**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

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

**For the fiscal year ended December 31, 2004**

**Commission File Number:  0-19394**

**GTSI CORP.**

(Exact name of registrantas specified in its charter)
| **Delaware**                                                     | **54-1248422**                        |
|------------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) | (I.R.S. Employer  Identification No.) |
| **3901 Stonecroft Boulevard, Chantilly, VA**                     | **20151-1010**                        |
| (Address of  principal executive offices)                        | (Zip Code)                            |
| **703-502-2000**                                                 |
| (Registrant’s  telephone number, including area code)       |

 

Securities registeredpursuant to section 12(b) of the Act:  **None**

Securities registeredpursuant to section 12(g) of the Act:  **Common Stock,par value $0.005 per share**

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   Yesx No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.   o

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act).   Yesx No o

The aggregate market value of the voting common equityheld by non-affiliates computed by reference to the price at which the commonequity was last sold, as of June 30, 2004 was 98,698,256.

The number of shares outstanding of the registrant’scommon stock on March 1, 2005 was 8,988,143.

DOCUMENTS INCORPORATED BYREFERENCE

Items10, 11, 12, 13 and 14 of Part III of this Form 10-K areincorporated by reference to GTSI’s proxy statement to be filed with theSecurities and Exchange Commission in connection with the Annual Meeting ofStockholders to be held on April 21, 2005.

 

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**CONTENTS**
|               | ** ** | ** **                                                                                   | ** ** | **Page** | ** ** |
|---------------|------------|----------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I   | Item 1.    | Business                                                                                     |       | 3        |       |
|          | Item 2.    | Properties                                                                                   |       | 15       |       |
|          | Item 3.    | Legal Proceedings                                                                            |       | 15       |       |
|          | Item 4.    | Submission of Matters to a  Vote of Security Holders                                         |       | 15       |       |
| PART II  | Item 5.    | Market for Registrant’s  Common Equity and Related Stockholder  Matters                 |       | 16       |       |
|          | Item 6.    | Selected Financial Data                                                                      |       | 17       |       |
|          | Item 7.    | Management’s Discussion and  Analysis of Financial Condition and  Results of Operations |       | 18       |       |
|          | Item 7A.   | Quantitative and Qualitative  Disclosures About Market Risk                                  |       | 29       |       |
|          | Item 8.    | Financial Statements and  Supplementary Data                                                 |       | 30       |       |
|          | Item 9.    | Changes in and Disagreements  With Accountants on Accounting and Financial Disclosure        |       | 49       |       |
|          | Item 9A.   | Controls and Procedures                                                                      |       | 49       |       |
| PART III | Item 10.   | Directors and Executive  Officers of the Registrant                                          |       | 51       |       |
|          | Item 11.   | Executive Compensation                                                                       |       | 51       |       |
|          | Item 12.   | Security Ownership of  Certain Beneficial Owners and Management                              |       | 51       |       |
|          | Item 13.   | Certain Relationships and  Related Transactions                                              |       | 51       |       |
|          | Item 14.   | Principal Accounting Fees  and Services                                                      |       | 51       |       |
|          | Item 15.   | Exhibits, Financial  Statement Schedules, and Reports on Form 8-K                       |       | 52       |       |
|          |       | Signatures                                                                                   |       | 53       |       |
| Schedule II   |       | Valuation and Qualifying Accounts                                                            |       | 55       |       |
|          |       | Exhibit Index                                                                           |       | 56       |       |
|               |            |                                                                                              |            |          |            |  |

 

 

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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 the Risk Factors subheading in this Business section. We specificallydisclaim any obligation to update these forward-looking statements. Theseforward-looking statements should not be relied on as representing ourestimates or views as of any subsequent date.*

**PART I**

**ITEM 1.     BUSINESS**

**Overview**

GTSI Corp. is a recognized IT solutions leader,providing products and services primarily to federal government customers. Weuse the terms “GTSI,” “we,” “our,” and “us” to refer to GTSI Corp. and itssubsidiaries. GTSI, a Delaware corporation, was founded in 1983 and has morethan 20 years of government-focused experience. Our complete product andsolution offering, technical expertise, logistics strengths, extensivecontracts portfolio, customer relationships and proven performance record makeGTSI equally valuable to our customers and technology partners.

We offer our customers aconvenient and cost-effective centralized source for computer, workstation,software, networking and other IT solutions through our broad selection ofpopular products and services at competitive prices. We specialize inunderstanding both the various IT needs and the procurement processes ofgovernment customers. GTSI sells to most departments and agencies of the U.S.Federal Government, as well as state and local governments, and primecontractors. Our total sales were $1.08 billion, $954.1 million and $934.7million for the years ended December 31, 2004, 2003 and 2002,respectively. The approximate percentage of our sales by customer type as of December 31was:
| ** **                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal  Government          |       | 75       | %          | 80       | %          | 76       | %          |
| Prime Contractors            |       | 20       |       | 17       |       | 21       |       |
| State and Local  Governments |       | 5        |       | 3        |       | 3        |       |
| Total                        |       | 100      | %          | 100      | %          | 100      | %          |

 

Additional informationrelated to net income, total assets, significant customers and long-livedassets is provided in the consolidated financial statements and in Note 15 ofthe financial statements appearing in Part II, Item 8 of this Form 10-K.

GTSI currently offersaccess to approximately 350,000 IT products from over 1,380 key manufacturersincluding Panasonic, HP, Sun Microsystems, Cisco Systems and Microsoft. Webelieve we provide our vendor partners with a cost effective marketing anddistribution channel to the many end-users constituting the government market,while substantially insulating these partners from complex governmentprocurement rules and regulations.

Wefulfill many of our customers’ orders from our state-of-the-art 140,000square-feet distribution center located in Northern Virginia in close proximityto Washington Dulles International Airport. We inventory many popular ITproducts to enable quick delivery to our customers. In addition, we leverageour Distribution Center and logistics expertise to offer a wide variety ofmanaged fulfillment services to our 

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customers.Within the Distribution Center, we manage a 30,000 square foot integrationcenter where we perform a number of value added services including:

·       Standardhardware integration;

·       Customerimage propagation;

·       Automatedsystem diagnostics and data capture;

·       Customerasset tagging; and

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

GTSI’s distribution andintegration operations are ISO 9001:2000 certified.

“GTSI” is a registeredservice mark of GTSI Corp. All other trademarks and service marks areproprietary to their respective owners.

**Business Strategy**

GTSI is committed to andfocused on the government customer. We believe there are significantopportunities to increase our relatively low market share within the growinggovernment IT market, and to improve our overall profitability as we grow ourrevenue base. In mid 2004, we launched a strategic growth plan to accomplishthe following key business initiatives during the next three years:

·       Doublethe revenue base of GTSI from $1 billion to $2 billion primarily throughorganic measures, supplemented by strategic acquisitions,

·       Improveour gross margins each year during the next three years through enhanced focuson purchasing and pricing initiatives, and

·       Driveenhanced profitability through continued process re-engineering initiativesaimed at streamlining processes and procedures, while enhancing overallcorporate wide productivity.

We plan to continue toincrease our work force to take advantage of the growing government IT market.Our management has undertaken a number of initiatives consistent with thisrevenue and earnings growth strategy (e.g., hiring and training additionalpersonnel, creating a centralized pricing organization, creating a centralizedpurchasing organization and implementing the final phase of our new ERP system).

*Focuson the Growing 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 procurement and contracting officers,information resource managers, Chief Information Officers, government ITexecutives, systems integrators, value-added resellers, prime contractors and awide array of end-users. We continue to increase our sales organization towiden customer coverage and broaden our enterprise solutions, products andservices. In addition, by concentrating on the government market, we haveavoided the higher credit risk of commercial customers.

*Execute New Government Contracts and Utilize FlexibleContract Vehicles*

GTSI holds a wide range ofgovernment contracts, including multimillion dollar, multi-year contracts withthe Department of Defense (“DoD”) and certain civilian agencies, as well asseveral multiple award schedules and blanket purchasing agreements with avariety of DoD and civilian agencies. We also serve as a subcontractor,providing products and services to other companies holding governmentcontracts. GTSI intends to continue to identify and pursue contract vehiclesthat best leverage our broad selection of solutions, services, integration anddistribution capabilities and partner relationships.

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*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 wide range of IT solutions andproducts through a variety of procurement mechanisms, we offer our customersthe convenience, flexibility and cost savings of purchasing from a centralizedsource. In our interactions with our customers, our employees focus onproviding high quality customer services associated with the order, delivery,installation and repair of the products we sell. In addition to our productofferings, we now offer service solutions to meet our customer needs in networkingand telecommunications, storage and continuity of operations solutions,enterprise software deployment and managed logistics support.

*Establish andMaintain Strong Partner Relationships*

To provide a centralizedsource of products and solutions for our customers, GTSI maintains strongrelationships with leading hardware, software and services partners. GTSIoffers our partners a wide range of marketing and sales services, which providethem with access to the millions of end-users constituting the governmentmarket. In addition, we insulate our partners from the procurement regulatorycomplexities, costs and complicated billing requirements associated with thegovernment market.

*Improve InternalEfficiencies*

GTSI has undertaken avariety of activities aimed at improving financial performance. We believe thatour improved product pricing, supply chain management, and quality and expensecontrol will lead to improved operating and net margins. In addition, we planto increase employee productivity through training, use of the improvedtechnology from our new Enterprise Resource Planning (“ERP”) system, and aheightened focus on our customer relationship management (“CRM”) initiatives.

**Customers**

GTSI’s sales are predominantlygenerated from multiple agencies and departments of the U.S. FederalGovernment, either directly or ultimately through prime contractors. Ourrevenue from the federal government accounted for approximately 95%, 98% and97% of our sales during 2004, 2003 and 2002, respectively. Federal governmentsales were earned from numerous agencies and departments as approximated below:
| ** **                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Department of  Defense             |       | 37       | %          | 41       | %          | 41       | %          |
| Civilian Agencies  and Departments |       | 42       |       | 41       |       | 38       |       |
| Prime Contractors                  |       | 21       |       | 18       |       | 21       |       |
| Total                              |       | 100      | %          | 100      | %          | 100      | %          |

 

**Contracts**

GTSI achieves its salesthrough federal, state and local government contracts and open marketprocurements. Our contracts with the 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 partner contacts, purchasing power, distribution strengthand procurement expertise to compete successfully on these bids. These majorprocurements may equal millions of dollars in total revenue, span multipleyears and provide a purchasing vehicle for many 

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government agencies. Insome cases, various government agencies levy an administrative fee on purchasesmade by departments outside of the agency that awarded the contract. These feesare collected by GTSI and remitted to the respective agency on a contractspecified payment schedule. Items offered under our contracts include platformsolutions, peripherals, maintenance, training and services. All of ourcontracts allow for the addition of products under certain circumstances.Additional details regarding our platform solutions and peripherals areprovided in the Products, Solutions, and Services subheading in this Businesssection.

*General ServicesAdministration*

GTSI holds a GSAdesignated Schedule 70 contract for the sale of IT products and services.Schedule 70 contracts are multi-award schedule contracts managed by theGSA IT Acquisition Center. In March 2002, the government formallyexercised its first of three five-year options to extend the GTSI contractthrough 2007. GSA contracts provide all government agencies, certaininternational organizations, authorized prime contractors, and state and localgovernments with an efficient and cost-effective means for buying commercialproducts. GSA purchasers may place unlimited orders for products under GSAcontracts.

Our GSA contract containsprice reduction clauses requiring that we pass on to government customerscertain reduced prices we may receive from our partners, but prohibits us frompassing on price increases for a period of one year. To mitigate thepotentially adverse impact of any such price increase, we require substantiallyall of our partners who supply our GSA contract to provide us with supply andprice protection.

*IndefiniteDelivery/Indefinite Quantity*

IDIQ contracts offer greater flexibility than GSAcontracts because they allow products to be added quickly and allow contractorsmore pricing flexibility. IDIQ contracts are pre-competed; therefore, ordersplaced under these contracts are not subject to protest unless the order isbeyond the scope of the contract. 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 other agencies under the authority of the Economy Act.

Detailsregarding our IDIQ contracts are as follows:
| **Contract Name**                                       | ** ** | ** **    | ** ** | **IDIQ Type**           | ** ** | **Contracting Agency** | ** ** | **Expiration Date** |
|---------------------------------------------------------|------------|---------------|------------|-------------------------|------------|------------------------|------------|---------------------|
| Scientific Engineering  Workstation  Procurement III(a) |       | GWAC          |       | NASA                    |       | July  30, 2006         |
| Electronic Commodity  Store III                         |       | GWAC          |       | NIH(b)                  |       | Nov.  26, 2012         |
| Maxi-Minis and Databases                                |       | MAC           |       | Army                    |       | May  25, 2005(c)       |
| Information Technology  Enterprise Solutions            |       | MAC           |       | Army                    |       | Nov.  1, 2006(c)       |
| Procurement of Computer Hardware and  Software -2       |       | single agency |       | Veterans Administration |       | April 2, 2005(c)       |

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(a) Comprises threecontracts which each relate to a specific category of IT products

(b) National Instituteof Health

(c) Contract containsextension options

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

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*Blanket Purchase Agreements*

Individual GSA orderingagencies may enter into GSA-authorized BPAs with GSA contract holders. BPAs aresimilar to second-tier contracts under a contractor’s GSA contract. BPAs enableagencies to obtain better pricing based on volume ordering and they decrease anagency’s administrative costs by streamlining the ordering process.

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 partnersto offer reduced BPA prices to the government. Our BPAs are agency specific andallow us to focus specific partner relationships on specific customers.

*State and Local*

In 2003, GTSI was awardedU.S. Communities, a multi-state contract available to cities, counties, specialdistricts (airport, water, etc.), state agencies, schools and large non-profitssuch as hospitals and clinics. In addition, GSA now allows state and localgovernment agencies to utilize GSA Schedules. Multi-state contractsenable individual states to utilize the buying power of multiple states, whichresults in lower costs based on volume purchasing. The initial term of the U.S.Communities contract expires on May 1, 2006 and the contract has threeone-year extension options.

The products are soldunder the contract at a fixed price; however, governments typically negotiate alower price for large quantity or high value orders. In addition, thesecontracts include an administrative fee calculated on the product price. Wecollect this fee and remit it on a quarterly basis to the contract’sadministering agency.

Many purchases in thestate and local government market are still made through individual competitiveprocurements, although many state and local governments issue invitations tobid for statewide computer term contracts. State and local procurementstypically require formal responses from a prospective bidder. Each statemaintains a separate code of procurement regulations that must be understood.Compliance is required to successfully market and sell to individual states.GTSI currently maintains several state and local IT contracts, regularly submitsoral and written bids to state and local governments and is on a number ofstate and local government bid lists.

*Open Market*

We also sell many ITproducts through open market procurements. These procurements are separate andapart from GSA Schedules, IDIQs and BPAs. Open market procurements includesimplified acquisition procedures, requests for quotes, invitations for bidsand requests for proposals. GTSI is on most government bid lists relevant toits product offerings and responds with proposals to hundreds of such bidsolicitations each year. We also sell to prime contractors to the government,including systems integrators, through open market procurements.

**Products, Solutionsand Services**

GTSI is a leading,dedicated business-to-government provider of IT solutions. We continuouslymonitor and evaluate existing and emerging technologies to ensure that we offerour customers state-of-the-art technology products and solutions.GTSI also offers simplified buying through our website, *gtsi.com*.

*Hardware*

GTSI has strong strategicrelationships with global market leaders such as Sun Microsystems, HP,Panasonic, Cisco Systems, Network Appliance, IBM, Dell, Gateway, Apple, APC andSGI. It also has resources dedicated to incubating new partners as technologydevelops and emerges. Whether it is 

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high-performancecomputing, physical security or telecommunication technology, GTSI offers state-of-the-arthardware solutions targeted at meeting a wide variety of customer needs. Inaddition to reselling workstations, desktops, laptops, notebooks, servers,facsimile products, and internet and extranet products; peripherals resold byus include disk drives, CD-ROM and DVD drives, printers, monitors, scanners,modems and related products. Our networking products including LANs, WANs,metropolitan area networks, and personal area networks are supplemented by GTSIservices, which include assisting customers in selecting, configuring,installing and maintaining networks. Through its extensive relationships, GTSIis able to secure state-of-the-art hardware to meet ever changing customerneeds.

