liabilities                                                                                                                                                                                                 |       | 23,194                |       | 17,452 |   |
| Deferred revenue                                                                                                                                                                                                    |       | 7,241                 |       | 6,020 |   |
| Total current liablilites                                                                                                                                                                                           |       | 220,110               |       | 248,668 |   |
| Long-term debt                                                                                                                                                                                                      |       | 10,000                |       | — |   |
| Long-term financed lease debt                                                                                                                                                                                       |       | 18,758                |       | 15,996 |   |
| Other liabilities                                                                                                                                                                                                   |       | 5,130                 |       | 3,076 |   |
| Total liabilities                                                                                                                                                                                                   |       | 253,998               |       | 267,740 |   |
| Commitments and contingencies                                                                                                                                                                                       |       | —                |       | — |   |
| Stockholders’  equity                                                                                                                                                                                          |       |                  |       |   |   |
| Preferred stock—$0.25 par value, 680,850 shares  authorized; none issued or outstanding                                                                                                                        |       | —                |       | — |   |
| Common stock—$0.005 par value, 20,000,000 shares  authorized; 9,806,084 issued and 9,512,019 outstanding at December 31,  2006; and 9,806,084 issued and 9,307,606 outstanding at December 31,  2005 |       | 49                    |       | 49 |   |
| Capital in excess of par value                                                                                                                                                                                      |       | 45,110                |       | 45,104 |   |
| Retained earnings                                                                                                                                                                                                   |       | 33,717                |       | 36,731 |   |
| Treasury stock, 294,065 shares at December 31,  2006 and 498,478 shares at December 31, 2005, at cost                                                                                                     |       | (2,193                | )          | (3,717 | ) |
| Total stockholders’ equity                                                                                                                                                                                     |       | 76,683                |       | 78,167 |   |
| Total liabilities  and stockholders’ equity                                                                                                                                                                    |       | $                     | 330,681    |   | $ | 345,907 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

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**GTSI CORP.CONSOLIDATED STATEMENTS OF OPERATIONS**(In thousands, except per share data)

| ** **                                                 | ** ** | **For the Years Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| SALES                                                      |       | $                                                             | 850,189    |   | $ | 882,012 |   | $ | 1,075,437 |   |
| COST OF SALES, exclusive of depreciation and  amortization |       | 739,337                                                       |       | 782,210 |   | 953,345 |   |
| GROSS MARGIN                                               |       | 110,852                                                       |       | 99,802 |   | 122,092 |   |
| SELLING, GENERAL & ADMINISTRATIVE EXPENSES        |       | 119,662                                                       |       | 119,371 |   | 110,015 |   |
| IMPAIRMENT LOSS                                            |       | —                                                        |       | 981 |   | — |   |
| TOTAL OPERATING EXPENSES                                   |       | 119,662                                                       |       | 120,352 |   | 110,015 |   |
| (LOSS) INCOME FROM OPERATIONS                              |       | (8,810                                                        | )          | (20,550 | ) | 12,077 |   |
| INTEREST AND  OTHER INCOME                                 |       |                                                          |       |   |   |   |   |
| Lease-related income                                       |       | 9,928                                                         |       | 4,573 |   | 3,786 |   |
| Interest and other income, net                             |       | 3,367                                                         |       | 1,778 |   | 2,135 |   |
| Interest expense                                           |       | (7,609                                                        | )          | (2,700 | ) | (1,005 | ) |
| Interest and other income, net                             |       | 5,686                                                         |       | 3,651 |   | 4,916 |   |
| (LOSS) INCOME  BEFORE INCOME TAXES                         |       | (3,124                                                        | )          | (16,899 | ) | 16,993 |   |
| INCOME TAX BENEFIT (PROVISION)                             |       | 110                                                           |       | 3,226 |   | (6,858 | ) |
| NET (LOSS) INCOME                                          |       | $                                                             | (3,014     | ) | $ | (13,673 | ) | $ | 10,135 |   |
| (LOSS) EARNINGS  PER SHARE                                 |       |                                                          |       |   |   |   |   |
| Basic                                                      |       | $                                                             | (0.32      | ) | $ | (1.49 | ) | $ | 1.17 |   |
| Diluted                                                    |       | $                                                             | (0.32      | ) | $ | (1.49 | ) | $ | 1.05 |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING                       |       |                                                          |       |   |   |   |   |
| Basic                                                      |       | 9,371                                                         |       | 9,166 |   | 8,664 |   |
| Diluted                                                    |       | 9,371                                                         |       | 9,166 |   | 9,618 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

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**GTSI CORP.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITYFor the Years Ended December 31, 2006, 2005 and 2004**(In thousands)

| ** **                             | ** ** | **Common Stock**   | ** ** | **Capital in** | ** ** | ** **                         | ** ** | ** **                   | ** ** | **Total**           | ** ** |
|----------------------------------------|------------|-------------------------|------------|---------------------|------------|------------------------------------|------------|------------------------------|------------|---------------------|------------|
| ** **                             | ** ** | **Shares  Outstanding** | ** ** | **Amount**          | ** ** | **Excess of  Par Value** | ** ** | **Retained   Earnings** | ** ** | **Treasury  Stock** | ** ** | **Stockholders’   Equity** | ** ** |
| **Balance,  December 31, 2003**   |       |                    | 8,505      |                |       |                               | $          | 49                           |       |                |       | $ | 46,117 |   |   | $ | 40,269 |   | $ | (8,083 | ) |   | $ | 78,352 |   |   |
| Common stock  issued                   |       |                    | 483        |                |       |                               | —     |                         |       |                | (427       | ) |   | — |   | 2,998 |   |   | 2,571 |   |   |
| Stock based  compensation              |       |                    | —     |                |       |                               | —     |                         |       |                | 480        |   |   | — |   | — |   |   | 480 |   |   |
| Tax benefit of stock options exercised |       |                    | —     |                |       |                               | —     |                         |       |                | 877        |   |   | — |   | — |   |   | 877 |   |   |
| Net income                             |       |                    | —     |                |       |                               |       |                         |       |                | —     |   |   | 10,135 |   | — |   |   | 10,135 |   |   |
| **Balance,  December 31, 2004**   |       |                    | 8,988      |                |       |                               | 49         |                         |       |                | 47,047     |   |   | 50,404 |   | (5,085 | ) |   | 92,415 |   |   |
| Common stock  issued                   |       |                    | 880        |                |       |                               | —     |                         |       |                | (2,125     | ) |   | — |   | 5,900 |   |   | 3,775 |   |   |
| Common stock  purchase                 |       |                    | (610       | )                   |       |                               | —     |                         |       |                | —     |   |   | — |   | (4,874 | ) |   | (4,874 | ) |   |
| Stock based  compensation              |       |                    | —     |                |       |                               | —     |                         |       |                | 33         |   |   | — |   | — |   |   | 33 |   |   |
| Restricted stock  issued               |       |                    | (50        | )                   |       |                               | —     |                         |       |                | (189       | ) |   | — |   | 342 |   |   | 153 |   |   |
| Tax benefit of stock options exercised |       |                    | —     |                |       |                               | —     |                         |       |                | 338        |   |   | — |   | — |   |   | 338 |   |   |
| Net loss                               |       |                    | —     |                |       |                               | —     |                         |       |                | —     |   |   | (13,673 | ) | — |   |   | (13,673 | ) |   |
| **Balance,  December 31, 2005**   |       |                    | 9,308      |                |       |                               | 49         |                         |       |                | 45,104     |   |   | 36,731 |   | (3,717 | ) |   | 78,167 |   |   |
| Common stock  issued                   |       |                    | 157        |                |       |                               | —     |                         |       |                | (1,018     | ) |   | — |   | 1,175 |   |   | 157 |   |   |
| Stock based  compensation              |       |                    | —     |                |       |                               | —     |                         |       |                | 1,146      |   |   | — |   | — |   |   | 1,146 |   |   |
| Restricted stock  issued               |       |                    | 47         |                |       |                               | —     |                         |       |                | (122       | ) |   | — |   | 349 |   |   | 227 |   |   |
| Net loss                               |       |                    | —     |                |       |                               | —     |                         |       |                | —     |   |   | (3,014 | ) | — |   |   | (3,014 | ) |   |
| **Balance, December 31, 2006**    |       |                    | 9,512      |                |       |                               | $          | 49                           |       |                |       | $ | 45,110 |   |   | $ | 33,717 |   | $ | (2,193 | ) |   | $ | 76,683 |   |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

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**GTSI CORP.CONSOLIDATED STATEMENTS OF CASH FLOWS**(In thousands)

| ** **                                                                            | ** ** | **For the Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **CASH FLOWS FROM OPERATING**                                                         | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net (loss) income                                                                     |       | $                                                             | (3,014     | ) | $ | (13,673 | ) | $ | 10,135 |   |
| Adjustments to reconcile  net income (loss) to net cash used in operating activities: |       |                                                          |       |   |   |   |   |
| Depreciation and amortization                                                         |       | 3,737                                                         |       | 4,250 |   | 3,022 |   |
| Impairment charge                                                                     |       | —                                                        |       | 981 |   | — |   |
| Stock based compensation                                                              |       | 1,373                                                         |       | 186 |   | 480 |   |
| Deferred taxes                                                                        |       | —                                                        |       | (441 | ) | 4,415 |   |
| Tax benefit of stock options exercised                                                |       | —                                                        |       | 338 |   | 877 |   |
| Reversal of vendor payables                                                           |       | 5,822                                                         |       | — |   | (10,120 | ) |
| Changes in  operating assets and liabilities:                                         |       |                                                          |       |   |   |   |   |
| Accounts receivable                                                                   |       | (30,137                                                       | )          | (50,797 | ) | (42,880 | ) |
| Inventory                                                                             |       | 21,128                                                        |       | (15,001 | ) | 1,146 |   |
| Other assets                                                                          |       | (9,521                                                        | )          | (12,074 | ) | (3,333 | ) |
| Accounts payable                                                                      |       | (15,600                                                       | )          | (19,813 | ) | 29,051 |   |
| Accrued liabilities                                                                   |       | 5,742                                                         |       | 1,747 |   | 3,688 |   |
| Other liabilities                                                                     |       | 3,275                                                         |       | (5,210 | ) | 1,015 |   |
| Net cash used in  operating activities                                                |       | (17,195                                                       | )          | (109,507 | ) | (2,504 | ) |
| **CASH  FLOWS FROM INVESTING**                                                        | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchase of  depreciable assets                                                       |       | (3,638                                                        | )          | (3,688 | ) | (7,535 | ) |
| Net cash used in  investing activities                                                |       | (3,638                                                        | )          | (3,688 | ) | (7,535 | ) |
| **CASH  FLOWS FROM FINANCING**                                                        | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Payments on)  borrowings under credit facility                                       |       | $                                                             | (17,102    | ) | 46,846 |   | (11,645 | ) |
| Proceeds from  financed lease debt                                                    |       | 28,456                                                        |       | 67,089 |   | 19,323 |   |
| Proceeds from  long-term debt                                                         |       | 10,000                                                        |       | — |   | — |   |
| Common stock  purchases                                                               |       | —                                                        |       | (4,874 | ) | — |   |
| Proceeds from common  stock issued                                                    |       | 157                                                           |       | 3,774 |   | 2,571 |   |
| Net cash provided  by financing activities                                            |       | 21,511                                                        |       | 112,835 |   | 10,249 |   |
| NET INCREASE (DECREASE) IN CASH                                                       |       | $                                                             | 678        |   | (360 | ) | 210 |   |
| CASH AT BEGINNING OF YEAR                                                             |       | 27                                                            |       | 387 |   | 177 |   |
| CASH AT END OF YEAR                                                                   |       | $                                                             | 705        |   | $ | 27 |   | $ | 387 |   |
| CASH PAID DURING  THE YEAR FOR:                                                       |       |                                                          |       |   |   |   |   |
| Interest                                                                              |       | $                                                             | 3,520      |   | $ | 823 |   | $ | 214 |   |
| Income taxes                                                                          |       | $                                                             | 43         |   | $ | 667 |   | $ | 2,708 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

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**GTSI CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the Years Ended December 31, 2006, 2005 and 2004**

**1.**   NATURE OF BUSINESSAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

**A.**   Nature of Business

GTSI Corp. (collectivelywith its subsidiaries, “GTSI” or the “Company”) is an IT hardware and solutionsprovider, focusing predominantly on U.S. federal, state, and local governmentcustomers. GTSI solves government technology challenges with industry-leadingsolutions, a powerful collection of contracts, dedicated teams of certifiedexperts, flexible financing options, and ISO 9001:2000 registered globalintegration and distribution.