*Software*

We provide products andsolutions from virtually every leading desktop and enterprise softwarepublisher including Adobe, BEA, BMC/Remedy, Citrix, Computer Associates, IBM,McAfee, Mercury, Microsoft, Novell, Oracle, Red Hat and Symantec/Veritas. GTSI’sbreadth of software providers is one of the broadest in the industry.

*Solutions*

GTSI has a number ofEnterprise Technology Practices. Each practice brings together talent that isfocused on specific industry and technical disciplines. Practices includefocused concentration in software, physical security, enterprise security,satellite, power, networks, telecommunications, enterprise computing, storageand mobile technologies. The practices are designed to provide a thoroughunderstanding and alignment to specific partners such as Sun Microsystems,Cisco Systems, Hewlett Packard, IBM and Panasonic. Each team includesprofessionals with extensive industry knowledge and experience in systemsengineering, project management and customized solution development.

*Services andWarranty*

We provide professional management of the creation anddelivery of services to our customers. GTSI’s services solutions capitalize oncore business capabilities through managed fulfillment and support services,implementation of technical product services and technology consultingservices, either through our own business resources or through our alliancewith partners. GTSI typically offers warranties on products for the same termas the manufacturer’s warranty. We also sell extended warranties ranging fromthree to five years beyond the manufacturer’s warranty on certain products.

Thefollowing table indicates, for the years ended December 31 (dollars inmillions), the approximate sales by product category along with relatedpercentages of total sales.
| **Products**                         | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Hardware                             |       | $          | 834.1      |     | 77.5       | %        | $          | 692.5    |       | 72.6 | % | $ | 673.7 |   | 72.1 | % |
| Software                             |       | 155.7      |       | 14.5     |       | 154.5    |       | 16.2     |       | 196.4 |   | 21.0 |   |
| Resold  third-party service products |       | 66.6       |       | 6.2      |       | 91.2     |       | 9.5      |       | 50.8 |   | 5.4 |   |
| Services                             |       | 19.7       |       | 1.8      |       | 15.9     |       | 1.7      |       | 13.8 |   | 1.5 |   |
| Total                                |       | $          | 1,076.1    |     | 100.0      | %        | $          | 954.1    |       | 100.0 | % | $ | 934.7 |   | 100.0 | % |

 

 

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**PartnerRelationships**

Tooffer our customers a centralized source for their IT needs, we establish andmaintain relationships with key partners. GTSI offers partners a number ofadvantages including:

·       Proactivesales of products and solutions;

·       Accessto the government market through a significant number of diverse contractvehicles and a large and experienced sales organization;

·       Helpingto lower costs to comply with procurement regulations involved in sellingdirectly to the government market;

·       Facilitatethe reduction of costs related to reduction or elimination of selling,marketing and various administrative programs; and

·       Participationin value-added services, including numerous government-specific marketingprograms and end-user technical support.

The terms of agreementswith our partners vary widely but typically permit us to purchase products forresale to the government market. Virtually none of our agreements require us topurchase any specified quantity of product. GTSI typically requires partners,acting as suppliers to us under our term government contracts to provide uswith supply and price protection for the duration of such contracts. Other thansupply agreements under term government contracts, our partner agreements aretypically terminable by the partner on short notice, at will or immediatelyupon default by GTSI, and may contain limitations on partner liability. Thesepartner agreements also generally permit GTSI to return previous productpurchases at no charge within certain time limits for a restocking fee or inexchange for other products of such partner. We also purchase some productsfrom independent distributors.

Our partners provide uswith various forms of marketing and sales assistance, including salesincentives and market development funds. Partners provide sell-through andother sales incentives in connection with certain product promotions.Additionally, key partners participate with us in cooperative advertising andsales events and typically provide funding that can offset all or part of thecosts of such efforts.

**InventoryManagement**

Aggressive inventorymanagement allows us to limit our inventory investment. We purchase productsfor resale both directly from manufacturers and indirectly through distributorsand other sources. During 2004, we purchased approximately 75% of the productswe sold directly from manufacturers and the remaining amount from distributorsand other sources.

We manage our inventory inan aggressive, cost-efficient manner, resulting in a rapid-turn inventorymodel. We generally only stock items that have consistent customer demand. Ourdistribution process is highly automated with 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 shipmentsthat meet published Department of Defense requirements.

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

**Marketing and Sales**

GTSI Marketing developsand manages our branding and positioning activities on a worldwide basis. Theseactivities inform the government market of our capabilities and valueproposition in order to acquire new customers and improve retention of existingbusiness. Most activities are funded by our partners in exchange for the entrythat GTSI’s relationships and knowledge offer in selling to the government.Each 

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activity is fullyintegrated with other GTSI marketing programs to provide compelling awareness,consistency across media and a maximum return on investment.

Our marketing activitiesinclude sponsorship of major trade shows and customer events, advertising inbroadcast media, solutions focused collateral, e-commerce Web sites located at *gtsi.com*, pinpointed e-mail marketing, outboundtelemarketing and sales-related incentive programs. We develop and distributetwo publications: “ClarITy”, an enterprise solution focused magazine and “TheGTSI Catalog”, an IT product focused directory. In addition, GTSI advertisingis a familiar and welcome face on the pages of virtually all governmentrelated publications.

GTSI recognizes that thesize and diversity of the government market make it imperative for us toidentify and understand the needs of our customers. Through years of intensiveeffort, GTSI has compiled and maintained a proprietary database that containsan extensive list of agency procurement and contracting officers, informationresource managers, senior policy makers, technology influencers, end-users,systems integrators, VARs and prime contractors. We use this database to targetour marketing efforts and perform data mining for various market researchpurposes. We conduct frequent customer surveys to assess the opinions andinterests of our customer base.

Our sales organization isfocused on understanding the current and emerging needs of our customers and toprovide products, services and bundled solutions to meet those needs. Our salesorganization continues to provide deep coverage for existing customers whileexpanding sales coverage to focus on new accounts and new product and serviceofferings to current customers. Our Customer Teams work closely with our Enterprise Technology Practices to bestmeet the requirements of our customers.

We offer lease and financesolutions to our customers as an alternative to outright purchase. This growingpractice warranted a more structured approach to support the business.Therefore, we established GTSI Financial Services in 2004 as a wholly ownedsubsidiary of GTSI Corp. to respond to our government customer’s budgetconstraints and need for financial solutions. GTSI Financial Services offerslease and financing programs under existing contracts as an alternative topurchasing equipment. The subsidiary’s focus is to enable government customersto proactively manage technology lifecycles with existing budget limitations.

**Competition**

The government IT marketis highly competitive and subject to rapid change. GTSI competes with a numberof competitors including certain leading hardware manufacturers, systemsintegrators, resellers, commercial computer retail chains and distributors.

Webelieve that the principal competitive factors in the government IT market inwhich we compete include:

·       Price;

·       Expertisein government procurement processes;

·       Breadthof product line;

·       Customerand partner relationships;

·       Technicalexpertise;

·       Distributioncapability;

·       Availableinventory; and

·       Customerservice and support.

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We believe thatcompetition may increase in the future, which could require us to reduceprices, increase advertising expenditures or take other actions which may haveadverse effects on our operating results. A number of our existing andpotential competitors have greater financial, marketing and technologicalresources than GTSI. Some of our competitors have reduced their prices in anattempt to stimulate sales. Decreasing prices of computers and relatedtechnology products and accessories resulting from competition require us tosell a greater number of products to achieve the same level of sales and grossmargin. If this trend continues and we are unable to attract new customers andsell increased quantities of products, our sales growth and profitability couldbe adversely affected. However, we believe we have a competitive advantage overcertain of our competitors because of our procurement expertise and our abilityto offer a centralized source for purchases of a wide variety of leadingtechnology products from numerous manufacturers.

**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 government ordering patterns and changes in inventoryavailability of various products. Our total backlog includes orders that havenot shipped (“unshipped backlog”) as well as orders that have shipped butcannot be recognized as revenue as of the date of the financial statements dueto FOB destination shipping terms. Total backlog at December 31, 2004 wasapproximately $86.8 million compared to $102.8 million at December 31,2003. Unshipped backlog at December 31, 2004 was approximately $81.5million, compared to $87.4 million at December 31, 2003.

**Employees**

At February 25, 2005we had 851 employees, including 579 in sales, marketing and contractmanagement; 108 in operations; and 164 in finance, IT, human resources, legaland other support functions. None of our employees are represented by a laborunion and we have experienced no material labor-related work stoppages.

**AvailableInformation**

GTSI is traded on theNASDAQ National Market under the symbol GTSI. Our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K,proxy statements 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.com* as soon as reasonably practicable after weelectronically file such material with, or furnish it to, the Securities andExchange Commission. All of GTSI’s current required Exchange Act filings withthe SEC, as well as press releases and other investor relations’ information,may be obtained free of charge by request to: Investor Relations, GTSI Corp.,3901 Stonecroft Boulevard, Chantilly, VA 20151-1010. Telephone (703) 502-2540.

**Risk Factors**

There are many factors that affect our business andresults of operations, some of which are beyond our control. The following is adescription of some important factors that may cause actual results to differmaterially from those in forward-looking statements and from historical trends.

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***The seasonality of our business makes our futurefinancial results less predictable, which may adversely affect our stock price.***

Our results fromoperations have been, and are expected to continue to be, subject tofluctuations as a result of numerous factors. The factors which make itdifficult to predict our future sales volume and profits include:

·       thecondition of the information technology industry in general,

·       shiftsin demand for hardware and software products,

·       productlife cycles,

·       significantseasonal fluctuations in our sales as a result of government buying and fundingpatterns,

·       fluctuationsin our gross margins and the factors that contribute to this as describedbelow,

·       theavailability of price protection, purchase discounts and rebate programs fromvendors,

·       howwell we execute on our strategy and operating plans,

·       changesin accounting rules, such as recording expenses for employee stock optiongrants, and

·       customerorder deferrals in anticipation of new product releases or upgrades frommanufacturers.

As a consequence,operating results for a particular future period are difficult to predict, and,therefore, prior results are not necessarily indicative of results to beexpected in future periods. Any of the foregoing factors, or any other factorsdiscussed elsewhere herein, could have a material effect on our business,results of operations, and financial condition that could adversely affect ourstock price.

***We expect gross margin to vary over time.***

Overall gross marginlevels may be negatively affected in the future by numerous factors including:

·       timingand size of orders from customers,

·       variationin mix of products sold,

·       increasesin product or shipping costs that we cannot pass on to customers,

·       ashift in sales mix to more complex requirements on contracts with additionalservice elements,

·       increasedprice competition, and

·       increasedwarranty costs.

***Any issue that compromises our relationship withagencies of the federal government would cause serious harm to our business.***

Our sales arehighly dependent on the government’s demand for IT products. Although we do notbelieve that the loss of any single agency or department would have amaterially adverse effect on our results of operations, a material decline inoverall sales to the government as a whole, or to certain key agencies thereof,could have such an effect. Among the key factors in maintaining ourrelationships with 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

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·       ourcompliance with complex procurement laws and regulations related to theformation, administration and performance of 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 revenue, 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 government, and civil or criminal liability.

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 may also seekto recover the costs of procuring the specified goods and services from adifferent contractor. The effect of unexpected contract terminations wouldnegatively impact our financial results.

***Our success is dependent on our ability to recruit,retain and motivate talented employees.***

In addition to the lowunemployment rate in the Washington, DC Metropolitan area, competition forexperienced management and technical, sales and support personnel in the ITindustry is substantial. Our rate of sales growth would be negatively affectedif we are unable to expand the size of our sales force. Financial results arealso affected by the addition of personnel or other expenses in anticipation ofsales growth. To attract and retain the number of employees we need to grow ourbusiness, we may have to increase our compensation levels or incur higherrecruiting costs in the future. This would adversely affect our financialperformance. GTSI experiences employee turnover at rates comparable to those ofother companies in the Northern Virginia area. We do not anticipate materialchanges to our employee turnover rate in 2005. However, a significant increasein turnover would likely have a material negative impact on our productivity.

***We are exposed to inventory risks.***

We are exposed toinventory risks as a result of balancing the need to maintain appropriateinventory levels to ensure competitive lead times against the risk of inventoryobsolescence because of rapidly changing technology and customer requirements.We seek to minimize our inventory exposure through a variety of inventorymanagement procedures and policies, vendor price protection and product returnprograms. If we ultimately determine that we have excess inventory, we may haveto reduce our prices and write-down inventory, which in turn could result inlower gross margins.

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

We are highlydependent on our infrastructure in order to process orders, track inventory,ship products in a timely manner, prepare invoices to our customers andotherwise carry on our business in the ordinary course. Key to the success ofour strategy to drive greater productivity and cost savings is theimplementation of the final phase of our ERP system expected in 2005. If weexperience problems with the implementation of this system, the resultingdisruption could adversely affect our sales and margins. The transition to ournew ERP system involves numerous risks including:

·       difficultiesin integrating the system with our current operations,

·       diversionof management’s attention away from normal daily operations of our business,

·       initialdependence on an unfamiliar system while training personnel in its use,

·       increaseddemand on our support operations, and

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·       potentialdelay in the processing of customer orders for shipment of products.

As a result of the above,our business, operating results and financial condition could be adverselyaffected.

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

GTSI maintains a “smallbusiness” status under its GSA Schedule contract, ITES contract and severalBPAs it held in 2004 based upon its size status at the time of the contracts’original award date. As a small business, GTSI enjoys a number of benefits,including being able to compete for small business orders, qualifying as asmall business subcontractor, bidding pursuant to small purchase proceduresdirected to non-manufacturer small business, and offering government agenciesan avenue to 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. Dependent onthe NAICS Code referenced in a solicitation, GTSI may or may not qualify as asmall business for new contract awards. Under a Federal Acquisition Regulation (FAR) Deviation issued on October 10,2002 by GSA, GTSI will be required to recertify its size status on its GSASchedule Contract no later than 2007. At such time, GTSI may not qualify as asmall business for new orders under the GSA Schedule. In addition, newlegislation or regulations may require GTSI to recertify its size status on itsGSA Schedule sooner than 2007. We cannot predict whether we would continue toqualify as a small business at the time of recertification.

***Our business depends on our vendor relationships andthe availability of products.***

We need to continue toobtain products at competitive prices from leading partners to provide acentralized source of price-competitive products for our customers and to beawarded government contracts. Sales of Panasonic, HP, Sun Microsystems andCisco products comprise a substantial portion of our sales and we believe ourrelationships with these key partners are good. The loss of, or change inbusiness relationship with, any of these or any other key vendors, or thediminished availability of their products, could reduce the supply and increasethe costs of products we sell and negatively impact our financial results.Delays in vendor shipments of new or existing products or in the processing ofincentives and credits due to GTSI would unfavorably influence our operatingperformance. In addition, we could be adversely affected if one or more keypartners decided to:

·       selldirectly to the government,

·       selltheir products to our competitors on more favorable terms than to GTSI,

·       allowadditional resellers to represent their products, or

·       restrictor terminate our rights to sell their products.

***Adverse changes infederal government fiscal spending could have a negative effect on ourbusiness.***

Changesin federal government spending policies or budget priorities could directlyaffect our financial performance. Among the factors that could materially harmour business are:

·       significantdecline in spending by the federal government in general or by specificdepartments or agencies in particular,

·       changesin the structure, composition and/or buying patterns of the government,

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

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

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These or other factors couldcause federal government agencies and departments to reduce their purchasesunder contracts, to exercise their right to terminate contracts, or not toexercise options to renew contracts, any of which would cause us to lose futurerevenue.