To help customers acquire,manage and refresh their technology in a strategic and application-appropriatemanner, GTSI has created a mix of hardware and professional and financialservices capable of managing and funding the entire technology lifecycle. GTSIhas enhanced its professional services organization to handle the increase inengineering, maintenance, and management services supporting its solutions. TheCompany offers leasing arrangements to allow government agencies to acquireaccess to technology as an evenly distributed operating expense, rather thanthe much more budget-sensitive and discontinuous capital expense. Additionally,GTSI markets and sells products, primarily computer hardware and software, andsolutions through its website, www.GTSI.com, providing a convenient, customizedshopping experience to meet the unique and changing needs of its customers.

**B.**   Risks and Uncertainties

There are many factorsthat affect the Company’s business and results of operations, some of which arebeyond our control, including reliance on a small number of transactions for asignificant portion of our sales and gross margins, increased competition,adverse changes in U.S. Federal Government spending, and infrastructurefailures that could adversely effect our ability to process orders, trackinventory and ship products in a timely manner. 

The Company currentlyrelies on a $135 million Credit Agreement with a group of banks as our primaryvehicle to finance operations.  The Credit Agreement imposes financial andreporting covenants on the Company, including the meeting of a minimum EBITDAlevel during each quarterly period.  During 2006, the Company signed twoamendments to the Credit Agreement to change the minimum EBITDA covenant.  The Company was in compliance with allfinancial covenants as set forth in the Credit Agreement as of December 31, 2006. On March 30, 2007, the Company and its lenders executed an amendment tothis Credit Agreement, which removed the minimum EBITDA covenant at March 31,2007 and revised the minimum EBITDA covenant for future measurement periods. 

While the Company believesthat it will remain in compliance with all of the financial and reportingcovenants under the Credit Agreement, including the minimum EBITDA covenantbased on the recent amendment, there can be no assurance that it will do so.  A breach of any of the covenants or restrictions in the Credit Agreementcould result in an event of default under the Credit Agreement.  Such adefault could result in the lenders discontinuing lending or declaring alloutstanding borrowings to be due and payable.  If any of these eventsoccur, the Company would need to find additional or alternative financing, ifavailable, to refinance any such accelerated obligations. There can be noassurance that such financing would be available.

**C.   Principles of Consolidation**

The consolidated financialstatements include the accounts of GTSI and its wholly-owned subsidiaries, GTSIFinancial Services, Inc. and Technology Logistics, Inc. (“TLI”). Allintercompany accounts and transactions have been eliminated. Investments inwhich the Company does not control the investee but has the ability to exercisesignificant influence are accounted for using the equity method of accounting.

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**D.   Use of Estimates**

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, the disclosure of contingentassets and liabilities at year end, and the reported amounts of revenue andexpenses during the reporting period. Actual results could differ from thoseestimates. Management’s estimates and assumptions are evaluated on an ongoingbasis and are based on historical experience, current conditions and availableinformation. Significant items subject to such estimates and assumptionsinclude valuation allowances for receivables and deferred tax assets, accrualof warranties, proportional performance estimates related to open professionalservice contracts, impairments of capitalized internal use software, marketvalue of inventory, accruals of liabilities and the fair value of stockoptions.

**E.   Revenue Recognition**

GTSI recognizes revenuewhen persuasive evidence of a sale arrangement exists, delivery has occurred orservices have been rendered, the sales price is fixed or determinable, andcollectibility is reasonably assured in accordance with SEC Staff AccountingBulletin No. 104, *Revenue Recognition inFinancial Statements* (“SAB 104”).

When a customer ordercontains multiple items such as hardware, software and services which aredelivered at varying times, the Company determines whether the delivered itemscan be considered separate units of accounting as prescribed under EmergingIssues Task Force (“EITF”) Issue No. 00-21, *RevenueArrangements with Multiple Deliverables* (“EITF 00-21”). EITF 00-21states that delivered items should be considered separate units of accountingif delivered items have value to the customer on a standalone basis, there isobjective and reliable evidence of the fair value of undelivered items, and ifdelivery of undelivered items is probable and substantially in GTSI’s control.

Generally, the Company isable to establish fair value for all elements of the arrangement. In theseinstances, revenue is recognized on each element separately. However, if fairvalue cannot be established or if the delivered items do not have stand alonevalue to the customer without additional services provided, the Companyrecognizes revenue on the contract as a single unit of accounting, based oneither the completed-contract or proportional-performance methods as describedbelow.

In most cases, revenuefrom hardware and software product sales is recognized when title passes to thecustomer. Based upon the Company’s standard shipping terms, FOB destination,title passes upon delivery of the products to the customer. However,occasionally GTSI’s customers will request bill-and-hold transactions insituations where the customer does not have space available to receive productsor is not able to immediately take possession of products for other reasons, inwhich case GTSI will store the purchased equipment in its distribution center.Under SAB 104, the Company only recognizes revenue for bill-and-holdtransactions when the goods are complete and ready for shipment, title and riskof loss have passed to the customer, management receives a written request fromthe customer for bill-and-hold treatment, and the ordered goods are physicallysegregated in GTSI’s warehouse from other inventory and cannot be used tofulfill other customer orders.

Revenue is recognized onservice contracts using either the completed-performance orproportional-performance method depending on the terms of the service agreement.When there are acceptance provisions based on customer-specified subjectivecriteria, the completed-performance method is used. For contracts where theservices performed in the last series of acts is very significant, in relationto the entire contract, performance is not deemed to have occurred until thefinal act is completed. Once customer acceptance has been received, or the lastsignificant act is performed, revenue is recognized. The Company uses theproportional-performance method when a service contract specifies a number ofacts to be performed and the Company has the ability to determine the patternin which service is provided to the customer.

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In many contracts, billingterms are agreed upon based on performance milestones such as the execution ofa contract, the customer’s acceptance of the equipment and/or vendor forproducts, the partial or complete delivery of products and/or the completion ofspecified services. Payments received before delivery has occurred or serviceshave been rendered are recorded as deferred revenue until the revenuerecognition criteria are met. Deferred revenue from extended warranty contractsis recognized over the terms of the extended warranty.

The Company sells productsto certain customers under sales-type lease arrangements for terms typicallyranging from two to four years. The Company accounts for its sales-type leasesaccording to the provisions of Financial Accounting Standards Board (“FASB”)Statement of Financial Accounting Standards (“FAS”) No. 13, *Accounting for Leases*, (“FAS 13”) and, accordingly,recognizes current and long-term lease receivables, net of unearned income, onthe accompanying balance sheets. The present value of all payments is recordedas sales and the related cost of the equipment is charged to cost of sales. Theassociated interest is recorded over the term of the lease using the effectiveinterest method.

In many cases, GTSItransfers these receivables to various unrelated financing companies andaccounts for the transfers in accordance with FAS No. 140, *Accounting for the Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities—a Replacement of FASB Statement 125* (“FAS 140”). Thetransfer of receivables in which GTSI surrenders control is accounted for as asale. To surrender control, the assets must be isolated from the Company, thetransferee has the right to pledge or exchange the receivables and GTSI mustnot have an agreement that entitles and obligates the Company to repurchase thereceivables or the ability to unilaterally cause the holder to return specificassets. If the transfer of receivables does not meet the criteria for a saleunder FAS 140, the transfer is accounted for as a secured borrowing with apledge of collateral. As a result, the Company has recorded certain transferredreceivables and secured borrowings, within accounts receivable and long-termfinancing receivables, and as financed lease debt on the balance sheet.

The Company may also enterinto sales arrangements with customers where the Company performs as an agentor broker without assuming the risks and rewards of ownership of the goods andservices. The Company recognizes revenue from these transactions on a net basisin accordance with EITF Issue No. 99-19, *ReportingRevenue Gross as a Principal versus Net as an Agent.* The Companysells services performed by third parties, such as maintenance contracts, andrecognizes revenue on a net basis at the time of sale.

GTSI offers rights ofreturn to its customers on the products it sells. In accordance with FAS No. 48,*Revenue Recognition When Right of Return Exists*,the Company records a sales return allowance based on historical trends inproduct return rates, when such returns became material. The allowance forfuture sales returns as of December 31, 2006 and December 31, 2005was $6.3 million and $8.1 million, respectively, and was recorded as areduction of accounts receivable, net. The estimated cost of sales of $5.7million and $7.3 million related to these sales were also deferred and recordedon the consolidated balance sheet as of December 31, 2006 and December 31,2005, respectively, as deferred costs.

In accordance with EITFIssue No. 02-16, *Accounting by a Customer(Including a Reseller) for Certain Consideration Received from a Vendor*(EITF02-16), the Company records cash received from a vendor as a reduction ofinventory and a subsequent reduction in cost of sales, unless the cash is areimbursement of a specific, identifiable, incremental cost related to sellingthe vendor’s product or the vendor receives, or will receive, an identifiablebenefit in exchange for the cash.

The Company records vendorrebates received under its vendor incentive programs pursuant to a bindingarrangement as a reduction of cost of sales based on a systematic and rationalallocation that results in progress by the Company toward earning the rebateprovided the amounts are probable and reasonably estimable. If the rebate isnot probable and reasonably estimable, it is recognized as the milestones areachieved. In the first quarter of 2006, the Company determined that rebatesunder one vendor rebate program were both probable and reasonably estimable andthus began to record rebates under this program as purchases were made. Accruedvendor rebates recorded at December 31, 2006 

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relatedto this vendor positively impacted gross margin, loss from operations and netloss by $1.1 million, or $0.12 per basic and diluted share, in 2006.

In accordance with EITFIssue No. 00-10, *Accounting for Shippingand Handling Fees and Costs*, the Company records freight billed tocustomers as sales and the related shipping costs as cost of sales.