**ITEM 2.     PROPERTIES**

GTSI’s primary business isconducted from a headquarters and distribution center located in NorthernVirginia. We do not own any real property. Our headquarters are located inoffice space of approximately 165,000 square feet in Chantilly, Virginia underlong-term leases with varying expiration dates through 2008. GTSI’s primarywarehousing and distribution operations are located in a facility ofapproximately 140,000 square-feet in Chantilly, Virginia under a lease expiringin December 2006. GTSI also has offices in several other U.S. locations,as well as overseas in Germany. We are fully utilizing all of our facilitiesand believe they are in good condition and suitable for the conduct of ourbusiness. For additional information regarding our obligations under leases,see Note 14 of the consolidated financial statements in Part II, Item 8 ofthis Form 10-K.

**ITEM 3.     LEGALPROCEEDINGS**

In November 2003,GTSI Corp. (“GTSI” or the “Company”) was served with a $25 million lawsuit,with treble damages, related to an alleged breach of contract due to thetermination of Ichiban, Inc., a former subcontractor. This suit was filedin Virginia Circuit Court in Fairfax County, Virginia and follows the Company’searlier lawsuit against the former subcontractor. In November 2004,plaintiff modified the claim eliminating treble damages. Management believesthe remaining claims are without merit and intends to defend vigorously thislawsuit, but the ultimate outcome of this matter is uncertain.

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

No matters were submittedto a vote of security holders during the fourth quarter of 2004.

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**PART II**

**ITEM 5.     MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

GTSI’scommon stock is traded on the NASDAQ National Market under the symbol GTSI. Asof March 1, 2005, there were 378 stockholders of record of the Company’scommon stock. The following stock prices are the high and low sales prices ofGTSI’s common stock during the calendar quarters indicated.
| **Quarter** | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------|------------|------------|------------|----------|------------|----------|------------|
| First       |       | $          | 14.52      |     | $          | 11.39    |       | $ | 15.50 |   | $ | 5.25 |   |
| Second      |       | $          | 12.63      |     | $          | 10.10    |       | $ | 9.64 |   | $ | 6.65 |   |
| Third       |       | $          | 11.54      |     | $          | 7.86     |       | $ | 12.60 |   | $ | 8.33 |   |
| Fourth      |       | $          | 11.12      |     | $          | 8.44     |       | $ | 13.93 |   | $ | 10.00 |   |

 

The Company has never paid any cash dividends and doesnot anticipate paying cash dividends on its common stock in the foreseeablefuture.

GTSI’s transfer agent is Wachovia Bank, N.A.,Shareholder Services Group, 1525 West W.T. Harris Blvd., 3C3, Charlotte, NC 28262-1153;telephone 1-800-829-8432.

The Annual Meeting of Stockholders is scheduled to beheld at 9:00 a.m. on Thursday, April 21, 2005, at the Company’sheadquarters located at 3901 Stonecroft Boulevard in Chantilly, Virginia.

Thefollowing table summarizes information regarding GTSI’s equity compensationplans as of December 31, 2004.
| **Plan Category**                                   | ** ** | ** ** | ** ** | **Number of Shares  to be Issued upon  Exercise of  Outstanding  Options  (a)** | ** ** | **Weighted Average  Exercise Price of  Outstanding Options  (b)** | ** ** | **Number of Shares  Remaining Available for  Future Issuance Under  Equity Compensation  Plans (excluding shares  reflected in column (a))  (c)** | ** ** |
|----------------------------------------------------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by stockholders      |       |       | 2,076,050  |                                                                                                          |       |                                                                                  | $          | 8.2734                                                                                                                                                                                                        |       |   |   | 767,500 |   |   |
| Equity  compensation plans not approved by stockholders* |       |       | 972,000    |                                                                                                          |       |                                                                                  | $          | 5.9313                                                                                                                                                                                                        |       |   |   | N/A |   |   |
| Total                                                    |       |       | 3,048,050  |                                                                                                          |       |                                                                                  | $          | 7.5265                                                                                                                                                                                                        |       |   |   | 767,500 |   |   |

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***                   **Representsan aggregate of 372,000 shares issuable under options granted from time to timeto persons (other than Mr. M.D. Young) not previously employed by theCompany, as an inducement essential to such persons entering into employmentagreements with the Company and 600,000 shares issuable under options grantedto M. Dendy Young, GTSI’s Chairman and Chief Executive Officer, in 1995 inconnection with a December 15, 1995 Employment Agreement between Mr. Youngand the Company.

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**ITEM 6.     SELECTEDFINANCIAL DATA**

Thefollowing selected consolidated financial data as of and for the years ended December 31,2004, 2003, 2002, 2001 and 2000 have been derived from the consolidated auditedfinancial statements. This selected financial data should be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations and our financial statements and related notesincluded in this Annual Report on Form 10-K.

**Statement ofOperations Data:**
| ** **                                                                        | ** ** | **For the years ended December 31,**      | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2004**                                                           | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                        | ** ** | **(in thousands, except per share data)** | ** ** |
| Sales                                                                             |       | $                                                                  | 1,076,148  |   | $ | 954,118 |   | $ | 934,730 |   | $ | 783,496 |   | $ | 677,754 |   |
| Cost of sales                                                                     |       | 954,143                                                            |       | 857,334 |   | 857,105 |   | 718,370 |   | 617,621 |   |
| Gross margin                                                                      |       | 122,005                                                            |       | 96,784 |   | 77,625 |   | 65,126 |   | 60,133 |   |
| Operating expenses:                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Selling, general  and administrative                                              |       | 107,833                                                            |       | 85,473 |   | 62,956 |   | 57,002 |   | 49,382 |   |
| Depreciation and  amortization                                                    |       | 3,022                                                              |       | 2,874 |   | 3,543 |   | 4,407 |   | 3,934 |   |
| Impairment charge                                                                 |       | —                                                             |       | 5,972 |   | — |   | — |   | — |   |
| Total operating  expenses                                                         |       | 110,855                                                            |       | 94,319 |   | 66,499 |   | 61,409 |   | 53,316 |   |
| Income from  operations                                                           |       | 11,150                                                             |       | 2,465 |   | 11,126 |   | 3,717 |   | 6,817 |   |
| Interest and other  income, net                                                   |       | 5,569                                                              |       | 2,832 |   | 4,520 |   | 3,707 |   | 2,259 |   |
| Income before  taxes                                                              |       | 16,719                                                             |       | 5,297 |   | 15,646 |   | 7,424 |   | 9,076 |   |
| Income tax  provision (benefit)                                                   |       | 6,455                                                              |       | 2,118 |   | 6,113 |   | 2,938 |   | (2,008 | ) |
| Net income before  cumulative effect of SAB No. 101 adoption            |       | 10,264                                                             |       | 3,179 |   | 9,533 |   | 4,486 |   | 11,084 |   |
| Cumulative effect  of SAB 101 adoption                                            |       | —                                                             |       | — |   | — |   | — |   | 467 |   |
| Net income                                                                        |       | $                                                                  | 10,264     |   | $ | 3,179 |   | $ | 9,533 |   | $ | 4,486 |   | $ | 10,617 |   |
| Earnings per common share                                                         |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic:                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic earnings per  share before cumulative effect of SAB No. 101 adoption   |       | $                                                                  | 1.18       |   | $ | 0.38 |   | $ | 1.15 |   | $ | 0.55 |   | $ | 1.23 |   |
| Cumulative effect  per share of SAB No. 101 adoption                         |       | —                                                             |       | — |   | — |   | — |   | (0.05 | ) |
| Basic earnings per  share                                                         |       | $                                                                  | 1.18       |   | $ | 0.38 |   | $ | 1.15 |   | $ | 0.55 |   | $ | 1.18 |   |
| Diluted:                                                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Diluted earnings  per share before cumulative effect of SAB No. 101 adoption |       | $                                                                  | 1.09       |   | $ | 0.35 |   | $ | 1.04 |   | $ | 0.50 |   | $ | 1.20 |   |
| Cumulative effect  per share of SAB No. 101 adoption                         |       | —                                                             |       | — |   | — |   | — |   | (0.05 | ) |
| Diluted earnings  per share                                                       |       | $                                                                  | 1.09       |   | $ | 0.35 |   | $ | 1.04 |   | $ | 0.50 |   | $ | 1.15 |   |
| Weighted average common shares outstanding                                        |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                                             |       | 8,664                                                              |       | 8,349 |   | 8,302 |   | 8,144 |   | 9,021 |   |
| Diluted                                                                           |       | 9,388                                                              |       | 9,116 |   | 9,156 |   | 9,049 |   | 9,225 |   |

 
| ** **                 | ** ** | **December 31,**   | ** ** |
|----------------------------|------------|-------------------------|------------|
| ** **                 | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                 | ** ** | **(in thousands)** | ** ** |
| **Balance Sheet Data:**    |       |                    |       |   |   |   |   |   |   |   |   |
| Working capital            |       | $                       | 79,027     |   | $ | 64,348 |   | $ | 62,836 |   | $ | 34,968 |   | $ | 43,659 |   |
| Total assets               |       | $                       | 296,386    |   | $ | 268,761 |   | $ | 224,918 |   | $ | 252,452 |   | $ | 227,065 |   |
| Notes payable to  banks    |       | $                       | 1,179      |   | $ | 12,813 |   | $ | 7,539 |   | $ | 20,186 |   | $ | 11,925 |   |
| Long-term  liabilities     |       | $                       | 3,473      |   | $ | 1,522 |   | $ | 1,640 |   | $ | 2,403 |   | $ | 2,145 |   |
| Total liabilities          |       | $                       | 204,249    |   | $ | 190,816 |   | $ | 149,427 |   | $ | 189,387 |   | $ | 168,586 |   |
| Stockholders’  equity |       | $                       | 92,137     |   | $ | 77,945 |   | $ | 75,491 |   | $ | 63,065 |   | $ | 58,480 |   |

 

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**ITEM7.     MANAGEMENT’S DISCUSSION ANDANALYSIS 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**

GTSI is a recognized ITsolutions leader, providing products and services primarily to federalgovernment customers worldwide. One of our key differentiators is the extensivenumber of contract vehicles we have in our portfolio. For over two decades GTSIhas served the public sector by partnering with global IT leaders such asPanasonic, HP, Cisco, Sun Microsystems and Microsoft. We seek to delivermaximum value through our broad range of products, customer service and ISO9001:2000 certified distribution center. Through our Technology Practices, wedeliver “best of breed” products and solutions to help our customers realizestrong value for their IT investments.

We experienced somesignificant successes in 2004, including our annual revenue exceeding the $1billion mark. We faced a number of challenges and we made significant progressin building an organization that can consistently deliver strong financialresults. Our sales grew 12.8% during 2004, outpacing the underlying growth ingovernment IT spending. We expect that GTSI will continue to outpace marketgrowth in 2005.

Asdiscussed in more detail throughout our MD&A:

·       Oursales increased $122.0 million from 2003 to 2004, exceeding $1 billion for thefirst time in GTSI history.

·       Thebuying and funding patterns of the government continue to have a significantpositive effect on our sales and net income in the third and fourth quarters.

·       Ourgross margin increased as a percentage of sales.

·       Ourbalance sheet remains solid, with no long-term debt.

·       Cashprovided by operating activities more than tripled to $16.8 million for theyear ended December 31, 2004.

We have initiated astrategic three-year growth plan designed to capitalize on the government’sheightened demand for IT services and we plan to double our revenue to $2billion, improve our productivity and increase our gross margins.  To double our sales we will continue toleverage the strong growth of personnel in our sales and marketingorganization. In addition, we are selectively, but aggressively, hiring talentedemployees and expect our headcount to reach approximately 950 employees by theend of 2005. We expect to expand our sales from lease arrangements for ITproducts and solutions in 2005.  We haveessentially completed the build-out of our ERP system. After full testing andretesting, extensive training and documentation of new work processes for SOXcompliance, we plan to implement the final phase of our ERP capabilitiesthroughout GTSI in the second quarter of 2005. 

In addition to theimplementation of the final phase of our ERP system, several other initiativesare underway to position GTSI to reach our strategic plan goal of increasedproductivity including proactive supply-chain management; customer, deal, andvendor profitability assessments; and order management improvements. Managementis also evaluating various CRM solutions, including the future use of ourexisting CRM platform. If we select a new CRM Solution, we may incur animpairment charge for the write-off of our existing CRM software.

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We believe we can makesignificant improvements to net income. First, additional sales are expected toimprove net income. Second, improved margin percentages are expected toincrease bottom line growth. And third, we believe our productivityimprovements will lower SG&A expense as a percentage of sales and improvenet income margin.

**Critical AccountingEstimates**

The discussion andanalysis of our financial condition and results of operations is based on ourconsolidated financial statements. The preparation of these financialstatements requires management to make estimates and judgments that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the consolidated financial statements and the reportedamounts of revenue and expenses during the reporting period. Criticalaccounting estimates are defined as those that are reflective of significantjudgments and uncertainties, and potentially result in materially differentresults under different assumptions and conditions. We have included below ourpolicies that are both important to our financial condition and operatingresults, and require management’s most subjective and complex judgments indetermining the underlying estimates and assumptions. Actual results may differfrom these estimates under different assumptions or conditions. Accountingestimates that management believes are most critical to our financial conditionand operating results pertain to merchandise inventories, long-lived assets,warranties, contingencies and revenue recognition. We have discussed theapplication of these critical accounting estimates with the Audit Committee ofour Board of Directors.

*Merchandise Inventories*

Our inventory is stated atthe lower of average cost or market value. We record a provision for excess andobsolete inventory based on assumptions about future demand and marketconditions. Our estimates of future product demand may prove to be inaccurate,in which case we may have understated or overstated the provision required forexcess or obsolete inventory. In the future, if there were a higher incidenceof inventory obsolescence because of rapidly changing technology and customerrequirements, we would be required to increase our inventory allowance and ourgross margin could be adversely affected.

During 2004 as a result ofour physical inventory counts and other internal controls, we discovered twoinstances of inventory losses.  Losses of$0.7 million and $0.6 million were recorded, that were subsequently offset byan insurance settlement of $0.6 million. A second insurance claim is stillpending. The outcome of the insurance claim, as well as the results of ourongoing investigations, could materially alter the amount of management’sestimate.

*Long-Lived Assets*

Long-lived assets,consisting primarily of capitalized software, furniture and equipment, arerequired to be tested for recoverability whenever events or changes incircumstances indicate that their carrying amount may not be recoverable. Ifthe carrying value exceeds the undiscounted cash flows expected to result fromthe use and eventual disposition of the asset, an impairment charge isrecognized. During 2003, we determined that it was not in our best interest tocontinue with a highly customized ERP system due to the high level ofdevelopment risk and the higher total cost of ownership associated withmaintaining a customized solution. We changed our strategy to a standard ERPsystem (“GEMS”) to lower the risk and reduce the overall project expenses. Dueto this change in strategy we estimated $6.0 million of the customized ERPsolution would have no future value and recorded an impairment charge in 2003.If any future events indicate the carrying amount of GEMS may exceed its fairvalue, we will test for recoverability which would necessitate the use ofsignificant assumptions regarding the fair value and undiscounted net cashflows expected. During 2004, we capitalized $5.5 million related to the ERPproject.

*Warranties*

We offer warranties onsales of certain products specific to the terms of the customer agreements. Ourstandard warranties require us to repair or replace defective products reportedto us during such warranty 

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period at no cost to thecustomer. We record an estimate for warranty related costs at the time of salebased on our actual historical return rates and repair costs at the time ofsale. We cannot guarantee that we will continue to experience the same warrantyreturn rates or repair costs that we have in the past. Factors that impact ouraccrued warranty liability include the number of installed units under warrantycontracts, the rate of unit failures, the cost of spare parts, and historicaland anticipated cost per warranty claim under the warranty contract. As thesefactors are affected by actual experience and future expectations, wereevaluate the adequacy of our accrued warranty liability and adjust amounts asnecessary.

*Contingencies*

We are subject to thepossibility of various loss contingencies arising in the ordinary course ofbusiness. We accrue an estimated loss contingency when it is probable that aliability has been incurred and the amount of loss can be reasonably estimated.We regularly evaluate current information available to us to determine whethersuch accruals should be adjusted and whether new accruals are required. Reviewof certain aged payables during 2004 resulted in reversals of $10.1 million and$2.5 million during the second half of 2004. A new accrual for potential payroll tax liability was estimatedat $0.8 million in 2004 for employees working in our office in Germany.