**F.   Cash**

Cash consists of all cashbalances held in bank accounts at the end of the year. As of December 31,2006 and 2005 approximately $22.1 million and $9.6 million, respectively, wereincluded in accounts payable as checks that were issued by the Company but hadnot cleared its bank accounts. The Credit Facility also considers the Company’slockbox accounts and all deposited cash contained within to be property of thelender to satisfy the Company’s obligations; therefore these balances werereclassified to offset against borrowings under the Credit Facility. See Note 7for a further explanation of the Credit Facility.

**G.   Concentration of Credit Risk**

Accounts receivableprincipally represents amounts collectible from the U.S. federal government andprime contractors to the government. The Company periodically performs creditevaluations of its non-governmental customers and generally does not requirecollateral. As of December 31, 2006 and 2005, trade accounts receivablefrom the U.S. Federal Government were $124.4 million and $126.6 million,respectively. Of these balances, trade receivables from the Department ofDefense accounted for 37.0% and 47.4% as of December 31, 2006 and 2005,respectively. No other single U.S. Federal Government department accounted for10% or more of accounts receivable. Credit losses have been insignificant.

**H.   Allowance for Doubtful Accounts**

The Company’s accountsreceivable balances are net of an estimated allowance for doubtful accounts.The allowance for doubtful accounts is based on a specific identification ofprobable losses and an analysis of historical trade receivable write-offs.These estimates could differ from actual collection experience and are subjectto adjustment. Therefore, the valuation reserve is re-evaluated quarterly andadjusted as information about the ultimate collectibility of accounts receivablebecomes available.

**I.   Software Development Costs**

The Company capitalizesthe cost of internally developed software that has a useful life in excess ofone year in accordance with Statement of Position (“SOP”) No. 98-1, *Accounting for the Costs of Computer Software Developed or Obtained forInternal Use* (“SOP 98-1”). These costs consist of the feespaid to consultants and the salaries of employees working on such softwaredevelopment to customize it to the Company’s needs as well as any third partyhardware/software purchases specific to development. Costs incurred inconnection with the development of upgrades or enhancements that result inadditional functionality are also capitalized and amortized over the usefullife of the software once the enhancements are implemented. Softwaremaintenance and training costs are expensed in the period in which they areincurred.

**J.   Impairment of Long-Lived Assets**

Long-lived assets,consisting primarily of furniture, equipment and capitalized internal usesoftware costs, are tested for recoverability whenever events or changes incircumstances indicate that their carrying amount may not be recoverable inaccordance with FAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets,* (“FAS 144”).Recoverability of long-lived assets is assessed by a comparison of the carryingamount to the estimated future net cash flows expected to result from the useof the assets and their eventual disposition. If estimated undiscounted futurenet cash flows are less than the carrying amount, the asset is consideredimpaired and a loss would be recognized based on the amount by which thecarrying value exceeds the fair value of the asset.

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**K.   Accounts Payable**

The Company purchasessignificant amounts of inventory each year and records an estimate of thepayable based on the purchases as of the balance sheet date and the historicrate of purchase price variances, which is analyzed and adjusted on a quarterlybasis. As invoices are received, the Company records adjustments for purchaseprice variances. Changes in management’s estimate of the amount payable foritems purchased positively impacted gross margin, loss from operations and netloss by $4.0 million, or $0.42 per basic and diluted share, and $1.6 million,or $0.17 per basic and diluted share, for the years ended December 31,2006 and 2005, respectively.

During the year ended December 31,2006 the Company was legally released from certain obligations and, inaccordance with FAS 140, recognized extinguishment of a liability for $5.8million. The impact to GTSI’s financial results was a non-cash increase togross margin and a reduction of net loss of $5.8 million, or $0.62 per basicand diluted share.

**L.   Stock-based Compensation**

Effective January 1,2006, the Company adopted the fair value recognition provisions of FAS No. 123(R),*Share-Based Payment*, (“FAS 123R”), usingthe modified-prospective transition method. Under this method, compensationcost recognized in the year ended December 31, 2006 includes: (a) compensationcost for all share-based payments granted prior to, but not yet vested as of January 1,2006, based on the grant date fair value estimated in accordance with theoriginal provisions of FAS 123, and (b) compensation cost for allshare-based payments granted subsequent to January 1, 2006, based on thegrant-date fair value estimated in accordance with the provisions of FAS 123R. Priorto 2006, the Company applied the intrinsic value method under AccountingPrinciples Board Opinion No. 25 *Accountingfor Stock Issued to Employees* (“APB 25”) in accounting for its stockoption plans. Results for the prior periods have not been restated.

As a result of adoptingFAS 123R on January 1, 2006, the Company’s reported loss from operations,loss before income taxes and net loss for the year ended December 31, 2006are $1.1 million higher, or $0.12 per basic and diluted share, than if it hadcontinued to account for share-based compensation under APB 25. Stock-basedcompensation expense for the year ended December 31, 2006 was $1.4million.

Prior to the adoption ofFAS 123R, the Company presented all tax benefits of deductions resulting fromthe exercise of stock options as operating cash flows in the condensedconsolidated Statement of Cash Flows. FAS 123R requires the cash flows from thetax benefits resulting from tax deductions in excess of the compensation costrecognized for those options (excess tax benefits) to be classified asfinancing cash flows. Since there was no tax benefit for stock options duringthe year ended December 31, 2006, there was no impact on the Company’sStatement of Cash Flows for the adoption of FAS 123R.

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Thefollowing table illustrates the effect on net (loss) income and (loss) earningsper share if the Company had applied the fair value recognition provisions ofFAS 123 to options granted under the Company’s stock option plans for the yearsended December 31, 2005 and 2004, using a Black-Scholes-Mertonoption-pricing formula: (in thousands, except per share data)

| ** **                                                                                                                                                                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net (loss)  income—as reported                                                                                                                                                              |       | $        | (13,673    | )        | $          | 10,135 |   |
| Deduct:                                                                                                                                                                                          |       |     |       |     |       |
| Total stock-based  employee compensation expense determined under fair value based method for  all awards, net of related tax effects for the years ended December 31,  2005  and 2004 |       | (3,772   | )          | (2,153   | )          |
| Net (loss)  income—pro forma                                                                                                                                                                |       | $        | (17,445    | )        | $          | 7,982 |   |
| (Loss) earnings per share—as reported                                                                                                                                                       |       |     |       |     |       |
| Basic                                                                                                                                                                                            |       | $        | (1.49      | )        | $          | 1.17 |   |
| Diluted                                                                                                                                                                                          |       | $        | (1.49      | )        | $          | 1.05 |   |
| (Loss) earnings per share—pro forma                                                                                                                                                         |       |     |       |     |       |
| Basic                                                                                                                                                                                            |       | $        | (1.90      | )        | $          | 0.92 |   |
| Diluted                                                                                                                                                                                          |       | $        | (1.90      | )        | $          | 0.83 |   |

 

**M.**   IncomeTaxes

The Company accounts for income taxes in accordancewith FAS No. 109*, Accounting for IncomeTaxes* (“FAS 109”), which requires the recognition of deferred taxassets and liabilities for the expected future tax effects of temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes. FAS109 requires that a valuation allowance be established when it is more likelythan not that some portion or all of a deferred tax asset will not be realized.A full valuation allowance on the net deferred tax asset has been recorded asof December 31, 2006 and 2005.

**N.   Advertising**

The costs of advertising are expensed as incurred.

**O.   Fair Valueof Financial Instruments**

At December 31, 2006 and 2005, the recordedvalues of financial instruments such as trade receivables, accounts payable andCredit Facility borrowings approximated their fair values based on theshort-term maturities of these instruments. As of December 31, 2006 and2005, the Company believes the carrying amount of its current and long-termlease receivables and financed lease debt approximate their fair value. As of December 31,2006, the Company also believes the carrying amount of its long-term debtapproximates fair value because the applicable interest rate is a comparablemarket rate.

**P.   EquityInvestments**

Investments in joint ventures and entities in whichthe Company exercises significant influence but not control are accounted forusing the equity method as prescribed by Accounting Principles Board No. 18,*The Equity Method of Accounting for Investments inCommon Stock* (“APB 18”). Under this method of accounting, whichgenerally applies to investments that represent a 20% to 50% ownership of theequity securities of the investees, the Company’s share of the net earnings orlosses of the affiliated companies is included in other income and expenses.

**Q.   NewAccounting Pronouncements**

In July 2006, the FASB issued FASB InterpretationNo. 48,*Accounting for Uncertainty inIncome Taxes* (“FIN 48”). FIN 48 clarifies the accounting forincome taxes by prescribing a minimum probability threshold that a tax positionmust meet before a financial statement benefit is recognized. The minimumthreshold is defined in FIN 48 as a tax position that is more likely thannot to be sustained upon 

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examination by theapplicable taxing authority, including resolution of any related appeals orlitigation processes, based on the technical merits of the position. The taxbenefit to be recognized is measured as the largest amount of benefit that isestimated to be greater than fifty percent likely of being realized uponultimate settlement. FIN 48 must be applied to all existing tax positions uponinitial adoption. The cumulative effect of applying FIN 48 at adoption, if any,is to be reported as an adjustment to the opening balance of retained earningsin the year of adoption. FIN 48 is effective for the Company on January 1,2007. The Company is currently evaluating the impact the adoption of FIN 48will have on the Company’s consolidated financial statements.

**In September 2006,the FASB issued FAS No. 157, *Fair Value Measurement*(“FAS 157”), which establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements. FAS 157 is effective for interim periods beginning after November 15,2007. The Company is in the process of evaluating the adoption of FAS No. 157.**

**R.**   Reclassifications

Certainprior year amounts were reclassified to conform to the current yearpresentation.

**2.   AccountsReceivable**

Accounts receivableconsists of the following as of December 31 (in thousands):

| ** **                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Trade accounts  receivable             |       | $        | 178,420    |     | $191,390   |   |
| Unbilled trade  accounts receivable    |       | 14,519   |       | 7,773    |       |
| Lease  receivables, net                |       | 15,234   |       | 14,105   |       |
| Vendor and other receivables           |       | 21,793   |       | 23,172   |       |
| Total accounts receivable              |       | 229,966  |       | 236,440  |       |
| Less: Allowance  for doubtful accounts |       | (1,612   | )          | (1,968   | )          |
|   Sales return allowance          |       | (6,282   | )          | (8,116   | )          |
|                                   |       | $222,072 |       | $226,356 |       |
|                                        |            |          |            |          |            |  |

 

**3.**   Leaseand Other Receivables

The Company leases computer hardware, generally undersales-type leases, in accordance with FAS 13. In connection with those leases,the Company sometimes sells related services, software and maintenance to itscustomers. The terms of the receivables from the sale of these related servicesare often similar to the terms of the leases of computer hardware; that is,receivables are interest bearing and are often due over a period of time thatcorresponds with the terms of the leased computer hardware.

The Company recognized revenue of $49.0 million, $65.5million and $34.5 million for the years ended December 31, 2006, 2005 and2004, respectively, from sales-type lease and related transactions. Otherrelated receivables include long term receivables for items such asmaintenance, services and software. As of December 31, 2006, the Companyhad outstanding lease and other receivables (current and long-term) of $42.4million compared with $46.8 million as of December 31, 2005.

Futureminimum payments for lease and other related receivables are as follows as of December 31,2006 (in thousands):

| 2007                    |   | $      | 22,407 |   |
|-------------------------|--------|--------|--------|--------|
| 2008                    |   | 10,188 |   |
| 2009                    |   | 5,768  |   |
| 2010                    |   | 2,405  |   |
| Thereafter              |   | 3      |   |
| Future minimum payments |   | $      | 40,771 |   |

 

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*Lease Receivables*

TheCompany’s investments in sales-type lease receivables were as follows as of December 31(in thousands):

| ** **                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Future minimum  lease payments receivable |       | $        | 26,307     |     | $          | 30,736 |   |
| Unguaranteed  residual values             |       | 10,516   |       | 8,723    |       |
| Unearned income                           |       | (6,485   | )          | (6,328   | )          |
|                                      |       | $        | 30,338     |     | $          | 33,131 |   |

 

*Other RelatedReceivables*

TheCompany’s investment in other receivables was as follows as of December 31(in thousands):

| ** **                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Future minimum  payments receivable |       | $        | 14,464     |     | $          | 16,414 |   |
| Unearned income                     |       | $        | (2,415     | )        | (2,742     | ) |
|                                |       | $12,049  |       | $        | 13,672     |   |

 

**4.   TransferredReceivables and Financed Lease Debt**

Duringthe years ended December 31, 2006 and 2005, receivables of $28.5 millionand $67.1 million, respectively, were transferred to third party financingcompanies. These amounts are included in cash flows from financing activitiesin the consolidated statements of cash flows. The financing receivablestypically have terms from two to four years and are usually collateralized by asecurity interest in the underlying assets. Though the Company received cashfor the transfer of these receivables, the transfers did not meet the criteriafor a sale under FAS 140. As a result, the receivables remain on the Company’sbalance sheets and are characterized as financing receivables. As ofDecember 31, 2006 and 2005, such financing receivables were$40.1 million and $36.2 million, respectively which is included inthe lease and other related receivables above. The interest income on the thesereceivables is recognized over the terms of the respective agreements aslease-related income, as a majority of transferred receivables are leasereceivables. As payments on these receivables are made by our customersdirectly to the third party financing companies, the related reduction of thesereceivables and financed lease debt is a non-cash transaction and excluded fromthe statement of cash flows. These non-cash items totaled $34.3 millionand $43.8 million for the years ended December 31, 2006 and 2005,respectively.

The terms of the financed lease debt, which is securedby the transferred receivables, generally correspond to the terms of theunderlying receivables, generally two to four years. The financed lease debthad a weighted average interest rate of 7.11%, 6.83% and 5.89% for the yearsended December 31, 2006, 2005 and 2004, respectively. The Companyrecognized $2.5 million, $1.6 million and $0.6 million of interest expenseassociated with the financed lease debt for the years ended December 31,2006, 2005 and 2004, respectively.

Thematurities of the financed lease debt as of December 31, 2006 are asfollows (in thousands):

| **Year** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------|------------|------------|------------|------------|------------|
| 2007     |       | $          | 16,546     |       |
| 2008     |       | 8,894      |       |
| 2009     |       | 6,648      |       |
| 2010     |       | 3,216      |       |
| 2011     |       | —     |       |
| Total    |       | $          | 35,304     |       |

 

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For the years ended December 31,2006, 2005 and 2004, the Company transferred lease and other relatedreceivables of $18.7 million, $7.5 million and $22.6 million, respectively, tothird party financing companies in transactions that met the sale criteriaunder FAS 140. These amounts are included in cash flows from operatingactivities in the consolidated statements of cash flows. As such, in 2006 theCompany derecognized the receivables associated with these transfers and recognized a netgain on these sales in the amount of $1.7 million, which is included inlease-related income on the accompanying consolidated statements of operations. Comparativeamounts in 2004 and 2005 were not significant.

**5. Inventory**

Inventory is valued at thelower of cost or market. Cost is determined using the average cost method. TheCompany writes down its inventory for obsolete or excess inventory based onassumptions about future demand and market conditions. The difficulties arisingfrom the implementation of GTSI Enterprise Management System (“GEMS”) in 2005distracted personnel from the management of procurement and inventory. Thatproblem was compounded by GEMS issues which resulted in ordering excessinventory. As a result, during the year ended December 31, 2005, theCompany recorded an impairment charge of $5.6 million for obsolete and excessinventory, which is included in cost of sales. This expense increased theCompany’s loss from operations by $5.6 million. During the year ended December 31,2004, GTSI recorded a charge of $0.7 million, net of insurance proceeds, incost of sales for inventory losses.

**6. DepreciableAssets**

Depreciableassets are stated at cost less accumulated depreciation and amortization.Depreciation and amortization are calculated using the straight-line methodover estimated useful lives. Furniture and equipment useful lives range fromthree to ten years. Purchased and developed computer software for internal use,including the GTSI Enterprise Resource Management System (“GEMS”), areamortized over expected lives ranging from three to seven years. The usefullife for leasehold improvements is the lesser of the term of the lease or thelife of the improvement, which range from three to nine years. Costs formaintenance and repairs are charged to expense when incurred. Depreciableassets consist of the following as of December 31 (in thousands):

| ** **                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Office furniture  and equipment                |       | $        | 15,482     |     | $          | 15,312 |   |
| Purchased  software for internal use           |       | 12,784   |       | 12,493   |       |
| Internally  developed software                 |       | 13,312   |       | 10,411   |       |
| Leasehold  improvements                        |       | 5,273    |       | 5,226    |       |
|                                           |       | 46,851   |       | 43,442   |       |
| Less accumulated depreciation and amortization |       | (33,224  | )          | (29,802  | )          |
| Depreciable assets, net                        |       | $        | 13,627     |     | $          | 13,640 |   |

 

Depreciation expense for 2006 was $3.7 million,compared to $4.3 million for 2005. During 2006 and 2005, the Companycapitalized $2.9 million and $2.1 million, respectively, of development costsrelated to GEMS. In addition, during 2006 and 2005, the Company capitalized$0.2 million and $0.7 million, respectively, for other purchased software forinternal use.

During 2005, the Companydecided to use a web-based customer resource management (“CRM”) softwareinstead of the CRM module of GEMS. As a result, the Company tested certainasset groupings within GEMS for recoverability and determined an impairmentloss of approximately $1.0 million, net of accumulated amortization, should berecorded in operating expenses to write down GEMS to its fair value as requiredby FAS 144. There were no indicators of impairment under FAS 144 during 2006.

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**7. Credit Facilityand Term Loan**

During 2006, the Company obtained a $135 millioncredit agreement with a group of lenders (the “Credit Facility”). This CreditFacility replaced GTSI’s former credit facility, which expired on May 31,2006. The gross outstanding balance of the Credit Facility as of December 31,2006 was $42.6 million and is included on the accompany balance sheet, net of the Company’s lockbox cash accounts that areaccessed by the lenders to pay down the Credit Facility outstanding balance,which was $11.7 million as of December 31, 2006.

The Credit Facility provides access to capital throughJune 2, 2010, with borrowings secured by substantially all of the assetsof the Company. The Facility matures in full on June 2, 2010. Borrowingunder the Credit Facility at any time is limited to the lesser of $135 millionor a collateral-based borrowing base less outstanding obligations. The CreditFacility subjects GTSI to certain covenants limiting its ability to (i) incurdebt; (ii) make guarantees; (iii) make restricted payments, purchasesor investments; (iv) enter into certain transactions with affiliates; (v) acquirereal estate and (vi) enter into sale and leaseback transactions. TheCredit Facility carries an interest rate generally indexed to the Prime Rateplus 0.25% plus margin. The average interest rate for 2006 was 8.47%. As of December 31,2006, GTSI had remaining available credit under the Credit Facility of $30.1million.

The Credit Facility contains negative financial performancecovenants, including a minimum EBITDA covenant for each period, informationcovenants and certain affirmative covenants. During 2006, the Company signedtwo amendments to the Credit Facility to change the frequency of disclosure tothe lender and the minimum EBITDA required. The Company was in compliance withall financial covenants set forth in the Credit Facility as of December 31,2006. On March 30, 2007, the Company executed the third amendment to theCredit Facility, which removed the minimum EBITDA covenant at March 31,2007 and revised the minimum EBITDA covenant for future measurement periods(see Note 16). The Company currently relies on its Credit Facility as itsprimary vehicle to finance its operations. If the Company fails to comply withany material provision or covenant of our credit facility, it would be requiredto seek a waiver or amendment of covenants.

At December 31, 2006, the Company had asubordinated secured long-term loan of $10 million (the “Term Loan”). The debtcovenants and maturity date on the Term Loan are the same as the CreditFacility and no payments of principal are due until June 2, 2010. Theinterest rate on the Term Loan is Prime plus 5.25% per annum and is due monthly.The average interest rate for 2006 was 13.25%. This agreement contains aprepayment penalty which is equal to the greater of (i) all interestpayable for the first twelve months of the agreement, less interest paidthrough current or (ii) 1% of the amount prepaid.

The Company defers loan financing costs and recognizesthese costs throughout the term of the loans. Deferred financing costs as of December 31,2006 and 2005 were $4.5 million and $0, respectively.

As of December 31, 2005 the Company had a $135million revolving credit facility with a group of banks that expired on May 31,2006 and was replaced by the Credit Facility discussed above. The former creditfacility included a revolving line of credit (the “Revolver”) and a provisionfor inventory financing of vendor products (the “Wholesale Financing Facility”).Borrowings under the Revolver were $48.0 million as of December 31, 2005. Borrowingsunder the Wholesale Financing Facility were $29.5 million as of December 31,2005.

The former credit facilitycarried an interest rate indexed to the London Interbank Offered Rate (“LIBOR”)plus 1.75 percentage points. At December 31, 2005, GTSI’s interest rateunder the Credit Facility was 6.1%. The weighted average interest rates for theyears ended December 31, 2005 and 2004 were 5.1% and 3.2%, respectively.

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**8. Stockholders’Equity**

*Purchase of CapitalStock*

During 2006 and 2004, the Company made no repurchasesof common stock. During 2005, the Company purchased approximately 610,000shares of common stock for an aggregate purchase price of $4.9 million. Theshares purchased were authorized under a stock purchase plan approved by GTSI’sBoard of Directors. In February 2000, the Board of Directors approved aplan for the purchase of common stock with a limit of up to $5.25 million. In2002, the Board of Directors authorized the use of up to an additional $5.0million for the purchase of outstanding shares of the Company’s common stock,provided the per share price did not exceed the market price. During 2005, theBoard of Directors approved a $7.3 million increase to the Company’s sharerepurchase program.

As of December 31,2006, GTSI had authorization for remaining future repurchases of $5.1 million;however, the Company is restricted under its Credit Agreement from purchasingits stock until 2010. Common stock purchased for the Company’s treasury isgenerally reissued for the employee stock purchase plan, for restricted stockgrants and upon the exercise of employee stock options.

*Stock IncentivePlans*

The Company has two stockholder approved combinationincentive and non-statutory stock incentive plans: the 1994 Stock Option Plan,as amended (“1994 Plan”), and the Amended and Restated 1996 Stock IncentivePlan (“1996 Plan”). These plans provide for the granting of options toemployees (both plans) and non-employee directors (only under the 1996 Plan) topurchase up to 300,000 and 3,500,000 shares, respectively, of the Company’scommon stock. The 1996 Plan also permits the grant of restricted stock andrestricted stock units to its employees and non-employee directors. The Companyhas another stockholder approved plan, the 1997 Non-Officer Stock Option Plan (“1997Plan”), which provides for the granting of non-statutory stock options toemployees (other than officers and directors) to purchase up to 300,000 sharesof the Company’s common stock. In addition, GTSI has utilized a vehiclepermitted under NASDAQ marketplace rules that allows a company withoutstockholder approval to offer stock options to prospective employees as aninducement to join GTSI (“Capitalization Vehicle”).