*Revenue Recognition*

The majority of our salesrelates to physical products and is generally recognized when title to theproducts sold passes to the customer. Based on our standard shipping terms,title generally passes upon the customer’s receipt of the products. Thisrequires us to analyze sales near the end of reporting periods to estimate theamount of products in transit to the customer that cannot be recognized asrevenue. At the time of sale, we record an estimate for product returns basedon historical experience. If actual product returns are greater than estimatedby management, additional expense may be incurred.

Certain of our service andsolution agreements contain multiple elements that sometimes requiresignificant contract interpretation to determine the appropriate accounting,including whether the deliverables should be treated as separate units ofaccounting for revenue recognition purposes, and if so, how the price should beallocated among the deliverable elements and when to recognize revenue for eachelement.

**HistoricalResults of Operations**

Thefollowing table illustrates the percentage of sales represented by items in ourconsolidated statements of operations for the years ended December 31:
| ** **                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Sales                               |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Cost of sales*                      |       | 88.7     |       | 89.9     |       | 91.7     |       |
| Gross margin                        |       | 11.3     |       | 10.1     |       | 8.3      |       |
| Operating expenses:                 |       |     |       |     |       |     |       |
| Selling, general and administrative |       | 10.0     |       | 8.9      |       | 6.7      |       |
| Depreciation and  amortization      |       | 0.3      |       | 0.3      |       | 0.4      |       |
| Impairment charge                   |       | —   |       | 0.6      |       | —   |       |
| Total operating expenses            |       | 10.3     |       | 9.8      |       | 7.1      |       |
| Income from operations              |       | 1.0      |       | 0.3      |       | 1.2      |       |
| Interest and other  income, net     |       | 0.6      |       | 0.3      |       | 0.5      |       |
| Income before taxes                 |       | 1.6      |       | 0.6      |       | 1.7      |       |
| Income tax provision                |       | 0.6      |       | 0.3      |       | 0.7      |       |
| Net income                          |       | 1.0      | %          | 0.3      | %          | 1.0      | %          |

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*                    As a result ofadopting Emerging Issues Task Force Issue No. 02-16, “Accounting forConsideration Received from a Vendor by a Customer (Including a Reseller of theVendor’s Product)”, we changed 

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our reporting of certainvendor considerations. Beginning January 1, 2003, GTSI recorded vendorconsideration as a reduction to Cost of Sales instead of as a reduction toSelling, General & Administrative expenses.

Thefollowing table sets forth the annual percentage changes in the dollar amountsof selected items within our consolidated statements of operations.
| ** **                          | ** ** | **Percentage Change** | ** ** |
|-------------------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **2003 to 2004** | ** ** | **2002 to 2003** | ** ** |
| Sales                               |       |                       | 12.8       | % |   |   | 2.1 | % |   |
| Cost of sales                       |       |                       | 11.3       | % |   |   | 0.0 | % |   |
| Gross margin                        |       |                       | 26.1       | % |   |   | 24.7 | % |   |
| Operating expenses:                 |       |                       |       |   |   |   |   |   |   |
| Selling, general and administrative |       |                       | 26.2       | % |   |   | 35.8 | % |   |
| Depreciation and amortization       |       |                       | 5.1        | % |   |   | (18.9 | )% |   |
| Impairment charge                   |       |                       | (100.0     | )% |   |   | 100.0 | % |   |
| Total operating  expenses           |       |                       | 17.5       | % |   |   | 41.8 | % |   |
| Income from operations              |       |                       | 352.3      | % |   |   | (77.8 | )% |   |
| Interest and  other income, net     |       |                       | 96.6       | % |   |   | (37.3 | )% |   |
| Income before  taxes                |       |                       | 215.6      | % |   |   | (66.1 | )% |   |
| Income tax  provision               |       |                       | 204.8      | % |   |   | (65.4 | )% |   |
| Net income                          |       |                       | 222.9      | % |   |   | (66.7 | )% |   |

 

Thefollowing tables indicate, for the years ended December 31 (dollars inmillions), the approximate sales by contract vehicle, vendor, and productcategory along with related percentages of total sales.
| **Contract  Vehicles**            | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| GSA Schedules                     |       | $          | 299.3      |     | 27.8       | %        | $          | 268.0    |       | 28.1 | % | $ | 276.0 |   | 29.5 | % |
| IDIQ Contracts                    |       | 428.0      |       | 39.8     |       | 430.4    |       | 45.1     |       | 388.7 |   | 41.6 |   |
| Open Market                       |       | 238.0      |       | 22.1     |       | 159.7    |       | 16.7     |       | 107.0 |   | 11.5 |   |
| Subcontracts and Other  Contracts |       | 110.8      |       | 10.3     |       | 96.0     |       | 10.1     |       | 163.0 |   | 17.4 |   |
| Total                             |       | $          | 1,076.1    |     | 100.0      | %        | $          | 954.1    |       | 100.0 | % | $ | 934.7 |   | 100.0 | % |

 
| **Top Five Vendors** | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Panasonic                      |       | $          | 188.0      |     | 17.5       | %        | $          | 162.2    |       | 17.0 | % | $ | 123.5 |   | 13.2 | % |
| HP                             |       | 153.4      |       | 14.3     |       | 139.3    |       | 14.6     |       | 167.7 |   | 17.9 |   |
| Cisco                          |       | 135.7      |       | 12.6     |       | 112.9    |       | 11.8     |       | 114.9 |   | 12.3 |   |
| Sun Microsystems               |       | 131.8      |       | 12.2     |       | 130.1    |       | 13.6     |       | 110.6 |   | 11.8 |   |
| Microsoft                      |       | 53.7       |       | 5.0      |       | 66.5     |       | 7.0      |       | 95.6 |   | 10.2 |   |
| Others                         |       | 413.5      |       | 38.4     |       | 343.1    |       | 36.0     |       | 322.4 |   | 34.6 |   |
| Total                          |       | $          | 1,076.1    |     | 100.0      | %        | $          | 954.1    |       | 100.0 | % | $ | 934.7 |   | 100.0 | % |

 
| **Products**                         | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Hardware                             |       | $          | 834.1      |     | 77.5       | %        | $          | 692.5    |       | 72.6 | % | $ | 673.7 |   | 72.1 | % |
| Software                             |       | 155.7      |       | 14.5     |       | 154.5    |       | 16.2     |       | 196.4 |   | 21.0 |   |
| Resold  third-party service products |       | 66.6       |       | 6.2      |       | 91.2     |       | 9.5      |       | 50.8 |   | 5.4 |   |
| Services                             |       | 19.7       |       | 1.8      |       | 15.9     |       | 1.7      |       | 13.8 |   | 1.5 |   |
| Total                                |       | $          | 1,076.1    |     | 100.0      | %        | $          | 954.1    |       | 100.0 | % | $ | 934.7 |   | 100.0 | % |

 

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**2004 Compared with 2003**

*Sales*

Sales consist of revenue from products delivered andservices sold or rendered, net of allowances for customer returns and credits.Sales increased $122.0 million, or 12.8%, from $954.1 million in 2003 to $1.08billion in 2004. The majority of this increase, by contract vehicle, is due tothe $78.2 million increase in Open Market procurements resulting from theefforts of our expanded sales force. Sales in GSA Schedule and Subcontracts andOther Contracts categories increased 11.7% and 15.4%, respectively, from 2003to 2004. IDIQ contract sales were relatively flat year over year.

An analysis of sales by product reveals our overallSales increase was due to the $141.6 million rise in Hardware to $834.1 millionin 2004 generated by increased sales of networking products, storage productsand large server sales. This increase was partially offset by a $24.6 milliondecline in sales of resold third-party service products. Sales ofservices increased 23.9% from 2003 to 2004 to $19.7 million. We intend to growour service revenue at a similar rate in 2005.

Although we offer our customers access to productsfrom hundreds of vendors, 61.6% of our sales in 2004 were products from our topfive vendor partners. As detailed in the preceding table, Panasonic remains ourtop vendor with product sales increasing $25.8 million from 2003 to 2004. Salesof Cisco and HP products also increased $22.8 million and $14.1 million,respectively, from the previous year. The increase in sales was also related tothe $16.0 million decrease in backlog as of December 31, 2004 compared to2003.

GTSI will be required torecertify our “small business” size status on our GSA Schedule Contract nolater than 2007. At such time, we may not qualify as a small business. Tomitigate any potential adverse affect on our sales from the loss of our smallbusiness status, GTSI has developed strategic relationships with smallbusinesses that benefit from the small business benefits described in theBusiness section in Part I of this Form 10-K. GTSI acts as both asupplier and prime contractor to these small businesses. In addition, wefurther mitigate this risk by participating in the Mentor-Protégé Programoffered under the SBAs 8(a) program, which is a business development initiativethat helps socially and economically disadvantaged Americans gain access toeconomic opportunity. Through this program, we provide various forms ofmentoring, expertise in key business areas and assistance to our protégé, EyakTechnology, LLC.

*Gross Margin*

Gross Margin increased$25.2 million, or 26.1%, from $96.8 million in 2003 to $122.0 million in 2004.Gross margin as a percentage of sales increased from 10.1% for 2003 to 11.3% in2004. This increase was predominantly due to the reduction in Cost of Salesresulting from the $10.1 million non-cash extinguishment of aged vendorliabilities. Without the impact of this extinguishment, gross margin would havebeen 10.4% as a percentage of sales. Management is committed to continuingmargin expansion. We have put in place new processes which we expect tocontinue to result in margin expansion including our centralized pricinginitiatives.

*Selling, General & Administrative Expenses*

Selling,General & Administrative (“SG&A”) expenses for 2004 increased $22.5million, or 25.5% from 2003. This increase was primarily related toapproximately $6.9 million in compensation and benefits expense associated withour long-term investments in new employees to increase headcount company-wideand $6.1 million of additional commissions and commission accelerators paid onour increased sales. Management feels that by making these investments inpersonnel, we are now better positioned to take advantage of:

·  new opportunities in the State and Localmarketplace utilizing the US Communities Contract;

·  additional federal government opportunities;

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·  sales to Prime Contractors through ourIntegrator Solutions Group; and

·  increased lease sales to the government.

In addition, we incurredexpenses of $2.0 million in consulting fees for our Sarbanes-Oxley (“SOX”)compliance and approximately $1.7 million for continued implementation of ourERP system. Legal and accounting fees increased $1.6 million due to litigationcosts and the internal control audit, performed by our independent registeredpublic accounting firm as required by SOX. Total Selling, General &Administrative expense increased 1.1% as a percentage of sales from 2003 to2004. Management has developed a new sales commission plan for 2005 to aligncommissions with the goals of our strategic growth plan.

*Interest and OtherIncome, Net*

Interest and Other Income,Net increased $2.7 million, or 96.6%, from 2003 to 2004. This increase ismainly due to approximately $3.2 million increase in interest income from the salesof our leases receivable. This increased income was partially offset by thecontinuing decline in prompt payment discounts received from vendors. Due tothe economy, fewer vendors are offering this incentive. Interest and otherexpense remained flat year over year.

*Income Taxes*

We recorded a taxprovision of $6.5 million for 2004, of which $3.9 million is due to thereversal of aged accrued liabilities, based on our expected annual effectivetax rate of approximately 38.6%. For 2003 we recorded a tax provision of $2.1million at an effective rate of 40.0%. The decrease in our effective tax ratefrom 2003 to 2004 is due to reduced state income taxes and a reduction inpermanent non-deductible items as a percentage of earnings before taxes. Themain difference between our effective tax rate in 2004 and the statutory rateare state income taxes.

**2003 Compared with 2002**

*Sales*

Net sales in 2003increased $19.4 million to $954.1 million, or 2.1% over 2002. Sales under IDIQand Open Market contracts increased $41.7 million and $52.7 million,respectively. IDIQ sales increased due primarily to increased sales on one ofour mature contracts combined with full year sales on a contract that began atthe end of 2002. Sales in the Subcontracts and Other Contracts categorydecreased 41.1% to $96.0 million due primarily to decreased volume onsubcontracts with prime contractors, specifically on the FBI’s Trilogycontract. Our sales of Panasonic products increased $38.7 million, or 31.3%,from 2002 to 2003 replacing HP as our top vendor. Sun Microsystem’s productsales also marked a significant increase of 19.5% year over year. Sales ofMicrosoft declined $29.1 million, or 30.4% from 2002. This decline alsocontributed to our overall decrease in software sales. When reviewed by producttype, this decrease was offset predominantly by the $40.4 million increase insales from resold third-party service products related to the increased volume of productized service and maintenancecontracts. Hardware sales also increased a moderate $18.8 million from2002 to 2003.

*Gross Margin*

Gross Margin increased $19.2 million, or 24.7%, to$96.8 million from $77.6 million in 2002. Gross margin as a percentage of salesalso increased to 10.1% for 2003 from 8.3% for 2002. This increase is dueprimarily to the January 1, 2003 adoption of Emerging Issues Task Force (“EITF”)Issue No. 02-16, “Accounting for Consideration Received from a Vendor by aCustomer (Including a Reseller of the Vendor’s Product)”, which resulted inrecording certain vendor funds as a reduction in Cost of Sales instead ofSelling, 

23

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General & Administrative expenses. Forcomparative purposes, if we applied EITF No. 02-16 to the year ended December 31,2002, our gross margin would have increased from $90.0 million to $96.8 million.The gross margin percentage would have increased from 9.6% for 2002 to 10.1%for 2003. The primary reason for the increase in margins on this comparativebasis is due to an increase in the volume of the vendor incentive fundsreceived in 2003 compared to 2002.

During the second quarterof 2003, our sales organization was successful in securing an order forsoftware inventory that had been reserved for during 2002. As a result, wereversed a $1.4 million reserve. This benefit partially contributed to theincrease in the gross margin percentage for the year.

*Selling, General &Administrative Expenses*

SG&A expenses for the year ended December 31,2003 increased $21.8 million to $88.3 million from $66.5 million for 2002. Alarge portion of this increase was a result of the adoption of EITF No. 02-16.For comparative purposes, Selling, General & Administrative expensesfor the year ended December 31, 2002 would have been $78.8 million if EITFNo. 02-16 was applied to 2002. In addition to the impact of this newaccounting pronouncement, Selling, General & Administrative expensesincreased due to higher personnel costs due to increased headcount primarily inthe Sales and Technology Team organizations. When an organization addsresources to its sales teams, there is a ramp-up period before these new salespersonnel are fully optimized.

During 2002, we determinedthat it was remote that certain accrued obligations would need to be paid. Accordingly,the associated obligation of $1.4 million was reversed. SG&A expenses as apercentage of sales increased to 9.3% for 2003 from 7.1% in 2002. Applying theimpact from EITF No. 02-16 to the year ended December 31, 2002 forcomparison purposes, SG&A expenses would have been 8.4% in 2002.

*Impairment charge*

In the fourth quarter of2003 we recorded an impairment charge of $6.0 million related to the impairmentof capitalized software because we determined that it was not in our bestinterest to continue to pursue a highly customized ERP solution due to the highlevel of development risk and the higher total cost of ownership associatedwith maintaining a customized solution. We changed our strategy and decided toimplement a standard ERP system that is expected to lower the risk, compressthe delivery time, provide significant value sooner, and reduce overall projectexpenses. Due to this change in strategy, $6.0 million of the capitalizedassets related to the customized solution was determined to have no futureeconomic value. The enterprise software and hardware for a standard ERP systempurchased to date will be fully utilized in the roll-out of the new ERP.

*Interest and OtherIncome, Net*

Interest and Other Income,Net is the amount of interest income, prompt payment discounts, and otherincome reduced by interest and other expenses. Interest and other income, net,decreased $1.7 million, from $4.5 million to $2.8 million, or 37.8%, in 2003compared to 2002. Interest and other income decreased by $2.1 million andinterest and other expense decreased $0.4 million over 2002. The decline ininterest income is primarily due to a $1.3 million decrease in prompt paymentdiscounts partially combined with a $0.4 million decrease in interest incomefrom lease receivables. Other income decreased $0.3 million due primarily to a$0.5 million gain on the sale of equipment leases in the first quarter of 2002that did not occur in 2003. Interest and other expense decreased $0.4 millionfrom 2002 to 2003 due primarily to improved cash management practices allowingus to rely less on the Credit Facility throughout the year.