Under the 1997, 1996 and1994 Plans, options have a term of up to ten years, generally vest over fouryears and option prices are required to be at not less than 100% of the fairmarket value of the Company’s common stock at the date of grant and, except inthe case of non-employee directors, must be approved by the Board of Directorsor its Compensation Committee. Options issued under the Capitalization Vehiclehave a term of seven years, vest over four years and option prices equal thefair market value of the Company’s common stock at the date of grant. Thevesting period for restricted stock and restricted stock units is determined bythe Compensation Committee on an individual award basis. GTSI recognizesstock-based compensation expense for these graded vesting awards on astraight-line basis over the requisite service period for the entire award,which is equal to the vesting period specified in the option agreement.

*ValuationAssumptions*

Thefair value of each option award is estimated on the date of grant using aBlack-Scholes-Merton option valuation model that uses the assumptions noted inthe following table. Expected volatilities are based on the historicalvolatility of GTSI’s stock over the historical period of time equal to theexpected term of the options. The Company uses historical data to estimateoption exercises, employee terminations and award forfeitures within thevaluation model. The expected term of options granted has been determined basedon historical exercise behavior and represents the period of time that optionsgranted are expected to be outstanding. The risk-free interest rate is based onthe U.S. Treasury rates at the time of grant, that approximates the expectedterm of the option. The expected dividend assumption is zero as the Company iscurrently restricted under its Credit Agreement from issuing dividends on itscommon stock 

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and it does not expect to declare a dividend in theforeseeable future. The fair value of the Company’s stock based option awardsto employees was based on the following weighted-average assumptions for theyears ended December 31:

| ** **                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected  volatility      |       | 49.6     | %          | 51.7     | %          | 62.7     | %          |
| Expected  dividends       |       | —   |       | —   |       | —   |       |
| Expected term (in  years) |       | 4.8      |       | 4.0      |       | 4.2      |       |
| Risk free interest rate   |       | 5.0      | %          | 4.0      | %          | 3.5      | %          |

 

*Stock Options*

Asummary of option activity under the Company’s stock incentive plans as of December 31,2006 and changes during the year then ended is presented below (in thousands):

| ** **                             | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  January 1, 2006   |       |       | 2,088      |                                   |       |                                                | $          | 8.57                            |       |   |   |   |   |   |   |   |   |   |
| Granted                                |       |       | 848        |                                   |       |                                                | $          | 7.00                            |       |   |   |   |   |   |   |   |   |   |
| Exercised                              |       |       | (198       | )                                      |       |                                                | $          | 4.34                            |       |   |   |   |   |   |   |   |   |   |
| Forfeited or  canceled                 |       |       | (633       | )                                      |       |                                                | $     | 9.90                            |       |   |   |   |   |   |   |   |   |   |
| Outstanding at  December 31, 2006 |       |       | 2,105      |                                   |       |                                                | $          | 7.93                            |       |   |   | 4.79 |   |   |   | $ | 3,772 |   |   |
| Exercisable at  December 31, 2006 |       |       | 1,178      |                                   |       |                                                | $          | 8.51                            |       |   |   | 3.64 |   |   |   | $ | 1,872 |   |   |

 

The weighted-average grant-date fair value of optionsgranted during 2006, 2005 and 2004 was $7.00, $8.15 and $11.28, respectively.The total intrinsic value of options exercised during 2006, 2005 and 2004 was$0.6 million, $3.6 million and $2.3 million, respectively. During 2006, aCompany executive exercised 100,000 stock options and received 31,073 shares ofGTSI common stock in a net share settlement, where he effectively tenderedshares. In addition, during 2006, 97,500 other stock options were exercised andcommon stock was issued from treasury stock. Stock compensation expense relatedto stock option awards was $1.2 million for the year ended December 31,2006.

During the year ended December 31, 2005, the Company’sBoard of Directors approved the acceleration of the vesting of unvested stockoptions with an exercise price higher than $8.09, the market value on the dateof the acceleration, previously awarded to employees, officers and directorsunder GTSI’s stock option plans. This action affected unvested options topurchase an aggregate of 515 thousand shares of common stock at exercise pricesper share between $8.23 and $13.67. The vesting of these options wasaccelerated to avoid recognizing compensation expense in future financialstatements upon the adoption of FAS 123R.

No tax benefit for the exercise of stock options wasrecognized during 2006. The tax benefit of stock options exercised during 2005and 2004 were $338 thousand and $877 thousand, respectively.

For 2006, 2005 and 2004,the Company recorded charges of $33 thousand, $22 thousand, and $13 thousand,respectively for stock-based compensation granted to non-employees based on thefair value method.

*Restricted Shares*

During 2006, the Company issued restricted stockgrants of 26,664 shares of the Company’s common stock to the non-employeemembers of the Board, which will vest in June 2007, as well as 29,667shares of 

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restricted stock toemployees, scheduled to vest on the third, fourth and fifth anniversaries ofthe grant date in equal installments. During 2005, the Company issuedrestricted stock grants of 26,664 shares of the Company’s common stock to thenon-employee members of the Board, which vested in June 2006, and alsoissued 23,333 shares of restricted stock to employees, scheduled to vest on thethird, fourth and fifth anniversaries of the grant date in equal installments. Therewas no restricted stock issued during 2004. Compensation is recognized on astraight-line basis over the vesting period of the grants. During 2006, 2005and 2004, $227 thousand, $153 thousand, and $0 respectively, was recorded asstock compensation expense for restricted stock.

Holdersof nonvested restricted stock have similar dividend and voting rights as commonshareholders. The fair value of nonvested shares of restricted stock isdetermined based on the closing trading price of the Company’s shares on thegrant date. A summary of the status of Company’s nonvested shares as of December 31,2006, and changes during 2006, is presented below (in thousands):

| ** **                           | ** ** | **Shares** | ** ** | **Weighted  Average  Grant-  Date Fair  Value** | ** ** |
|--------------------------------------|------------|------------|------------|------------------------------------------------------|------------|
| Nonvested at  January 1, 2006   |       |       | 50         |                                                 |       |   | $ | 8.16 |   |   |
| Granted                              |       |       | 56         |                                                 |       |   | $ | 7.34 |   |   |
| Forfeited                            |       |       | (10        | )                                                    |       |   | $ | 8.12 |   |   |
| Restricted lapse                     |       |       | (28        | )                                                    |       |   | $ | 8.20 |   |   |
| Nonvested at  December 31, 2006 |       |       | 68         |                                                 |       |   | $ | 7.47 |   |   |

 

*UnrecognizedCompensation*

As of December 31,2006, there was $3.2 million of total unrecognized compensation cost related tononvested stock-based awards. That cost is expected to be recognized over aweighted-average period of 3.1 years. During 2006, approximately 54 thousandawards vested.

*Employee StockPurchase Plan*

GTSI has established an Employee Stock Purchase Plan (“ESPP”).Beginning January 1, 2006, eligible employees may elect to set aside,through payroll deduction, up to 15% of their compensation to purchase commonstock of the Company at 95% of the fair market value of shares of common stockon the first day of the offering period. The maximum number of shares that aneligible employee may purchase during any offering period is equal to 5% ofsuch employee’s compensation for the 12 calendar-month period prior to thecommencement of an offering period divided by 95% of the fair market value of ashare of common stock on the first day of the offering period. The ESPP isimplemented through one offering during each six-month period beginning January 1and July 1. Prior to January 1, 2006, the ESPP purchase price was 85%of the lower of the fair market value of a share of common stock on the firstday or the last day of the offering period. No other material changes were madeto the plan. The Company uses its treasury shares to fulfill the obligation ofboth the employee withholding and the discount.

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Thetable below summarizes the number of shares purchased by employees under theESPP during the offering periods indicated:

| **Offering period ended** | ** ** | ** ** | ** ** | **Number of  shares  purchased** | ** ** | **Purchase  price** | ** ** |
|-------------------------------------|------------|------------|------------|---------------------------------------|------------|---------------------|------------|
| December 31,  2006             |       |       | 13,547     |                                  |       |                | $          | 8.77 |   |   |
| June 30,  2006                 |       |       | 15,546     |                                  |       |                | $          | 6.13 |   |   |
| December 31,  2005             |       |       | 41,605     |                                  |       |                | $          | 5.95 |   |   |
| June 30,  2005                 |       |       | 35,612     |                                  |       |                | $          | 6.92 |   |   |
| December 31,  2004             |       |       | 40,994     |                                  |       |                | $          | 8.93 |   |   |
| June 30, 2004                  |       |       | 44,098     |                                  |       |                | $          | 9.73 |   |   |

 

The weighted average fairmarket value of shares under the ESPP was $7.36 in 2006, $6.40 in 2005 and$9.35 in 2004. GTSI has reserved 1,600,000 shares of common stock for the ESPP,of which 711,118 were available for future issuance as of December 31,2006.

**9. Contract Termination Costs**

In October 2005and February 2006 the Company implemented two reductions in workforce toeliminate duplication within the organization and move out of activities whichhave failed to yield adequate profitability. These actions resulted in excessoffice space for which the Company recorded a charge during 2006 of $166thousand for the consolidation of facilities. Of the remaining $122 thousandliability at December 31, 2006, $58 thousand represents a non-currentliability for costs to be incurred though 2008 related to facilities that aresub-leased or anticipated to be sub-leased at rates below the Company’s costs.This charge is included in selling, general & administrative expenseson the accompanying consolidated statement of operations. Although the subleaseended during the second quarter, the Company continues to actively market thespace available in an effort to offset future expenses. Contract terminationcost reserve activities as of and for the year ended December 31, 2006were as follows (in thousands):

| Contract  termination charge                                 |   | $   | 166 |   |
|--------------------------------------------------------------|--------|-----|-----|--------|
| Less: cash  payments                                         |   | (44 | )   |
| Contract termination  liability as of December 31, 2006 |   | $   | 122 |   |

 

**10. Related PartyTransactions**

Aspart of the Mentor-Protégé Program offered under SBAs 8(a) program, GTSIserves as the official mentor to Eyak Technology, LLC (“Eyak”), providingassistance and expertise in many key business areas. In 2002, GTSI made a $370thousand investment in Eyak and assumed a 37% ownership of the company. GTSIalso has a designee on Eyak’s Board of Directors. The investment in Eyak isaccounted for under the equity method and adjusted for earnings or losses asreported in the financial statements of Eyak and dividends received from Eyak.At December 31, 2006 and 2005, the investment balance for Eyak was $1.4million and $0.6 million, respectively, and equity in earnings was $0.9 millionand $0.1 million, respectively. The Company recognized sales to Eyak of $14.4million, $25.8 million and $34.4 million during 2006, 2005 and 2004 andreceivables have been recorded by the Company totaling $5.8 million and $4.4million as of December 31, 2006 and 2005, respectively. GTSI also receivesa fee from Eyak based on sales from products sold at cost by GTSI to Eyak and feesrecognized by the Company during 2006, 2005, and 2004 are $1.5 million, $1.8million, and $2.5 million, respectively, which are included in sales in theaccompanying consolidated statements of operations. The amounts due areincluded in accounts receivable totaling $0.8 million and $0.4 million for theyear ended December 31, 2006 and 2005 