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*Income Taxes*

Our effective tax rate in2002 was 39.1% resulting in a tax provision of $6.1 million. The differencebetween the effective rate and the statutory rate is primarily state taxes andpermanent non-deductible items.

**Seasonal Fluctuations**

We have historically experienced and expect tocontinue to experience significant seasonal fluctuations in our operations as aresult of government buying and funding patterns. The unpredictability of thefactors affecting such seasonality makes our annual and quarterly financialresults difficult to predict and subject to significant fluctuation. Whilesales to the U.S. Government are usually weaker in the first and second quarterand stronger in the third and fourth quarter, our Selling, General &Administrative expenses are more level throughout the year. As such, first andsecond quarter earnings are typically well below those of the third and fourthquarters. Our stock price could be adversely affected if any such financial resultsfail to meet the financial community’s expectations.

Thefollowing tables show our results of operations, sales by contract, and salesby vendor on a quarterly basis. This information has been included to provideadditional insight into the seasonal nature of our business.
| ** **                                           | ** ** | **2004**                                                         | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **Q1**                                                           | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **(in millions except per share data)** | ** ** |
| Sales                                                |       | $                                                                | 178.6      |   | $ | 239.0 |   | $ | 330.6 |   | $ | 327.9 |   | $ | 1,076.1 |   |
| Cost of sales                                        |       | 160.5                                                            |       | 217.5 |   | 283.9 |   | 292.2 |   | 954.1 |   |
| Gross margin                                         |       | 18.1                                                             |       | 21.5 |   | 46.7 |   | 35.7 |   | 122.0 |   |
| Selling, general &  administrative expenses |       | 21.7                                                             |       | 24.6 |   | 30.4 |   | 34.2 |   | 110.9 |   |
| (Loss) income from  operations                       |       | (3.6                                                             | )          | (3.1 | ) | 16.3 |   | 1.5 |   | 11.1 |   |
| Interest and other  income, net                      |       | 1.3                                                              |       | 0.5 |   | 1.0 |   | 2.8 |   | 5.6 |   |
| (Loss) income before  taxes                          |       | (2.3                                                             | )          | (2.6 | ) | 17.3 |   | 4.3 |   | 16.7 |   |
| Income tax (benefit)  provision                      |       | (0.9                                                             | )          | (1.0 | ) | 6.8 |   | 1.5 |   | 6.4 |   |
| Net (loss) income                                    |       | $                                                                | (1.4       | ) | $ | (1.6 | ) | $ | 10.5 |   | $ | 2.8 |   | $ | 10.3 |   |
| Basic (loss) earnings  per share                     |       | $                                                                | (0.16      | ) | $ | (0.18 | ) | $ | 1.21 |   | $ | 0.31 |   | $ | 1.18 |   |
| Diluted (loss) earnings per share                    |       | $                                                                | (0.16      | ) | $ | (0.18 | ) | $ | 1.13 |   | $ | 0.29 |   | $ | 1.09 |   |

 
| ** **                        | ** ** | **2004 Quarter Ended**    | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | **March 31,**                  | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                        | ** ** | **(dollars in millions)** | ** ** |
| *Contract Vehicles*               |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| GSA Schedules                     |       | $                                   | 42.2       |   | 23.6 | % | $ | 54.8 |   | 22.9 | % | $ | 105.7 |   | 32.0 | % | $ | 96.6 |   | 29.5 | % |
| IDIQ Contracts                    |       | 72.9                                |       | 40.8 |   | 93.1 |   | 39.0 |   | 127.6 |   | 38.6 |   | 134.4 |   | 41.0 |   |
| Open Market                       |       | 36.0                                |       | 20.2 |   | 59.8 |   | 25.0 |   | 72.9 |   | 22.0 |   | 69.3 |   | 21.1 |   |
| Subcontracts and other  contracts |       | 27.5                                |       | 15.4 |   | 31.3 |   | 13.1 |   | 24.4 |   | 7.4 |   | 27.6 |   | 8.4 |   |
| Total                             |       | $                                   | 178.6      |   | 100.0 | % | $ | 239.0 |   | 100.0 | % | $ | 330.6 |   | 100.0 | % | $ | 327.9 |   | 100.0 | % |
| *Top Five Vendors*                |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Panasonic                         |       | $                                   | 34.4       |   | 19.3 | % | $ | 36.2 |   | 15.1 | % | $ | 65.6 |   | 19.8 | % | $ | 51.8 |   | 15.8 | % |
| HP                                |       | 18.2                                |       | 10.2 |   | 31.5 |   | 13.2 |   | 47.7 |   | 14.4 |   | 56.0 |   | 17.1 |   |
| Cisco                             |       | 23.1                                |       | 12.9 |   | 20.8 |   | 8.7 |   | 50.1 |   | 15.1 |   | 41.7 |   | 12.7 |   |
| Sun                               |       | 20.4                                |       | 11.4 |   | 37.4 |   | 15.6 |   | 40.3 |   | 12.2 |   | 33.7 |   | 10.3 |   |
| Microsoft                         |       | 7.7                                 |       | 4.3 |   | 8.3 |   | 3.5 |   | 28.8 |   | 8.7 |   | 8.9 |   | 2.7 |   |
| Other                             |       | 74.8                                |       | 41.9 |   | 104.8 |   | 43.9 |   | 98.1 |   | 29.8 |   | 135.8 |   | 41.4 |   |
| Total                             |       | $                                   | 178.6      |   | 100.0 | % | $ | 239.0 |   | 100.0 | % | $ | 330.6 |   | 100.0 | % | $ | 327.9 |   | 100.0 | % |

 

25

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| ** **                                           | ** ** | **2003**                                                         | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **Q1**                                                           | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **(in millions except per share data)** | ** ** |
| Sales                                                |       | $                                                                | 178.9      |   | $ | 189.7 |   | $ | 273.1 |   | $ | 312.4 |   | $ | 954.1 |   |
| Cost of sales                                        |       | 162.8                                                            |       | 167.0 |   | 245.6 |   | 281.9 |   | 857.3 |   |
| Gross margin                                         |       | 16.1                                                             |       | 22.7 |   | 27.5 |   | 30.5 |   | 96.8 |   |
| Selling,  general & administrative expenses |       | 19.7                                                             |       | 21.6 |   | 22.6 |   | 24.4 |   | 88.3 |   |
| Impairment charge                                    |       | —                                                           |       | — |   | — |   | 6.0 |   | 6.0 |   |
| Total operating  expenses                            |       | 19.7                                                             |       | 21.6 |   | 22.6 |   | 30.4 |   | 94.3 |   |
| (Loss) income  from operations                       |       | (3.6                                                             | )          | 1.1 |   | 4.9 |   | 0.1 |   | 2.5 |   |
| Interest and  other income, net                      |       | (0.7                                                             | )          | (0.8 | ) | (0.8 | ) | (0.5 | ) | (2.8 | ) |
| (Loss) income  before taxes                          |       | (2.9                                                             | )          | 1.9 |   | 5.7 |   | 0.6 |   | 5.3 |   |
| Income tax  (benefit) provision                      |       | (1.1                                                             | )          | 0.8 |   | 2.2 |   | 0.2 |   | 2.1 |   |
| Net (loss) income                                    |       | $                                                                | (1.8       | ) | $ | 1.1 |   | $ | 3.5 |   | $ | 0.4 |   | $ | 3.2 |   |
| Basic earnings per share                             |       | $                                                                | (0.21      | ) | $ | 0.14 |   | $ | 0.42 |   | $ | 0.04 |   | $ | 0.38 |   |
| Diluted earnings per  share                          |       | $                                                                | (0.21      | ) | $ | 0.13 |   | $ | 0.39 |   | $ | 0.04 |   | $ | 0.35 |   |

 
| ** **                        | ** ** | **2003 Quarter Ended**    | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | **March 31,**                  | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                        | ** ** | **(dollars in millions)** | ** ** |
| *Contract Vehicles*               |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| GSA Schedules                     |       | $                                   | 51.9       |   | 29.0 | % | $ | 53.9 |   | 28.4 | % | $ | 77.6 |   | 28.4 | % | $ | 84.6 |   | 27.1 | % |
| IDIQ Contracts                    |       | 78.9                                |       | 44.1 |   | 83.3 |   | 43.9 |   | 119.8 |   | 43.9 |   | 148.4 |   | 47.5 |   |
| Open Market                       |       | 27.0                                |       | 15.1 |   | 28.5 |   | 15.0 |   | 50.5 |   | 18.5 |   | 53.7 |   | 17.2 |   |
| Subcontracts and  other contracts |       | 21.1                                |       | 11.8 |   | 24.0 |   | 12.7 |   | 25.2 |   | 9.2 |   | 25.7 |   | 8.2 |   |
| Total                             |       | $                                   | 178.9      |   | 100.0 | % | $ | 189.7 |   | 100.0 | % | $ | 273.1 |   | 100.0 | % | $ | 312.4 |   | 100.0 | % |
| *Top  Five Vendors*               |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Panasonic                         |       | $                                   | 34.8       |   | 19.5 | % | $ | 33.6 |   | 17.7 | % | $ | 48.4 |   | 17.7 | % | $ | 45.4 |   | 14.5 | % |
| HP                                |       | 30.3                                |       | 16.9 |   | 28.6 |   | 15.1 |   | 38.9 |   | 14.2 |   | 41.5 |   | 13.3 |   |
| Sun Micro.                        |       | 19.7                                |       | 11.0 |   | 34.8 |   | 18.3 |   | 38.9 |   | 14.2 |   | 36.7 |   | 11.7 |   |
| Cisco                             |       | 20.5                                |       | 11.5 |   | 18.1 |   | 9.5 |   | 32.2 |   | 11.8 |   | 42.1 |   | 13.5 |   |
| Microsoft                         |       | 14.9                                |       | 8.3 |   | 17.1 |   | 9.0 |   | 19.3 |   | 7.1 |   | 15.2 |   | 4.9 |   |
| Other                             |       | 58.7                                |       | 32.8 |   | 57.5 |   | 30.4 |   | 95.4 |   | 35.0 |   | 131.5 |   | 42.1 |   |
| Total                             |       | $                                   | 178.9      |   | 100.0 | % | $ | 189.7 |   | 100.0 | % | $ | 273.1 |   | 100.0 | % | $ | 312.4 |   | 100.0 | % |

 

**Liquidity and Capital Resources**

*Cash flows for the year ended December 31,*
| ** **                                       | ** ** | **2004**               | ** ** | **2003** | ** ** | **  Change  ** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|----------|------------|------------------------------------|------------|
| ** **                                       | ** ** | **(in millions)** | ** ** |
| Cash provided by operating activities            |       | $                      | 16.8       |     | $          | 4.6                                |       |   | $ | 12.2 |   |   |
| Cash used in investing activities                |       | $                      | (7.5       | )        | $          | (7.9                               | )          |   | $ | (0.4 | ) |   |
| Cash (used in)  provided by financing activities |       | $                      | (9.1       | )        | $          | 3.4                                |       |   | $ | 12.5 |   |   |

 

Cash provided by operating activities for the yearended December 31, 2004 was $16.8 million, an increase of $12.2 millionfrom cash provided for the year ended December 31, 2003. This increase wasprimarily due to improved collections of trade accounts receivable. Totalaccounts receivable provided $10.7 million more to operations in 2004 comparedto 2003. In the latter half of 2004, we implemented new processes 

26

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related to cash management that we feel had, and willcontinue to have, a positive impact on cash from operations.

Cash used in investing activities was relativelyconstant from 2003 to 2004 and consisted principally of investments in our ERPsystem.

Cash used in financingactivities of $9.1 million during 2004 was due primarily to the net payments onour line-of-credit of $11.6 million. This amount was partially offset by $3.4million in proceeds from stock options and employee stock purchase planactivity. During 2003, we received cash proceeds of $5.3 million from netborrowings and used $4.0 million in the first half of 2003 to purchase GTSI’scommon stock from third party shareholders. During the year ended December 31,2004, we did not purchase any GTSI common stock.

*Bank CreditFacility*

We have a $125 million credit facility with a group ofbanks (the “Credit Facility”). The Credit Facility includes a revolving line ofcredit (the “Revolver”) and a provision for inventory financing of vendorproducts (the “Wholesale Financing Facility”). The Credit Facility, unlessterminated earlier, will continue after the maturity date of February 28,2006 from year to year, unless any party gives the other party written noticeof termination not less than 90 days prior to the start of a new renewal period.We are currently negotiating with our lead lender to increase the size of theCredit Facility and add other partners. We expect to conclude thesenegotiations during the first half of 2005. Borrowing under the Revolver islimited to 85% of eligible accounts receivable. The Revolver is secured bysubstantially all of our assets. Borrowing under the Wholesale FinancingFacility is limited to 100% of the value of our inventory. The WholesaleFinancing Facility is secured by the underlying inventory. The Credit Facilitycarries an interest rate indexed to London Interbank Offered Rate (“LIBOR”)plus 1.75 percentage points. The Credit Facility also contains certaincovenants as well as provisions specifying compliance with certain quarterlyand annual financial ratios. In 2004, GTSI and its lenders signed threeamendments to the Revolver to add a new lender and add GTSI’s wholly ownedsubsidiaries, Technology Logistics, Inc. and GTSI Financial Services, asborrowers.

At December 31, 2004and 2003, GTSI’s interest rate under the Credit Facility was 4.17% and 2.88%,respectively. We were in compliance with all financial covenants set forth inthe Credit Facility and had available credit of $59.0 million at December 31,2004 and $90.4 million at December 31, 2003.

*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 the first quarter of 2004, we were able topay completely our notes payable to banks. We anticipate that we will continueto rely primarily on operating cash flow, vendor credit and our WholesaleFinancing Facility to finance our operating cash needs. We believe that suchfunds should be sufficient to satisfy our near term anticipated cashrequirements for operations. Nonetheless, we may seek additional sources of capital,including obtaining permanent financing over a longer term at fixed rates, tofinance our working capital requirements or other strategic initiatives. GTSIbelieves that such capital sources will be available to us on acceptable terms,if needed. During 2004 and 2003 we made capital expenditures of $5.5 millionand $6.0 million, respectively, for capitalized consulting costs associatedwith the implementation of our ERP system and the purchase of software forinternal use, respectively.

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**ContractualObligations (in millions)**
| ** **                     | ** ** | **Total**        | ** ** | **Less Than  1 Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years**   | ** ** |
|--------------------------------|------------|------------------|------------|---------------------------------|------------|----------------|------------|------------------|------------|
| Operating Lease Obligations    |       | $  8.0 |       |                            | $ 2.9 |           |       | $  3.8 |       | $  1.3 |   |
| Notes Payable to Banks         |       | 1.2              |       |                            | 1.2        |           |       | —           |       | — |   |
| Total Contractual  Obligations |       | $  9.2 |       |                            | $ 4.1 |           |       | $  3.8 |       | $  1.3 |   |

 

At December 31, 2004GTSI was obligated under an operating lease to provide our landlord with aletter of credit in the amount of $0.8 million as a security deposit for all tenantimprovements associated with the lease. In February, 2005 an amendment to thelease was executed which reduced the letter of credit to $0.2 million. GTSI wasalso obligated to provide a letter of credit in the amount of $1.75 million toguarantee the performance by GTSI of all obligations under a customer contract.This letter of credit will expire on August 31, 2005.