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respectively. The following table summarize Eyak’sfinancial information as of and for the year ended December 31 (inthousands):

| ** **   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues     |       | $        | 91,985     |     | $          | 72,463   |       | $ | 65,292 |   |
| Gross margin |       | $        | 12,087     |     | $          | 7,313    |       | $ | 5,419 |   |
| Net income   |       | $        | 2,513      |     | $          | 129      |       | $ | 837 |   |

 

| ** **              | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Current assets          |       | $        | 54,911     |     | $          | 24,842 |   |
| Noncurrent assets       |       | $        | 423        |     | $          | 464 |   |
| Current  liabilities    |       | $        | 51,411     |     | $          | 23,580 |   |
| Noncurrent  liabilities |       | $        | 114        |     | $          | 130 |   |
| Member’s equity    |       | $        | 3,809      |     | $          | 1,596 |   |

 

**11. (Loss) EarningsPer Share**

Basic (loss) earnings per share are calculated bydividing net income or loss by the weighted average shares outstanding duringthe period, which includes shares of restricted stock that are fully vested.Diluted (loss) earnings per share are computed similarly to basic (loss)earnings per share, except that the weighted average shares outstanding areincreased to include equivalents, when their effect is dilutive. Antidilutiveemployee stock options totaling 285 thousand and 741 thousand and restricted stockunits totaling 45 thousand and 26 thousand have been excluded for 2006 and2005, respectively.

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Thefollowing table sets forth the computation of basic and diluted (loss) earningsper share for the years ended December 31 (in thousands except per shareamounts):

| ** **                                                                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Basic (loss) earnings  per share:                                             |       |     |       |     |       |     |       |
| Net (loss) income                                                             |       | $        | (3,014     | )        | $          | (13,673  | )          | $ | 10,135 |   |
| Weighted average shares outstanding                                           |       | 9,371    |       | 9,166    |       | 8,664    |       |
| Basic (loss) earnings per share                                               |       | $        | (0.32      | )        | $          | (1.49    | )          | $ | 1.17 |   |
| Diluted (loss)  earnings per share:                                           |       |     |       |     |       |     |       |
| Net (loss) income                                                             |       | $        | (3,014     | )        | $          | (13,673  | )          | $ | 10,135 |   |
| Weighted average shares outstanding                                           |       | 9,371    |       | 9,166    |       | 8,664    |       |
| Incremental shares attributable to the exercise of  outstanding stock options |       | N/A      |       | N/A      |       | 954      |       |
| Weighted average shares and equivalents                                       |       | 9,371    |       | 9,166    |       | 9,618    |       |
| Diluted (loss)  earnings per share                                            |       | $        | (0.32      | )        | $          | (1.49    | )          | $ | 1.05 |   |

 

**12. Income Taxes**

The benefit (provision)for income taxes consists of the following for the years ended December 31(in thousands):

| ** **                            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                              |       |     |       |     |       |     |       |
| Federal                               |       | $        | 98         |     | $          | 3,197    |       | $ | (2,109 | ) |
| State                                 |       | 12       |       | 470      |       | (334     | )          |
|                                  |       | $        | 110        |     | $          | 3,667    |       | $ | (2,443 | ) |
| Deferred:                             |       |     |       |     |       |     |       |
| Federal                               |       | $        | —     |     | $          | (401     | )          | $ | (3,997 | ) |
| State                                 |       | —   |       | (40      | )          | (418     | )          |
|                                  |       | $        | —     |     | $          | (441     | )          | $ | (4,415 | ) |
| Total income tax  benefit (provision) |       | $        | 110        |     | $          | 3,226    |       | $ | (6,858 | ) |

 

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Deferredincome taxes include the net tax effects of net operating loss (“NOL”)carryforwards and tax credits and the net tax effects of temporary differencesbetween the carrying amounts of assets and liabilities and the amounts recordedfor income tax purposes. The components of the deferred tax assets and liabilitiesare as follows as of December 31 (in thousands):

| ** **                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                 |       |     |       |     |       |
| Allowance                            |       | $        | 737        |     | $          | 952 |   |
| Inventory reduction of cost basis    |       | 954      |       | 2,643    |       |
| Reserves                             |       | 1,067    |       | 315      |       |
| Bid and proposal costs               |       | 2,410    |       | 1,902    |       |
| Deferred revenue                     |       | 446      |       | 265      |       |
| Stock compensation                   |       | 392      |       | 120      |       |
| Sale of receivables                  |       | 928      |       | —   |       |
| Net operating losses and tax credits |       | 693      |       | 927      |       |
| Total deferred tax assets            |       | 7,627    |       | 7,124    |       |
| Deferred tax  liabilities:           |       |     |       |     |       |
| Prepaid expenses and other           |       | (240     | )          | (268     | )          |
| Sale of receivables                  |       | —   |       | (25      | )          |
| Depreciation and amortization        |       | (3,413   | )          | (2,901   | )          |
| Total deferred tax liabilities       |       | (3,653   | )          | (3,194   | )          |
| Valuation  allowance                 |       | (3,974   | )          | (3,930   | )          |
| Net deferred tax assets              |       | $        | —     |     | $          | — |   |

 

The Company has provided avaluation allowance against the full amount of the net deferred tax assets asof December 31, 2006 and 2005 because, in the opinion of management, it isnot more likely than not that these deferred tax assets will be realized.

Thefollowing is a reconciliation of the statutory U.S. income tax rate to theCompany’s effective tax rate for the years ended December 31:

| ** **                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory rate                                  |       | (34.0    | )%         | (34.0    | )%         | 34.0     | %          |
| State income  taxes, net of federal benefit     |       | (6.2     | )          | (3.1     | )          | 3.6      |       |
| Non-deductible  meals & entertainment costs |       | 4.5      |       | 1.0      |       | 0.7      |       |
| Non-deductible  accrued incentive costs         |       | 3.7      |       | 0.4      |       | —   |       |
| Other                                           |       | 0.2      |       | (0.6     | )          | 0.8      |       |
| Change in the tax  contingency reserve          |       | (3.5     | )          | (1.4     | )          | 1.3      |       |
| Change in  valuation allowance                  |       | 31.8     |       | 18.6     |       | —   |       |
| Effective tax  rate                             |       | (3.5     | )%         | (19.1    | )%         | 40.4     | %          |

 

Asof December 31, 2006 and 2005, respectively, the Company has NOLcarryforwards of approximately $4.3 million and $2.5 million for Federal incometax purposes which will expire through 2027. With the implementation ofFAS123R, the amount of the NOL carryforward related to stock based compensationexpense is not recognized until the stock-based compensation tax deductionsreduce taxes payable. Accordingly, the NOLs reported in gross deferred taxassets do not include the component of the NOL related to excess tax deductionsover book compensation cost related to stock based compensation. The NOL’srelated to excess stock based compensation, and the related offsettingvaluation allowance, as of December 31, 2005 have been removed from thedeferred tax items included in the Company’s deferred taxes. The amount ofvaluation allowance that was removed as a result of reduction inDecember 31, 2005 NOL’s was approximately $0.9 million; as a result,the valuation allowance on a net basis increased by $44 thousand althoughthe actual gross increase, before the FAS 123R adjustment to the valuation

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allowance, was approximately $1 million. The NOLrelated to these excess tax deductions will be recorded directly into capitalin excess of par value at the time they produce a future current tax benefit. Approximately$3.0 million and $2.5 million of the December 31, 2006 and 2005 NOL carryforwardrelates to stock based compensation expense for which subsequently recognizedtax benefits will be allocated to capital in excess of par value. The taxdeduction benefit from the exercise of stock options of $0, $0.3 million, and$0.9 million was recorded to capital in excess of par value for the years endedDecember 31, 2006, 2005 and 2004, respectively.

TheCompany has an alternative minimum tax credit carryforward of approximately$177,000 at December 31, 2006 and 2005 with no expiration date.

TheCompany has established contingency reserves related to income taxes inaccordance with SFAS No. 5. These reserves predominantly relate to taxbasis in inventory and interest due as a result of the prior year financialstatement restatement. The reserve is recorded within current taxes payable.

TheCompany’s NOL and tax credit carryforwards may be significantly limited under Section 382of the Internal Revenue Code (“IRC”). NOL and tax credit carryovers are limitedunder Section 382 when there is a significant “ownership change” asdefined in the IRC. During 2005 and 2006, the Company may have experienced suchownership changes.

The limitation imposed by Section 382 would placean annual limitation on the amount of NOL and tax credit carryovers that can beutilized. When the Company completes the necessary studies, the amount of NOLcarryovers available may be reduced significantly. However, since the Companyhas established a full valuation allowance, there is no impact on the reportedassets, liabilities, revenues and expenses for the periods presented

**13. 401(k) Plan**

GTSI maintains the Employees’ 401(k) InvestmentPlan (the “Plan”), a savings and investment plan intended to be qualified underSection 401 of the IRC. All employees of the Company who are at least 21years of age are eligible to participate. The Plan is voluntary and allowsparticipating employees to make pretax contributions, subject to limitationsunder IRC, of a percentage (not to exceed 30%) of their total compensation.Employee contributions are fully vested at all times. Employer contributionsvest at 20% over five years. GTSI matches employee contributions 50% of thefirst five percent of eligible pay. In 2006, 2005 and 2004, the Companycontributed approximately $1.1 million, $1.2 million and $1.0 million to thePlan, respectively.

**14. Commitments andContingencies**

*Product Warranties*

GTSIoffers extended warranties on certain products for which GTSI is the primaryobligor which are generally covered for three or five years beyond the warrantyprovided by the manufacturer. Products under extended warranty require repairor replacement of defective parts at no cost to the customer. The Companyrecords warranty liabilities at the time of sale for the estimated costs thatmay be incurred under its extended warranty contracts. The following tablesummarizes the activity related to product warranty liabilities for the yearsended December 31 (in thousands):

| ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Accrued  warranties at beginning of year   |       | $        | 849        |     | $          | 2,429 |   |
| Charges made  against warranty liabilities |       | (600     | )          | (1,316   | )          |
| Adjustments to  warranty reserves          |       | 381      |       | (613     | )          |
| Accruals for  additional warranties sold   |       | 225      |       | 349      |       |
| Accrued warranties at  end of year         |       | $        | 855        |     | $          | 849 |   |

 

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Revenuefrom extended warranty contracts is recorded as deferred revenue andsubsequently recognized over the term of the contract. The following tablesummarizes the activity related to the deferred warranty revenue for the yearsended December 31 (in thousands):

| ** **                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred warranty  revenue at beginning of year  |       | $        | 1,361      |     | $          | 2,598 |   |
| Deferred warranty  revenue recognized            |       | (848     | )          | (1,370   | )          |
| Revenue deferred  for additional warranties sold |       | (7       | )          | 133      |       |
| Deferred warranty  revenue at end of year        |       | $        | 506        |     | $          | 1,361 |   |

 

*Lease Commitments*

TheCompany conducts its operations from leased real properties, which includeoffices and a warehouse. These obligations expire at various dates through2011. Most of the leases contain renewal options at inception, some of whichhave been exercised, as well as escalation clauses, which are recognized on astraight-line basis over the lease term. No leases contain purchase options orrestrictions of the Company’s activities concerning dividends, additional debt,or further leasing. Rent expense for 2006, 2005 and 2004 was approximately $2.7million, $2.7 million and $2.4 million, respectively. Future minimum leasepayments under operating leases that had initial or remaining non-cancelablelease terms in excess of one year as of December 31, 2006 are as follows(in thousands):

| 2007                          |   | $     | 3,095  |   |
|-------------------------------|--------|-------|--------|--------|
| 2008                          |   | 3,010 |   |
| 2009                          |   | 785   |   |
| 2010                          |   | 806   |   |
| 2011                          |   | 762   |   |
| Total minimum lease  payments |   | $     | 8,458  |   |

 

*Letters of Credit*

GTSI was obligated under an operating lease to provideits landlord with a letter of credit in the amount of $150 thousand at December 31,2006 and 2005, as a security deposit for all tenant improvements associatedwith the lease.

As of December 31, 2006, the Company had anoutstanding letter of credit, scheduled to expire in June 2007, to acustomer in the amount of $4.6 million to guarantee the performance by theCompany of its obligations under the contract. GTSI provided one of its vendorsa $3.0 million letter of credit as collateral for a line of credit of $25million.

As of December 31,2005, GTSI had an outstanding letter of credit to a customer in the amount of$1.75 million to guarantee the performance by the Company of all obligationsunder the contract. This obligation expired on February 28, 2006.

*EmploymentAgreements*

As of December 31, 2005, the Company had anemployment agreement with its former Chief Executive Officer which provided forpayment of $0.7 million upon termination of employment. This agreement wasterminated on February 15, 2006 when the Company entered into a transitionagreement with its former CEO (the “Transition Agreement”). The TransitionAgreement provides for a payment of $1.1 million to be paid out over the next18 months, as well as reimbursement for certain benefits and legal fees. As aresult, the Company recorded severance expense of $1.2 million in selling,general & 

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administrative expensesduring 2006. The balance of the severance liability related to these severancepayments, which is included in accrued liabilities, is $644 thousand as of December 31,2006.

On February 16, 2006,GTSI entered into an employment agreement with the Company’s current Presidentand Chief Executive Officer. This agreement provides for payments of 12 monthsof base salary plus bonus equal to the previous year’s bonus payments upontermination of employment or a change in control. In addition, GTSI has changein control agreements with 15 additional executives and key employees. Thesearrangements provide for payments of as much as 18 months of total targetcompensation and continuation of benefits upon the occurrence of specifiedevents. As of December 31, 2006, no accruals have been recorded for theseagreements.

*Legal Proceedings*

The Company is occasionally involved in variouslawsuits, claims and administrative proceedings arising in the normal course ofbusiness. The Company believes that any liability or loss associated with suchmatters, individually or in the aggregate, will not have a material adverseeffect on the Company’s financial condition or results of operations.

In 2006, the Supreme Courtof Virginia rejected a Petition for a Rehearing filed by Ichiban, a formersubcontractor seeking to appeal the dismissal of a lawsuit against GTSI it hadfiled in 2003. The Company is aggressively working to collect the awardedattorneys’ fees and costs from Ichiban; however, in accordance with FAS No. 5,*Accounting for Contingencies*, no amountsfor this gain contingency were accrued as of December 31, 2006.

**15. SegmentReporting**

GTSIengages in business activities as one operating segment that resells hardwareand software and provides services primarily to the U. S. Federal Government. TheCompany’s chief operating decision maker evaluates performance and determinesresource allocation based on GTSI’s consolidated sales and operating results. Thefollowing table summarizes the Company’s sales by type for the years ended December 31(in thousands):

| ** **                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Hardware                             |       | $        | 647,337    |     | $          | 706,686  |       | $ | 833,433 |   |
| Software                             |       | 110,644  |       | 117,813  |       | 155,724  |       |
| Resold  third-party service products |       | 36,729   |       | 37,204   |       | 66,618   |       |
| Service                              |       | 55,479   |       | 20,309   |       | 19,662   |       |
| Total                                |       | $        | 850,189    |     | $          | 882,012  |       | $ | 1,075,437 |   |

 

*Major Customers*

All of GTSI’s sales areearned from U.S. companies. Sales to multiple agencies and departments of theU.S. Federal Government, either directly or through prime contractors,accounted for approximately 92%, 92% and 95% of the Company’s consolidatedsales during 2006, 2005,and 2004, respectively.

**16. SubsequentEvents**

On March 30, 2007, the Company and its lendersexecuted an amendment to the Company’s credit agreement, which removed theminimum EBITDA covenant at March 31, 2007 and revised the minimum EBITDAcovenant for future measurement periods. In exchange for these financialcovenant accommodations, the Company agreed to make a one-time payment to thelenders in an amount equal to 0.30% of the Credit Facility

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On March 30, 2007,the Company also amended the subordinated secured long-term loan agreement withthe lenders, under similar terms as the above referenced amendment to thecredit agreement. In exchange for these financial covenant accommodations, theCompany agreed to make a one-time payment to the lenders in an amount equal to0.30% of the loan balance.

**17. SelectedQuarterly Financial Data (unaudited)**

Thefollowing tables illustrate selected quarterly financial data for 2006 and2005. GTSI has historically experienced significant seasonal fluctuations inits operations as a result of the U.S. Federal Government buying and fundingpatterns. Results of any one or more quarters are not necessarily indicative ofannual results or continuing trends (in thousands).
|                                    | ** ** | **2006** | ** ** |
|------------------------------------|------------|----------|------------|
| ** **                         | ** ** | **Q1**   | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| Sales                              |       | $        | 148,279    |   | $ | 180,956 |   | $ | 241,569 |   | $ | 279,385 |   | $ | 850,189 |   |
| Gross margin(b)                    |       | 18,301   |       | 26,510 |   | 25,900 |   | 40,141 | (a) | 110,852 |   |
| Net (loss) income(b)(c)            |       | $        | (10,028    | ) | $ | 944 |   | $ | (3,393 | ) | $ | 9,463 | (a) | $ | (3,014 | ) |
| Basic (loss)  earnings per share   |       | $        | (1.08      | ) | $ | 0.10 |   | $ | (0.36 | ) | $ | 1.00 |   | $ | (0.32 | ) |
| Diluted (loss)  earnings per share |       | $        | (1.08      | ) | $ | 0.10 |   | $ | (0.36 | ) | $ | 0.98 |   | $ | (0.32 | ) |

 

| ** **                         | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|
| ** **                         | ** ** | **Q1**   | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| Sales                              |       | $        | 156,629    |   | $ | 179,122 |   | $ | 267,449 |   | $ | 278,812 |   | $ | 882,012 |   |
| Gross margin(d)                    |       | 17,393   |       | 19,063 |   | 35,901 |   | 27,445 |   | 99,802 |   |
| Net (loss) income(d)(e)            |       | $        | (6,244     | ) | $ | (5,538 | ) | $ | 2,967 |   | $ | (4,858 | ) | $ | (13,673 | ) |
| Basic (loss)  earnings per share   |       | $        | (0.69      | ) | $ | (0.60 | ) | $ | 0.32 |   | $ | (0.53 | ) | $ | (1.49 | ) |
| Diluted (loss) earnings  per share |       | $        | (0.69      | ) | $ | (0.60 | ) | $ | 0.31 |   | $ | (0.53 | ) | $ | (1.49 | ) |

----

(a)           Gross margin and netincome for the quarter ended December 31, 2006 was positively impacted byextinguishment of a liability for $5.8 million, or $0.62 and $0.61 per basicand diluted share, in accordance with FAS 140 and changes in estimates ofvendor rebates of $1.1 million, or $0.12 and $0.11 per basic and diluted share.

(b)          Gross margin and net (loss) income was positively impacted by $1.1million in Q1, or $0.12 per basic and diluted share; $2.5 million in Q2, or$0.26 per basic and diluted share; and $0.4 million in Q4, or $0.04 per basicand diluted share, by changes in management’s estimate of the amount payable foritems purchased.

(c)           Net (loss) income includes $0.2million, $0.3 million, $0.3 million and $0.3 million of compensation expenserecognized as a result of adopting SFAS No. 123(R) in the quartersended March 31, 2006, June 30, 2006, September 30,2006 and December 31, 2006, respectively.

(d)          Gross margin and netloss for the year ended December 31, 2005 were negatively impacted by a$5.6 million, or $0.61 per basic and diluted share, charge for excess andobsolete inventory to write-down inventory to its market value as discussed inNote 5 of the consolidated financial statements. Gross margin was reduced $1.6million in Q2, $0.4 million in Q3 and $3.6 million in Q4 of 2005 for thisinventory impairment. This was offset in Q4 by the positive effects to grossmargin of $1.6 million due to a change in estimated payable to vendors.

(e)           During Q4 2005, theCompany recorded a valuation allowance against its net deferred tax asset,which increased net loss by $0.7 million.

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**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES

An evaluation was carried out under the supervisionand with the participation of our management, including the Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures, as defined in Rules 13a-15(e) or15d-15(e) under the Securities Exchange Act of 1934, as amended,(the “Exchange Act”) as of December 31, 2005. Our disclosure controls andprocedures are designed to (i) ensure that information required to bedisclosed by us in reports we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms and (ii) isaccumulated and communicated to GTSI’s management including our principalexecutive officer and our principal financial officer, as appropriate to allowtimely decisions regarding required disclosures. Based on this evaluation, ourChief Executive Officer and Chief Financial Officer concluded that, because ofthe material weaknesses previously disclosed in our 2005 Form 10-K/Afiled on December 22, 2006 with the SEC, our disclosure controls andprocedures were not effective as of December 31, 2006.

After management concluded that there were materialweaknesses, we performed additional analyses and other post-closing proceduresto ensure that our consolidated financial statements included in this AnnualReport on Form 10-K were prepared in accordance with generallyaccepted accounting principles and present fairly in all material respects ourfinancial position, results of operations and cash flows for the periodspresented.

There was no change in our internal control overfinancial reporting during our fourth quarter of the year ended December 31,2006 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

Because GTSI was not anaccelerated filer for the year ended December 31, 2006, it is not requiredto report on, and is not including management’s report on internal control overfinancial reporting in this filing, and the associated report from itsindependent registered public accounting firm. We continue our remediation ofthe material weaknesses previously disclosed in our 2005 10-K/A, andexpect to finalize those efforts by late 2007.

**ITEM 9B.**       OTHERINFORMATION

None.

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**PART III**

**ITEM 10.**         DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information requiredby this Item is incorporated by reference to the Registrant’s definitive ProxyStatement for the Annual Meeting of Registrant’s Stockholders scheduled to beheld on May 3, 2007 (the “Proxy Statement”). The Proxy Statement will be filedwith the Commission within 120 days after December 31, 2006.

**ITEM 11.**         EXECUTIVECOMPENSATION

The information requiredby this Item is incorporated by reference to the Proxy Statement. 

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

Except for the “EquityCompensation Plan Information” disclosed in Item 5 above, the informationregarding the security ownership of certain beneficial owners and managementrequired by this Item is incorporated by reference to the Proxy Statement.