**New Accounting Pronouncements**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 123 (Revised 2004) “Share-Based Payment” (“FAS 123R”), which is arevision of FASB Statement No. 123, “Accounting for Stock-BasedCompensation.” FAS 123R supersedes Accounting Principal Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB 25”) and its relatedimplementation guidance. Generally, the approach to accounting in FAS 123Rrequires all share-based payments to employees, including grants of employeestock options, to be recognized in the financial statements based on thegrant-date fair value of the award. As permitted by FAS No. 123, GTSIcurrently accounts for share-based payments to employees using the intrinsicvalue provisions of APB 25 and, as such, generally recognizes no compensationcosts for employee stock options. Accordingly, the adoption of FAS 123R’s fairvalue method will have a significant impact on our results of operations,although it will have no impact on our overall financial position. The impactof FAS 123R cannot be predicted at this time because it will depend on levelsof share-based payments granted in the future. However, had we adopted FAS 123Rin prior periods, the impact of that standard would have approximated theimpact of FAS No. 123 as described in the disclosure of pro forma netincome and earnings per share in Note 1G to our consolidated financialstatements in Part II, Item 8 of this Form 10-K. FAS 123R alsorequires the benefits of tax deductions in excess of recognized compensationcost to be reported as a financing cash flow, rather than as an operating cashflow as required under current literature. This requirement will reduce netoperating cash flows and increase net financing cash flow in periods afteradoption. FAS 123R is effective as of the beginning of the first interim orannual reporting period that begins after June 15, 2005 and we will adoptthe standard beginning July 1, 2005. The Statement offers severalalternatives for implementation. At this time, management plans to use themodified prospective transition method. We are also evaluating the impact ofFAS 123R on our employee stock purchaseplan and may decrease ourcurrent 15% upfront purchase discount to employees.

In November 2004, theFASB issued SFAS No. 151 “Inventory Costs, an amendment of APB No. 43,Chapter 4,” (“FAS 151”) which clarifies the types of costs that should beexpensed rather than capitalized as inventory. The amendments made by FAS 151also clarify the circumstances under which fixed overhead costs associated withoperating facilities used in inventory processingshould be capitalized. FAS 151 is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. Earlier application ispermitted for inventory costs incurred during fiscal years beginning after November 24,2004. We are presently analyzing the potential impact of this statement but donot expect the adoption of FAS 151 will have a significant impact on ourfinancial position or results of operations.

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**Outlook**

As of December 31, 2004, our salessurpassed $1 billion for the first time. We have initiated a strategicthree-year growth plan designed to capitalize on the government’s heighteneddemand for IT services and we plan to double our revenue to $2 billion, improveour productivity and increase our gross margins. To double our sales we willcontinue to leverage the strong growth of personnel in our sales and marketingorganization. In addition, we are selectively, but aggressively, hiringtalented employees and expect our headcount to reach approximately 950employees by the end of 2005. We expect to expand our sales from leasearrangements for IT products and solutions in 2005. We have essentiallycompleted the build-out of our ERP system. After full testing and retesting,extensive training and documentation of new work processes for SOX compliance,we plan to implement the final phase of our ERP capabilities throughout GTSI inthe second quarter of 2005.

In addition to the implementation of the final phaseof our ERP system, several other initiatives are underway to position GTSI toreach our strategic plan goal of increased productivity including proactivesupply-chain management; customer, deal, and vendor profitability assessments;and order management improvements. Management is also evaluating various CRMsolutions, including the future use of our existing CRM platform. If we selecta new CRM Solution, we may incur an impairment charge for the write-off of ourexisting CRM software.

We believe we can makesignificant improvements to net income. First, additional sales are expected toimprove net income. Second, improved marginpercentages are expected to increase bottom line growth. And third, we believeour productivity improvements will lower SG&A expense as a percentage of sales and improve net incomemargin. 

**ITEM 7A.   QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

GTSI had a $125 million credit facility indexed atLIBOR plus 1.75 percentage points as of December 31, 2004. This variablerate credit facility subjects GTSI to potential borrowing cost exposureresulting from changes in interest rates. In recent years, we have not borrowedsuch significant amounts that any movement in interest rates has had a materialeffect on our earnings or cash flows. Accordingly, at current borrowing levels,we do not believe that any move in interest rates would have such an effect. IfGTSI were to significantly increase borrowings under its Credit Facility, thenfuture interest rate changes could potentially have such a material impact onearnings.

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**ITEM 8.   FINANCIAL STATEMENT AND SUPPLEMENTARYDATA**

**Report of Independent Registered Public AccountingFirm**

To the Board of Directors and Stockholders of GTSICorp.:

We have audited the accompanying consolidated balancesheets of GTSI Corp. and subsidiaries as of December 31, 2004 and 2003 andthe related consolidated statements of operations, changes in stockholders’equity and cash flows for each of the three years in the period ended December 31,2004. Our audit also included the financial statement schedule listed in theIndex at Item 15(a). These financial statements and the financial statementschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements and the financialstatement 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. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of GTSI Corp. and subsidiaries as of December 31, 2004and 2003, and the consolidated results of their operations and their cash flowsfor each of the three years in the period ended December 31, 2004 inconformity with U.S. generally accepted accounting principles. Also, in ouropinion, the related financial statement schedule, when considered in relationto the basic financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

As discussed in Note 1 to the financial statements, in2003, the Company changed its method of accounting for certain considerationreceived from vendors.

Wealso have audited, in accordance with the standards of the Public AccountingOversight Board (United States), the effectiveness of GTSI Corp.’s internalcontrol over financial reporting as of December 31, 2004, based oncriteria established in Internal Control—Integrated Framework used by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated March 11, 2005 expressed an unqualified opinion thereon.
|                     | /s/ Ernst & Young LLP |
|---------------------|--------------------------------|
| McLean, Virginia    |
| March 11, 2005 |

 

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**GTSI CORP.CONSOLIDATED BALANCE SHEETS(In thousands, except share data)**
| ** **                                                                                                                                                                                                          | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                          | ** ** | **2004**              | ** ** | **2003**              | ** ** |
| **ASSETS**                                                                                                                                                                                                          | ** ** |                  | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current assets:                                                                                                                                                                                                     | ** ** |                  | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Cash                                                                                                                                                                                                           |       |                  | $          | 397                   | ** ** |   |   | $ | 177 | ** ** |   |
| Accounts receivable, net                                                                                                                                                                                            |       |                  | 202,742    | ** **            |       |   | 172,370 | ** ** |   |
| Leases receivable, net                                                                                                                                                                                              |       |                  | 7,864      | ** **            |       |   | 9,618 | ** ** |   |
| Merchandise inventories                                                                                                                                                                                             |       |                  | 59,184     | ** **            |       |   | 55,987 | ** ** |   |
| Other current assets                                                                                                                                                                                                |       |                  | 9,616      | ** **            |       |   | 15,490 | ** ** |   |
| Total current assets                                                                                                                                                                                                |       |                  | 279,803    | ** **            |       |   | 253,642 | ** ** |   |
| Property and equipment, net                                                                                                                                                                                         |       |                  | 15,183     | ** **            |       |   | 10,670 | ** ** |   |
| Other assets                                                                                                                                                                                                        |       |                  | 1,400      | ** **            |       |   | 4,449 | ** ** |   |
| Total assets                                                                                                                                                                                                        |       |                  | $          | 296,386               | ** ** |   |   | $ | 268,761 | ** ** |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                      |       |                  |       | ** **            |       |   |   | ** ** |   |
| Current liabilities:                                                                                                                                                                                                |       |                  |       | ** **            |       |   |   | ** ** |   |
| Notes payable to banks                                                                                                                                                                                              |       |                  | $          | 1,179                 | ** ** |   |   | $ | 12,813 | ** ** |   |
| Accounts payable                                                                                                                                                                                                    |       |                  | 173,218    | ** **            |       |   | 152,435 | ** ** |   |
| Accrued liabilities                                                                                                                                                                                                 |       |                  | 14,734     | ** **            |       |   | 11,168 | ** ** |   |
| Deferred revenue                                                                                                                                                                                                    |       |                  | 9,216      | ** **            |       |   | 8,323 | ** ** |   |
| Accrued warranty liabilities                                                                                                                                                                                        |       |                  | 2,429      | ** **            |       |   | 4,555 | ** ** |   |
| Total current liabilities                                                                                                                                                                                           |       |                  | 200,776    | ** **            |       |   | 189,294 | ** ** |   |
| Other liabilities                                                                                                                                                                                                   |       |                  | 3,473      | ** **            |       |   | 1,522 | ** ** |   |
| Total liabilities                                                                                                                                                                                                   |       |                  | 204,249    | ** **            |       |   | 190,816 | ** ** |   |
| Commitments and  contingencies—See Note 14                                                                                                                                                                     |       |                  |       | ** **            |       |   |   | ** ** |   |
| 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 8,987,643 outstanding at December 31, 2004; and  9,806,084 issued and 8,505,045 outstanding at December 31, 2003 |       |                  | 49         | ** **            |       |   | 49 | ** ** |   |
| Capital in excess of par value                                                                                                                                                                                      |       |                  | 46,817     | ** **            |       |   | 45,911 | ** ** |   |
| Retained earnings                                                                                                                                                                                                   |       |                  | 50,395     | ** **            |       |   | 40,131 | ** ** |   |
| Treasury stock, 818,441 shares at December 31,  2004 and 1,301,039 shares at December 31, 2003, at cost                                                                                                   |       |                  | (5,124     | )                     |       |   | (8,146 | ) |   |
| Total stockholders’ equity                                                                                                                                                                                     |       |                  | 92,137     | ** **            |       |   | 77,945 | ** ** |   |
| Total liabilities  and stockholders’ equity                                                                                                                                                                    |       |                  | $          | 296,386               | ** ** |   |   | $ | 268,761 | ** ** |   |

;x

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

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**GTSI CORP.CONSOLIDATED STATEMENTS OFOPERATIONS(In thousands, except per share data)**
| ** **                                          | ** ** | ** For the Years Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2004**                                                            | ** ** | **2003** | ** ** | **2002** | ** ** |
| SALES                                               |       | $                                                                   | 1,076,148  | ** ** | $ | 954,118 |   | $ | 934,730 |   |
| COST OF SALES                                       |       | 954,143                                                             | ** ** | 857,334 |   | 857,105 |   |
| GROSS MARGIN                                        |       | 122,005                                                             | ** ** | 96,784 |   | 77,625 |   |
| SELLING, GENERAL & ADMINISTRATIVE EXPENSES |       | 110,855                                                             | ** ** | 88,347 |   | 66,499 |   |
| IMPAIRMENT CHARGE                                   |       | —                                                              | ** ** | 5,972 |   | — |   |
| TOTAL OPERATING  EXPENSES                           |       | 110,855                                                             | ** ** | 94,319 |   | 66,499 |   |
| INCOME FROM OPERATIONS                              |       | 11,150                                                              | ** ** | 2,465 |   | 11,126 |   |
| INTEREST AND OTHER INCOME                           |       | ** **                                                          | ** ** |   |   |   |   |
| Interest and other income                           |       | 5,880                                                               | ** ** | 3,119 |   | 5,198 |   |
| Interest and other expense                          |       | (311                                                                | **)**      | (287 | ) | (678 | ) |
| Interest and other income, net                      |       | 5,569                                                               | ** ** | 2,832 |   | 4,520 |   |
| INCOME BEFORE INCOME TAXES                          |       | 16,719                                                              | ** ** | 5,297 |   | 15,646 |   |
| INCOME TAX PROVISION                                |       | 6,455                                                               | ** ** | 2,118 |   | 6,113 |   |
| NET INCOME                                          |       | $                                                                   | 10,264     | ** ** | $ | 3,179 |   | $ | 9,533 |   |
| EARNINGS PER SHARE                                  |       | ** **                                                          | ** ** |   |   |   |   |
| Basic                                               |       | $                                                                   | 1.18       | ** ** | $ | 0.38 |   | $ | 1.15 |   |
| Diluted                                             |       | $                                                                   | 1.09       | ** ** | $ | 0.35 |   | $ | 1.04 |   |
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING          |       | ** **                                                          | ** ** |   |   |   |   |
| Basic                                               |       | 8,664                                                               | ** ** | 8,349 |   | 8,302 |   |
| Diluted                                             |       | 9,388                                                               | ** ** | 9,116 |   | 9,156 |   |

 

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

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**GTSI CORP.CONSOLIDATED STATEMENTS OFCHANGES IN STOCKHOLDERS’ EQUITYFor the Years Ended December 31, 2004, 2003 and 2002(In thousands)**
| ** **                              | ** ** | **Common Stock**   | ** ** | ** Capital in ** | ** ** | ** **                    | ** ** | ** **             | ** ** | **Total**           | ** ** |
|-----------------------------------------|------------|-------------------------|------------|---------------------------------|------------|-------------------------------|------------|------------------------|------------|---------------------|------------|
| ** **                              | ** ** | **Shares  Outstanding** | ** ** | **Amount**                      | ** ** | **Excess of  Par Value** | ** ** | **Retained  Earnings** | ** ** | **Treasury  Stock** | ** ** | **Stockholders’  Equity** | ** ** |
| **Balance,  December 31, 2001**    |       |                    | 8,163      |                            |       |                          | $          | 49                     |       |                |       | $ | 43,434 |   |   | $ | 27,419 |   | $ | (7,837 | ) |   | $ | 63,065 |   |   |
| Stock options  exercised                |       |                    | 406        |                            |       |                          | —     |                   |       |                | 201        |   |   | — |   | 2,298 |   |   | 2,499 |   |   |
| Employee stock  purchase plan           |       |                    | 141        |                            |       |                          | —     |                   |       |                | 120        |   |   | — |   | 387 |   |   | 507 |   |   |
| Common stock  repurchase                |       |                    | (100       | )                               |       |                          | —     |                   |       |                | —     |   |   | — |   | (797 | ) |   | (797 | ) |   |
| Tax benefit of  stock options exercised |       |                    | —     |                            |       |                          | —     |                   |       |                | 684        |   |   | — |   | — |   |   | 684 |   |   |
| Net income                              |       |                    | —     |                            |       |                          | —     |                   |       |                | —     |   |   | 9,533 |   | — |   |   | 9,533 |   |   |
| **Balance, December 31, 2002**     |       |                    | 8,610      |                            |       |                          | 49         |                   |       |                | 44,439     |   |   | 36,952 |   | (5,949 | ) |   | 75,491 |   |   |
| Stock options  exercised                |       |                    | 355        |                            |       |                          | —     |                   |       |                | 155        |   |   | — |   | 882 |   |   | 1,037 |   |   |
| Employee stock  purchase plan           |       |                    | 147        |                            |       |                          | —     |                   |       |                | 203        |   |   | — |   | 891 |   |   | 1,094 |   |   |
| Common stock  repurchase                |       |                    | (607       | )                               |       |                          | —     |                   |       |                | —     |   |   | — |   | (3,970 | ) |   | (3,970 | ) |   |
| Tax benefit of  stock options exercised |       |                    | —     |                            |       |                          | —     |                   |       |                | 1,114      |   |   | — |   | — |   |   | 1,114 |   |   |
| Net income                              |       |                    | —     |                            |       |                          | —     |                   |       |                | —     |   |   | 3,179 |   | — |   |   | 3,179 |   |   |
| **Balance, December 31, 2003**     |       |                    | 8,505      |                            |       |                          | 49         |                   |       |                | 45,911     |   |   | 40,131 |   | (8,146 | ) |   | 77,945 |   |   |
| Stock options  exercised                |       |                    | 398        |                            |       |                          | —     |                   |       |                | (713       | ) |   | — |   | 2,489 |   |   | 1,776 |   |   |
| Employee stock  purchase plan           |       |                    | 85         |                            |       |                          | —     |                   |       |                | 262        |   |   | — |   | 533 |   |   | 795 |   |   |
| Stock based  compensation               |       |                    | —     |                            |       |                          | —     |                   |       |                | 480        |   |   | — |   | — |   |   | 480 |   |   |
| Tax benefit of  stock options exercised |       |                    | —     |                            |       |                          | —     |                   |       |                | 877        |   |   | — |   | — |   |   | 877 |   |   |
| Net income                              |       |                    | —     |                            |       |                          | —     |                   |       |                | —     |   |   | 10,264 |   | — |   |   | 10,264 |   |   |
| **Balance,  December 31, 2004**    |       |                    | 8,988      |                            |       |                          | $          | 49                     |       |                |       | $ | 46,817 |   |   | $ | 50,395 |   | $ | (5,124 | ) |   | $ | 92,137 |   |   |

 

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

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**GTSI CORP.CONSOLIDATED STATEMENTS OFCASH FLOWS(In thousands)**
| ** **                                                                         | ** ** | **For the Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                                                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                         |       |                                                          |       |   |   |   |   |
| Net Income                                                                         |       | $                                                             | 10,264     |   | $ | 3,179 |   | $ | 9,533 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                                          |       |   |   |   |   |
| Depreciation and amortization                                                      |       | 3,022                                                         |       | 2,874 |   | 3,543 |   |
| Impairment charge                                                                  |       | —                                                        |       | 5,972 |   | — |   |
| Loss on disposal of property and equipment                                         |       | —                                                        |       | 64 |   | 593 |   |
| Stock based compensation                                                           |       | 480                                                           |       | — |   | — |   |
| Deferred taxes                                                                     |       | 4,381                                                         |       | 502 |   | (421 | ) |
| Tax benefit of stock options exercised                                             |       | 877                                                           |       | 1,114 |   | 684 |   |
| Reversal of vendor payables                                                        |       | (10,120                                                       | )          | — |   | — |   |
| Changes in  operating assets and liabilities:                                      |       |                                                          |       |   |   |   |   |
| Accounts receivable                                                                |       | (30,372                                                       | )          | (41,106 | ) | (779 | ) |
| Leases receivable                                                                  |       | 1,754                                                         |       | (1,410 | ) | 28,851 |   |
| Merchandise inventories                                                            |       | (3,197                                                        | )          | 52 |   | 5,395 |   |
| Other assets                                                                       |       | 6,937                                                         |       | (2,271 | ) | (5,860 | ) |
| Accounts payable                                                                   |       | 30,903                                                        |       | 30,003 |   | (28,946 | ) |
| Accrued liabilities and warranty liabilities                                       |       | 2,333                                                         |       | 5,728 |   | 2,397 |   |
| Other liabilities                                                                  |       | (444                                                          | )          | (118 | ) | (763 | ) |
| Net cash provided  by operating activities                                         |       | 16,818                                                        |       | 4,583 |   | 14,227 |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                         |       |                                                          |       |   |   |   |   |
| Purchase of  property and equipment                                                |       | (7,535                                                        | )          | (7,873 | ) | (3,871 | ) |
| Net cash used in  investing activities                                             |       | (7,535                                                        | )          | (7,873 | ) | (3,871 | ) |
| **CASH  FLOWS FROM FINANCING ACTIVITES:**                                          |       |                                                          |       |   |   |   |   |
| (Payment of)  proceeds from bank notes                                             |       | (11,634                                                       | )          | 5,274 |   | (12,647 | ) |
| Purchase of  treasury stock                                                        |       | —                                                        |       | (3,970 | ) | (797 | ) |
| Proceeds from  employee stock purchase plan                                        |       | 795                                                           |       | 1,094 |   | 507 |   |
| Proceeds from  exercises of stock options                                          |       | 1,776                                                         |       | 1,037 |   | 2,499 |   |
| Net cash (used  in) provided by financing activities                               |       | (9,063                                                        | )          | 3,435 |   | (10,438 | ) |
| NET INCREASE (DECREASE) IN CASH                                                    |       | 220                                                           |       | 145 |   | (82 | ) |
| CASH AT BEGINNING  OF YEAR                                                         |       | 177                                                           |       | 32 |   | 114 |   |
| CASH AT END OF  YEAR                                                               |       | $                                                             | 397        |   | $ | 177 |   | $ | 32 |   |
| CASH PAID DURING  THE YEAR FOR:                                                    |       |                                                          |       |   |   |   |   |
| Interest                                                                           |       | $                                                             | 214        |   | $ | 299 |   | $ | 770 |   |
| Income taxes                                                                       |       | $                                                             | 2,708      |   | $ | 1,796 |   | $ | 4,347 |   |

 

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

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**GTSI CORP.NOTES TO CONSOLIDATED FINANCIALSTATEMENTSFor the Years Ended December 31, 2004, 2003 and 2002**

**1.   SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

**A.   Nature of Operations**

GTSI Corp. (collectively with its subsidiaries, “GTSI”or the “Company”) is a recognized IT solutions leader, focusing predominantlyon federal, state, and local government customers worldwide. For more than 20years, the Company has delivered hardware, software and peripherals to publicsector customers by teaming with global IT leaders like HP, Panasonic,Microsoft, Sun Microsystems, and Cisco. GTSI helps its customers do their jobsmore effectively through a combination of a broad range of products andservices, an extensive contract portfolio, and the Company’s ISO 9001:2000Registered logistics.

GTSI uses its unique Enterprise Technology Practicesof technical experts to support a wide range of integrated IT solutions in suchareas as high performance computing, advanced networking, mobile and wireless,web portals, high availability storage, and information assurance.Additionally, GTSI markets and sells products through its web site, *gtsi.com*, providing convenient, customized shopping zones tomeet the unique and changing needs of its customers.

GTSI’s primary business isconducted from a combined headquarters and distribution center located inChantilly, Virginia, outside of Washington DC, and has offices throughout theUnited States as well as overseas in Germany.

**B.   Principles of Consolidation**

During 2004, the Companycreated two new wholly owned subsidiaries: GTSI Financial Services, Inc.and Technology Logistics, Inc. (“TLI”). The consolidated financialstatements include the accounts of GTSI and all of its wholly ownedsubsidiaries. All intercompany transactions and balances have been eliminated. Investmentsin which the Company does not control the investee but has the ability toexercise significant influence over its operating and financial policies areaccounted for using the equity method of accounting.

**C.   Revenue Recognition**

Revenue is recognized when a customer order has beenexecuted, the sales price is fixed and determinable, delivery of services orproducts has occurred, and collection of the sales price is considered probableand can be reasonably estimated. Revenue from hardware and software productsales is recognized when title to the products sold passes to the customer.Based upon the Company’s standard shipping terms, FOB destination, title passesupon the customer’s receipt of the products. The Company sells third-partyservices, such as maintenance contracts, and recognizes revenue on a net basisat the time of sale. The Company also sells extended warranty contracts tocustomers that extend the warranty offered by the manufacturer for additionalyears. Revenue from extended warranty contracts is recorded as deferred revenueand subsequently recognized over the term of the contract. Revenue from otherservices are recognized when the services are complete or on a time andmaterials basis. The Company may also enter into sales arrangements withcustomers that contain multiple elements or deliverables such as hardware,software, and services. The Company recognizes revenue from these transactionsin accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21, “RevenueArrangements with Multiple Deliverables.” Judgments and estimates are criticalto determine if the multiple elements should be accounted for as separateaccounting units. These judgments may relate to determining if the delivereditem has stand alone value, if there is objective and reliable evidence of thefair value of undelivered items, and if delivery and performance of undelivereditems is probable and substantially in the control of the 

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vendor. Payments received before delivery has occurredor services have been rendered are recorded as deferred revenue.

In accordance with EITF00-10, “Accounting for Shipping and Handling Fees and Costs,” the Companyrecords freight billed to customers as Sales and the related shipping costs asCost of Sales.

**D.   Cash**

Cash consists of all cashbalances. Included in accounts payable at December 31, 2004 and 2003 areapproximately $17.7 million and $7.7 million, respectively, which representchecks that were issued but had not cleared that would otherwise be considereda net overdraft.

**E.   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. The allowance for non-collection of receivables is based onhistorical trade receivable write-off experience. As of December 31, 2004and 2003, trade accounts receivable from the federal government were $143.6million and $122.9 million, respectively. Of these balances, trade receivablesfrom the Department of Defense accounted for 43.7% and 51.6% in 2004 and 2003,respectively. No other single government department accounted for 10% or more ofaccounts receivable. Credit losses have been insignificant and withinmanagement’s expectations.

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

Long-lived assets,consisting primarily of furniture, equipment and capitalized software, aretested for recoverability whenever events or changes in circumstances indicatethat their carrying amount may not be recoverable in accordance with Statementof Financial Accounting Standards (“SFAS”) No. 144 “Accounting for theImpairment or Disposal of Long-Lived Assets.” Recoverability of long-livedassets is assessed by a comparison of the carrying amount to the estimated undiscountedfuture net cash flows expected to result from the use of the assets and theireventual disposition. If estimated undiscounted future net cash flows are lessthan the carrying amount, the asset is considered impaired and a loss would berecognized based on the amount by which the carrying value exceeds the fairvalue of the asset.

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**G.   Stock-Based Compensation**

TheCompany accounts for stock-based compensation using the intrinsic value methodof accounting in accordance with Accounting Principles Board Opinion No. 25“Accounting for Stock Issued to Employees” (“APB 25”) and relatedInterpretations. Accordingly, no compensation cost for stock options granted toemployees was reflected in net income, as all options granted had an exerciseprice equal to the fair market value of the Company’s common stock on the dateof the grant. The following table illustrates, in accordance with theprovisions of SFAS No. 148 “Accounting for Stock-Based Compensation—Transitionand Disclosure” the effect on net income and earnings per share if compensationcosts for the Company’s stock options had been determined based on the fairvalue method consistent with the provisions of SFAS No. 123 “Accountingfor Stock-Based Compensation” (in thousands, except per share data):
| ** **                                                                                                                                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income—as  reported                                                                                                                       |       | $        | 10,264     |     | $          | 3,179    |       | $ | 9,533 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (1,843   | )          | (1,647   | )          | (943     | )          |
| Net earnings—pro  forma                                                                                                                       |       | $        | 8,421      |     | $          | 1,532    |       | $ | 8,590 |   |
| Earnings per  share—as reported                                                                                                               |       |     |       |     |       |     |       |
| Basic                                                                                                                                              |       | $        | 1.18       |     | $          | 0.38     |       | $ | 1.15 |   |
| Diluted                                                                                                                                            |       | $        | 1.09       |     | $          | 0.35     |       | $ | 1.04 |   |
| Earnings per share—pro  forma                                                                                                                 |       |     |       |     |       |     |       |
| Basic                                                                                                                                              |       | $        | 0.97       |     | $          | 0.18     |       | $ | 1.03 |   |
| Diluted                                                                                                                                            |       | $        | 0.90       |     | $          | 0.17     |       | $ | 0.94 |   |

 

The Company modified its definition of an employee inits stock option plans to include employees of any entity that GTSI holds atleast a 35% ownership interest. This modification triggered the requirement inFinancial Accounting Standards Board (“FASB”) Interpretation No. 44 “Accountingfor Certain Transactions involving Stock Compensation, an interpretation of APB25,” (“FIN 44”) to account for these modified awards as new awards tonon-employees. As prescribed by FIN 44, the Company recorded a charge ofapproximately $480,000 ($295,000 net of taxes) during 2004 for stock-basedcompensation to non-employees based on the fair value method. No stockcompensation expense to non-employees was included in net income in 2003 or2002.

Fordisclosure purposes, the fair value of each stock option granted is estimatedon the date of grant using the Black-Scholes option-pricing model. Under theBlack-Scholes model, the total value of options granted in 2004, 2003 and 2002was $2.9 million, $4.3 million, and $2.8 million, respectively. These optionswould be amortized on a pro-forma basis based on the vesting schedule specifiedin the option agreement. The fair value of the Company’s stock-based optionawards to employees was estimated assuming no expected dividends and thefollowing weighted-average assumptions:
| ** **                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected life (in  years) |       | 4.2      |       | 4.0      |       | 4.0      |       |
| Risk free  interest rate  |       | 3.48     | %          | 3.34     | %          | 2.53     | %          |
| Expected volatility       |       | 62.7     | %          | 78.1     | %          | 77.95    | %          |

 

Under the Black-ScholesOption pricing model, the fair value of options granted during 2004, 2003 and2002 was $5.84, $6.24, and $5.55, respectively.

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**H. Income Taxes**

The Company accounts forincome taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”(“FAS 109”). Under FAS 109, deferred tax assets and liabilities are computedbased on the estimated future tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. FAS 109 requires that a valuationallowance be established when necessary to reduce deferred tax assets toamounts expected to be realized.

**I. Use of Estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at year end, and the reportedamount of revenue and expenses during the year. Actual results could differfrom those estimates. Management’s estimates and assumptions are evaluated onan ongoing basis and are based on historical experience, current conditions andavailable information. Significant items subject to such estimates andassumptions include valuation allowances for receivables and inventories, andreserves for future costs to be incurred under the Company’s warranty programs.

**J. Marketing Development and CooperativeAdvertising Funds**

The costs of advertisingare expensed as incurred. Certain vendors provide GTSI with sales incentiveprograms. Generally, the funds received under these programs are determinedbased on the Company’s purchases and/or sales of the vendor’s product. Thefunds are earned upon performance of specific promotional programs or uponcompletion of predetermined objectives dictated by the vendor.

On January 1, 2003the Company adopted EITF Issue No. 02-16, “Accounting for ConsiderationReceived from a Vendor by a Customer (Including a Reseller of the Vendor’sProducts)” (“EITF 02-16”). This pronouncement requires that consideration fromvendors, such as advertising support funds and sales volume incentives, beaccounted for as a reduction to cost of sales unless certain requirements aremet. In accordance with EITF 02-16, the Company recorded certain vendorconsiderations received in 2004 and 2003 as a reduction of MerchandiseInventories and a subsequent reduction in Cost of Sales when the relatedproduct is sold. During 2002, the Company recorded these items as a reductionto Selling, General & Administrative expenses. If EITF 02-16 wasapplied to 2002, the impact would have been a reduction to net income ofapproximately $13,000.

**K. FairValue of Financial Instruments**

At December 31, 2004and 2003, the recorded values of financial instruments such as notes payable tobanks approximated their fair values based on the short-term maturities ofthese instruments. As of December 31, 2004 and 2003, the Company believesthe carrying amount of its current and long-term lease receivables approximatestheir value since the lease receivables are discounted at an interest rate thatapproximates market.

**L. NewAccounting Pronouncements**

In December 2004, theFASB issued SFAS No. 123 (Revised 2004) “Share-Based Payment” (“FAS 123R”),which is a revision of FASB Statement No. 123, “Accounting for Stock-BasedCompensation.” FAS 123R supersedes APB 25 and its related implementationguidance. Generally, the approach to accounting in FAS 123R requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the financial statements based on the grant-date fair valueof the award. As permitted by FAS No. 123, the Company currently accountsfor share-based payments to employees using the intrinsic value provisions ofAPB 25 and, as such, generally recognizes no 

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compensation costs for employeestock options. Accordingly, the adoption of FAS 123R’s fair value method willhave a significant impact on the Company’s results of operations, although itwill have no impact on GTSI’s overall financial position. The impact ofadoption of FAS 123R cannot be predicted at this time because it will depend onlevels of share-based payments granted in the future. However, had the Companyadopted FAS 123R in prior periods, the impact of that standard would haveapproximated the impact of FAS No. 123 as described in the disclosure ofpro forma net income and earnings per share in Note 1G to GTSI’s consolidatedfinancial statements. FAS123R also requires the benefits of tax deductions inexcess of recognized compensation cost to be reported as a financing cash flow,rather than as an operating cash flow as required under current literature.This requirement will reduce net operating cash flows and increase netfinancing cash flow in periods after adoption. FAS 123R is effective as of thebeginning of the first interim or annual reporting period that begins after June 15,2005 and GTSI will adopt the standard beginning July 1, 2005. TheStatement offers several alternatives for implementation. At this time,management plans to use the modified prospective transition method. The Companyis also evaluating the impact of FAS 123R to its employee stock purchase plan and may decrease the current 15% upfront purchasediscount to employees.

In November 2004, theFASB issued SFAS No. 151 “Inventory Costs, an amendment of APB No. 43,Chapter 4,” (“FAS 151”) which clarifies the types of costs that should beexpensed rather than capitalized as inventory. The amendments made by FAS 151also clarify the circumstances under which fixed overhead costs associated withoperating facilities used in inventory processing should be capitalized. FAS151 is effective for inventory costs incurred during fiscal years beginningafter June 15, 2005. Earlier application is permitted for inventory costsincurred during fiscal years beginning after November 24, 2004. TheCompany is presently analyzing the potential impact of this statement but doesnot expect the adoption of FAS 151 will have a significant impact on itsfinancial position or results of operations.