**ITEM13.**         CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information requiredby this Item is incorporated by reference to the Proxy Statement. 

**ITEM 14.**         PRINCIPALACCOUNTING FEES AND SERVICES

The information requiredby this Item is incorporated by reference to the Proxy Statement.

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**PART IV**

**ITEM 15.**         EXHIBITSAND  FINANCIAL STATEMENTS AND SCHEDULES:

**(a)****         FinancialStatements**

The consolidated financial statements of GTSI Corp.filed are as follows:

Consolidated Balance Sheets as of December 31,2006 and 2005

Consolidated Statement of Operations for each of thethree years in the period ended December 31, 2006

Consolidated Statements of Changes in Stockholders’Equity for each of the three years in the period ended December 31, 2006

Consolidated Statements of Cash Flows for each of thethree years in the period ended December 31, 2006

Notes to Consolidated Financial Statements

**Financial Statement Schedules**

The financial statement schedules of GTSI Corp. andsubsidiaries filed are as follows:

Schedule II—Valuation and Qualifying Accounts for each of the three years in theperiod ended December 31, 2006

All other schedules are omitted because they are notapplicable, or the required information is shown in the consolidated financialstatements or the notes thereto.

**Exhibits**

The exhibits set forth inthe Exhibit Index are filed as part of this Annual Report on Form 10-K.

 

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15 (d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned thereunto duly authorized.

|        |   |   | ** ** | **GTSI CORP.**                        |
|--------|--------|--------|------------|---------------------------------------|
|   |   |   | ** ** | ** **                            |
|   |   | By:    |       | /s/ JAMES J. LETO                     |
|   |   |   |       | James J. Leto                         |
|   |   |   |       | President and Chief Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed on March 30, 2007 by the following persons on behalf of theregistrant and in the capacities indicated.

|                                 | **Signature** | ** **                                                            | ** ** | ** **          | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|---------------------------------|---------------|-----------------------------------------------------------------------|------------|---------------------|-----------|------------|------------|------------|----------|------------|
| /s/ JAMES J. LETO               |          | President and Chief Executive Officer                                 |       | April 2, 2007  |
| James  J. Leto                  |          | (Principal  Executive Officer)                                        |       |                |
| /s/ JOE RAGAN                   |          | Senior  Vice President and                                            |       | April 2,  2007 |
| Joe  Ragan                      |          | Chief  Financial Officer (Principal Financial and Accounting Officer) |       |                |
| /s/ M. DENDY YOUNG              |          | Chairman  of the Board                                                |       | April 2,  2007 |
| M.  Dendy Young                 |          |                                                                  |       |                |
| /s/ THOMAS HEWITT               |          | Director                                                              |       | April 2,  2007 |
| Thomas  Hewitt                  |          |                                                                  |       |                |
| /s/ LEE JOHNSON                 |          | Director                                                              |       | April 2,  2007 |
| Lee  Johnson                    |          |                                                                  |       |                |
| /s/ JOSEPH KEITH KELLOGG, JR.   |          | Director                                                              |       | April 2,  2007 |
| Joseph  Keith Kellogg, Jr. |          |                                                                  |       |                |
| /s/ STEVEN KELMAN               |          | Director                                                              |       | April 2,  2007 |
| Steven  Kelman                  |          |                                                                  |       |                |
| /s/ BARRY REISIG                |          | Director                                                              |       | April 2,  2007 |
| Barry  Reisig                   |          |                                                                  |       |                |
| /s/ JOHN M. TOUPS               |          | Director                                                              |       | April 2,  2007 |
| John  M. Toups                  |          |                                                                  |       |                |
| /s/ DANIEL R. YOUNG             |          | Director                                                              |       | April 2, 2007  |
| Daniel R. Young                 |          |                                                                  |       |                |

 

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**GTSI CORP.VALUATION AND QUALIFYING ACCOUNTS**(Inthousands)

**SCHEDULE II**

| ** **                                          | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Allowance for Doubtful  Accounts                    |       |                                        |       |   |   |   |   |
| Balance at beginning of year                        |       | $                                           | 1,968      |   | $ | 1,009 |   | $ | 699 |   |
| Additions—charged to expense or other accounts |       | 1,485                                       |       | 1,410 |   | 507 |   |
| Deductions                                          |       | (1,841                                      | )          | (451 | ) | (197 | ) |
| Balance at end of year                              |       | $                                           | 1,612      |   | $ | 1,968 |   | $ | 1,009 |   |
| Sales Return  Allowance (1)                         |       |                                        |       |   |   |   |   |
| Balance at beginning of year                        |       | $                                           | 8,116      |   | $ | — |   | $ | — |   |
| Additions—charged to expense or other accounts |       | 6,480                                       |       | 9,903 |   | — |   |
| Deductions                                          |       | (8,314                                      | )          | (1,787 | ) | — |   |
| Balance at end of year                              |       | $                                           | 6,282      |   | $ | 8,116 |   | $ | — |   |
| Deferred Tax Asset Valuation Allowance              |       |                                        |       |   |   |   |   |
| Balance at beginning of year                        |       | $                                           | 3,930      |   | $ | — |   | $ | — |   |
| Additions—charged to expense or other accounts |       | 44                                          |       | 3,930 |   | — |   |
| Deductions                                          |       | —                                      |       | — |   | — |   |
| Balance at end of  year                             |       | $                                           | 3,974      |   | $ | 3,930 |   | $ | — |   |

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(1)          The sales returnsallowance is reported as a reduction of accounts receivable on the consolidatedbalance sheets.

All other schedules are omitted because the requiredinformation is not present or is not present in amount sufficient to requiresubmission of the schedule, or because the information is included in theconsolidated financial statements or notes thereto.

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**EXHIBITINDEX**

| Exhibit  Number  | ** ** | **Description**                                                                                                                                                                                  |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1    |       | Restated Certificate of Incorporation (1)                                                                                                                                                        |
| 3.2    |       | Bylaws, as amended (2)                                                                                                                                                                           |
| 10.1   |       | GTSI Employee’s  401(k) Investment Plan, and amendments No. 1, 2 and 3 thereto*(3)                                                                                                |
| 10.2   |       | Employee Stock Purchase  Plan, as amended to date*(4)                                                                                                                                            |
| 10.3   |       | 1994 Stock Option Plan,  as amended to date*(5)                                                                                                                                                  |
| 10.4   |       | Amended and Restated  1996 Stock Incentive Plan*(6)                                                                                                                                              |
| 10.5   |       | 1997 Non-Officer Stock  Option Plan, as amended to date (7)                                                                                                                                      |
| 10.6   |       | Lease dated  August 11, 1995 between the Company and Security Capital Industrial  Trust, and Amendments for distribution center facility (8)                                                |
| 10.7   |       | Lease dated  December 10, 1997 between the Company and Petula Associates, Ltd. and  Amendment for headquarters facility (8)                                                                 |
| 10.8   |       | Second Amendment to Deed  of Lease dated February 11, 2005 between the Company and AG/ARG Avion,  L.L.C. (successor-in-interest to Petula Associates, Ltd.) for headquarters  facility. (3) |
| 10.9   |       | Credit Agreement dated  as of June 2, 2006 between GTSI Corp., SunTrust Bank and Bank of America  (9)                                                                                       |
| 10.10            |       | Credit Agreement dated  as of June 2, 2006 between GTSI Corp., and Crystal Capital Fund, L.P.  (9)                                                                                          |
| 10.11            |       | First Amendment to  Credit Agreement dated as of July 13, 2006 between GTSI Corp., SunTrust  Bank and Bank of America (10)                                                                  |
| 10.12            |       | First Amendment to  Credit Agreement dated as of July 13, 2006 between GTSI Corp. and  Crystal Capital Fund, L.P. (10)                                                                      |
| 10.13            |       | Second Amendment to  Credit Agreement dated as of November 30, 2006 between GTSI Corp. the  Lenders, the other Borrower Parties, and SunTrust Bank. (11)                                    |
| 10.14            |       | Second Amendment to  Credit Agreement dated as of November 30, 2006 between GTSI Corp the  Lenders, the other Borrower Parties, and Crystal Capital Fund, L.P. (11)                         |
| 10.15            |       | Third Amendment to  Credit Agreement dated as of March 30, 2007 between GTSI Corp. the  Lenders, the other Borrower Parties, and SunTrust Bank. (filed herewith)                            |
| 10.16            |       | Third Amendment to  Credit Agreement dated as of March 30, 2007 between GTSI Corp the  Lenders, the other Borrower Parties, and Crystal Capital Fund, L.P. (filed  herewith)                |
| 10.17            |       | GTSI Corp. Long Term  Incentive Plan * (13)                                                                                                                                                      |
| 10.18            |       | GTSI 2005 Executive  Incentive Compensation Plan * (3)                                                                                                                                           |
| 10.19            |       | Form of GTSI Change  in Control Agreement *(3)                                                                                                                                              |
| 10.20            |       | Transition Agreement  with M. Dendy Young dated February 15, 2006* (14)                                                                                                                     |
| 10.21            |       | Employment Agreement  dated February 16, 2006 between the Registrant and James J. Leto* (15)                                                                                                |
| 10.22            |       | Form of GTSI  Severance Agreement * (16)                                                                                                                                                    |
| 14.1   |       | Code of Ethics (12)                                                                                                                                                                              |

67

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| 23.1                   |   | Consent of  Ernst & Young LLP (filed herewith)                                                  |
|----------------------------------|--------|----------------------------------------------------------------------------------------------------------|
| 31.1                   |   | Section 302  Certification of Chief Executive Officer (filed herewith)                              |
| 31.2                   |   | Section 302  Certification of Chief Financial Officer (filed herewith)                              |
| 32      |   | Section 906  Certification of Chief Executive Officer and Chief Financial Officer (filed  herewith) |

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                 * Management contracts and compensatory plans andarrangements required to be filed pursuant to Item 15 (c).

       (1) Incorporated by reference to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2000.

       (2) Incorporated by reference to the Registrant’s Quarterly Report onForm 10-Q for the period ended June 30, 2004.

       (3) Incorporated by reference to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2004.

       (4) Incorporated by reference to the Registrant’s Current Report onForm 8-K dated December 27, 2005.

       (5) Incorporated by reference to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002.

       (6) Incorporated by reference to Appendix A of the Registrant’s 2005Proxy Statement.

       (7) Incorporated by reference to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002.

       (8) Incorporated by reference to the Registrant’s Quarterly Report onForm 10-Q for the period ended September 30, 2004.

       (9) Incorporated by reference to the Registrant’s current report onForm 8-K dated June 2, 2006.

(10) Incorporated by reference to the Registrant’s current report onForm 8-K dated July 13, 2006.

(11) Incorporated by reference to the Registrant’s current report onForm 8-K dated December 5, 2006.

(12) Incorporated by reference to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2003.

(13) Incorporated by reference to Appendix B of the Registrant’s 2004Proxy Statement

(14) Incorporated by reference to the Registrant’s current report onForm 8-K dated February 15, 2006.

(15) Incorporated by reference to the Registrant’s current report onForm 8-K dated February 16, 2006.

(16) Incorporated by reference to the Registrant’s current report onForm 8-K dated April 28, 2006.

68

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