**M. Reclassifications**

Certain amounts reportedin previous years have been reclassified to conform to the 2004 presentation.

**2. AccountsReceivable**

Accountsreceivable consists of the following at December 31, (in thousands):
| ** **                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Trade accounts  receivable             |       | $        | 180,329    |     | $          | 153,386 |   |
| Vendor and other  receivables          |       | 23,422   |       | 19,683   |       |
| Total accounts receivable              |       | 203,751  |       | 173,069  |       |
| Less: Allowance  for doubtful accounts |       | (1,009   | )          | (699     | )          |
| Accounts  receivable, net              |       | $        | 202,742    |     | $          | 172,370 |   |

 

Vendorand other receivables primarily result from items billed to suppliers undervarious sales incentive programs.

**3. LeasesReceivable**

The Company sells productsto certain customers under sales-type lease arrangements for terms of two orthree years. The Company accounts for its sales-type leases according to theprovisions of SFAS No. 13 “Accounting for Leases” and, accordingly, recognizes currentand long-term lease receivables, net of unearned finance income, on theaccompanying balance sheets. GTSI periodically sells lease receivables tovarious unrelated financing companies and accounts for those sales inaccordance with SFAS No. 140 “Accounting for the Transfers and Servicingof Financial Assets and Extinguishments of Liabilities—a Replacement of FASBStatement No. 125” (“FAS 140”). In accordance with the criteria set forthin 

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FAS 140, leasereceivables amounting to $39.4 million in 2004 and $19.5 million in 2003 wereaccounted for as sales and, as a result, the related receivables have beenexcluded from the accompanying balance sheets.

Interest and other incomeincludes $3.7 million, $0.5 million and $1.4 million in 2004, 2003 and 2002,respectively, of interest income from lease receivables.

Totalfuture minimum lease payments and unearned finance income due from customersunder lease arrangements areas follows (in thousands):
| ** **                  | ** ** | **Total Lease  Payments Due  to GTSI** | ** ** | **Unearned  Finance Income** | ** ** | **Net Principal Due** | ** ** |
|-----------------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| 2005                        |       |                                                  | $          | 7,951                             |       |                            |       | $ | 87 |   |   |   | $ | 7,864 |   |   |
| 2006                        |       |                                                  | 445        |                              |       |                            | 36         |   |   |   | 409 |   |   |
| 2007                        |       |                                                  | 128        |                              |       |                            | 8          |   |   |   | 120 |   |   |
| Total lease  receivables    |       |                                                  | $          | 8,524                             |       |                            |       | $ | 131 |   |   |   | 8,393 |   |   |
| Less current  portion       |       |                                                  |       |                              |       |                            |       |   |   |   | 7,864 |   |   |
| Long-term lease  receivable |       |                                                  |       |                              |       |                            |       |   |   |   | $ | 529 |   |   |

 

**4. Property andEquipment**

Propertyand equipment are stated at cost less accumulated depreciation andamortization. Depreciation and amortization are calculated using thestraight-line method over estimated useful lives. Furniture, equipment,software and ERP systemuseful lives range from three to ten years. The useful life for leaseholdimprovements is the lesser of the term of the lease or the life of theimprovement. Costs for maintenance and repairs are charged to expense whenincurred. Property and equipment consists of the following at December 31(in thousands):
| ** **                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Office furniture  and equipment                 |       | $        | 15,019     |     | $          | 13,561 |   |
| Computer software                               |       | 11,901   |       | 11,829   |       |
| Enterprise  Resource Planning System            |       | 9,482    |       | 3,976    |       |
| Leasehold  improvements                         |       | 5,184    |       | 5,041    |       |
|                                            |       | 41,586   |       | 34,407   |       |
| Less accumulated  depreciation and amortization |       | (26,403  | )          | (23,737  | )          |
| Property and equipment,  net                    |       | $        | 15,183     |     | $          | 10,670 |   |

 

Depreciation andamortization expense was $3.0 million in 2004, $2.9 million in 2003 and $3.5million in 2002. During 2004 the Companybegan amortizing $2.9 million of the $9.5 million ERP system. Theremaining $6.6 million willbegin being amortized in 2005 when the project is scheduled to be completed.

**5. Inventory**

Merchandise inventoriesare valued at the lower of cost or market. Cost is determined using a weightedaverage method. During the third quarter of 2004, GTSI recorded a charge of approximately$0.7 million in Cost of Sales for the loss of inventory and filed acomprehensive claim with its insurance carrier. The Company received proceedsof $0.6 million from the insurance settlement during the fourth quarter of2004, resulting in a net charge to Cost of Sales  in 2004 of$0.1 million  for  this issue.

During October 2004,senior management was informed that certain integrated hardware components weremissing from certain hardware delivered on a customer order. This matter iscurrently under investigation by the Company’s management and it is not clearwhere or when the loss occurred through the supply chain. The Company recordeda charge of approximately $0.6 million in Cost of Sales during 

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the fourth quarterrepresenting the book value of the missing integrated hardware components. GTSIhas filed a comprehensive claim with its insurance carrier and managementbelieves that it is reasonably possible that the Company will recover all, or aportion of, this claim. Should the Company be successful in its collectionefforts, any proceeds collected will be netted against Costof Salesfor financial statement purposes. In accordance with SFAS No. 5 “Accountingfor Contingencies,” no gain contingency has been recorded in GTSI’s financialstatements.

During the second quarterof 2003, the Company’s sales organization was successful in securing an orderfor software inventory that had been reserved for during 2002. As a result, theCompany reversed a $1.4 million reserve.

**6. NotesPayable and Line of Credit**

The Company has a $125million credit facility with a group of banks (the “Credit Facility”). TheCredit Facility includes a revolving line of credit (the “Revolver”) and aprovision for inventory financing of vendor products (the “Wholesale FinancingFacility”). The Credit Facility, unless terminated earlier, will continue afterthe maturity date of February 28, 2006 from year to year, unless any partygives the other party written notice of termination not less than 90 days priorto the start of a new renewal period. Borrowing under the Revolver is limitedto 85% of eligible accounts receivable. The Revolver is secured bysubstantially all of the Company’s assets. Borrowing under the WholesaleFinancing Facility is limited to 100% of the value of GTSI’s inventory. TheWholesale Financing Facility is secured by the underlying inventory. The CreditFacility carries an interest rate indexed to London Interbank Offered Rate (“LIBOR”)plus 1.75 percentage points. The Credit Facility also contains certaincovenants as well as provisions specifying compliance with certain quarterlyand annual financial ratios. In 2004, the Company and its lenders signed threeamendments to the Revolver to add a new lender and add GTSI’s wholly ownedsubsidiaries, TLI and GTSI Financial Services, as borrowers.

At December 31, 2004and 2003, GTSI’s interest rate under the Credit Facility was 4.17% and 2.88%,respectively. The weighted average interest rates for the years ended December 31,2004, 2003 and 2002 were 3.23%, 2.96% and 3.50%, respectively. GTSI was incompliance with all financial covenants set forth in the Credit Facility andhad available credit of $59.0 million at December 31, 2004 and $90.4 million at December 31,2003.

**7. Accounts Payable**

SFAS No. 140 “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities,” states that the judicial release from an obligation results inthe extinguishment of a liability. Upon the expiration of the statute oflimitations in 2004, GTSI was judicially released from obligations whichresulted in the Company derecognizing $10.1 million in aged accrued payables.The impact to GTSI’s financial results was a non-cash increase to gross marginof $10.1 million and an increase to net income of $6.2 million ($0.66 pershare) after taxes were applied.

During 2004, the Companyconducted a comprehensive review of its accounts payable. As a result of thisreview, management concluded that an additional $2.5 million in aged accruedpayables were no longer valid liabilities. The Company reversed theseliabilities, resulting in a $2.5 million increase in gross margin and a $1.5million ($0.17 per share) increase in net income. Management will continue toconduct such a review of its accounts payable on a quarterly basis, one year inarrears.

**8. Stockholders’ Equity**

*Stock Options*

The Company has twostockholder approved combination incentive and non-statutory stock optionplans, the 1994 Stock Option Plan, as amended (“1994 Plan”) and the 1996 StockOption Plan, as amended 

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(“1996 Plan”). These plansprovide for the granting of options to employees (both plans) and non-employeedirectors (only under the 1996 Plan) to purchase up to 2,500,000 and 300,000shares, respectively, of the Company’s common stock. The Company has anotherstockholder approved plan, the 1997 Non-Officer Stock Option Plan (the “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 vehicle thatallows a company without stockholder approval to offer stock options toprospective employees as an inducement 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 typicallyequal the fair market value of the Company’s common stock on the date ofapproval by the Board of Directors.

In January 2003, theCompany agreed that the unvested options held by one officer wouldautomatically vest if a change in control of the Company occurs. The maximumcompensation expense impact, if any, related to this change is $0.8 million.This change results in a new measurement date as required by FASBInterpretation No. 44, “Accounting for Certain Transactions InvolvingStock Compensation—An Interpretation of APB Opinion No. 25.” No compensationexpense was recorded as a result of this modification at that time or to datebecause the Company is unable to estimate whether a change in control willoccur. The compensation expense, if recorded, would not impact the Company’scash flows or stockholders’ equity. On May 14, 2003, the stockholders ofthe Company approved a change to extend the exercise period for certain optionsgranted to its non-employee directors following cessation from the Company tothe earlier of the fifth anniversary of the cessation date or the expirationdate of the respective option. The maximum compensation expense impact, if any,related to these changes, is $1.8 million. On March 18, 2004, the membersof the Company’s Board of Directors formally waived this right, effectivelynegating the potential for compensation expense impact related to the extensionof stock options. Also, during 2003, an executive submitted Company maturestock with a value of $1.1 million previously purchased on the open market topay for the exercise of 100,000 stock options pursuant to the terms of theCompany’s stock option plan, which resulted in a cashless exchange of stockoptions for Company stock.

Thefollowing summary presents changes in the Company’s stock options outstandingunder all plans as of December 31, 2002, 2003 and 2004:
| ** **                             | ** ** | **Number of  Option  Shares** | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** |
|----------------------------------------|------------|------------------------------------|------------|--------------------------------------------------------|------------|
| Outstanding at  January 1, 2002   |       | 2,905,508                          |       |                                                   | $          | 4.55 |   |   |
| Granted                                |       | 572,000                            |       |                                                   | $          | 9.50 |   |   |
| Forfeited or canceled                  |       | (133,417                           | )          |                                                   | $          | 7.47 |   |   |
| Exercised                              |       | (450,982                           | )          |                                                   | $          | 4.17 |   |   |
| Outstanding at  December 31, 2002 |       | 2,893,109                          |       |                                                   | $          | 5.45 |   |   |
| Granted                                |       | 768,833                            |       |                                                   | $          | 10.47 |   |   |
| Forfeited or canceled                  |       | (124,833                           | )          |                                                   | $          | 7.84 |   |   |
| Exercised                              |       | (426,192                           | )          |                                                   | $          | 5.64 |   |   |
| Outstanding at  December 31, 2003 |       | 3,110,917                          |       |                                                   | $          | 6.57 |   |   |
| Granted                                |       | 558,500                            |       |                                                   | $          | 11.28 |   |   |
| Forfeited or canceled                  |       | (223,875                           | )          |                                                   | $          | 9.04 |   |   |
| Exercised                              |       | (397,492                           | )          |                                                   | $          | 4.47 |   |   |
| Outstanding at December 31, 2004  |       | 3,048,050                          |       |                                                   | $          | 7.53 |   |   |

 

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Thefollowing table summarizes information on stock options outstanding at December 31,2004:
| **Options Outstanding**        | ** ** | **Options Exercisable** | ** ** |
|-------------------------------------|------------|------------------------------|------------|
| **Range of  Exercise  Prices** | ** ** | ** **                   | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining Contractual  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $1.43-2.85                          |       | 75,000                       |       |   | 5.4 |   |   |   | $ | 2.81 |   |   | 75,000 |   |   | $ | 2.81 |   |   |
| $2.86-4.28                          |       | 885,550                      |       |   | 1.5 |   |   |   | $ | 3.75 |   |   | 883,050 |   |   | $ | 3.75 |   |   |
| $4.29-5.70                          |       | 276,250                      |       |   | 2.6 |   |   |   | $ | 5.07 |   |   | 274,000 |   |   | $ | 5.08 |   |   |
| $5.71-7.13                          |       | 253,500                      |       |   | 4.6 |   |   |   | $ | 6.26 |   |   | 203,250 |   |   | $ | 6.25 |   |   |
| $7.14-8.55                          |       | 235,500                      |       |   | 6.0 |   |   |   | $ | 8.21 |   |   | 193,500 |   |   | $ | 8.24 |   |   |
| $8.56-9.98                          |       | 218,500                      |       |   | 4.8 |   |   |   | $ | 8.88 |   |   | 50,750 |   |   | $ | 8.84 |   |   |
| $9.99-11.40                         |       | 723,500                      |       |   | 5.2 |   |   |   | $ | 11.01 |   |   | 254,252 |   |   | $ | 11.02 |   |   |
| $11.41-12.83                        |       | 375,250                      |       |   | 6.0 |   |   |   | $ | 12.02 |   |   | 40,250 |   |   | $ | 11.85 |   |   |
| $12.84-14.25                        |       | 5,000                        |       |   | 5.0 |   |   |   | $ | 13.67 |   |   | 2,500 |   |   | $ | 13.67 |   |   |
|                                |       | 3,048,050                    |       |   | 4.0 |   |   |   | $ | 7.53 |   |   | 1,976,552 |   |   | $ | 5.84 |   |   |

 

Thefollowing table sets forth the number of options exercisable and available forgrant as of December 31, 2004:
| **Plan**               | ** ** | ** ** | ** ** | **Options Exercisable** | ** ** | **Options Available  for grant** | ** ** |
|------------------------|------------|------------|------------|------------------------------|------------|--------------------------------------------|------------|
| 1994 plan              |       |       | 39,250     |                         |       |                                       | 1,217      |   |   |
| 1996 plan              |       |       | 1,123,602  |                         |       |                                       | 754,791    |   |   |
| 1997 plan              |       |       | 34,700     |                         |       |                                       | 11,492     |   |   |
| Capitalization Vehicle |       |       | 779,000    |                         |       |                                       | N/A        |   |   |

 

*Employee StockPurchase Plan*

GTSI has established an Employee Stock Purchase Plan (“ESPP”).Eligible employees may elect to set aside, through payroll deduction, up to 15%of their compensation to purchase common stock of the Company. The maximumnumber of shares that an eligible employee may purchase during any offeringperiod is equal to 5% of such employee’s compensation for the 12 calendar-monthperiod prior to the commencement of an offering period divided by 85% of thefair market value of a share of common stock on the first day of the offering period.The ESPP is implemented through one offering during each six-month periodbeginning January 1 and July 1. The ESPP purchase price is 85% of thelower of the fair market value of a share of common stock on the first day orthe last day of the offering period. The Company uses its treasury shares tofulfill the obligation of both the employee withholding and the discount.

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, 2004              |       |       | 40,994     |                                      |       |                    | $          | 8.93 |   |   |
| June 30, 2004                  |       |       | 44,098     |                                      |       |                    | $          | 9.73 |   |   |
| December 31, 2003              |       |       | 81,314     |                                      |       |                    | $          | 7.44 |   |   |
| June 30, 2003                  |       |       | 65,780     |                                      |       |                    | $          | 7.44 |   |   |
| December 31, 2002              |       |       | 77,858     |                                      |       |                    | $          | 6.67 |   |   |
| June 30, 2002                  |       |       | 63,269     |                                      |       |                    | $          | 6.67 |   |   |

 

43

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The weighted average fairmarket value of shares under the ESPP was $9.35 in 2004, $7.44 in 2003, and$6.67 in 2002. GTSI has reserved 1,650,000 shares of common stock for the ESPP,of which 871,107 were available for future issuance as of December 31,2004.

*Purchase of CapitalStock*

The Company purchased $0and $4.0 million of GTSI’s common stock in 2004 and 2003, respectively. Theshares purchased in 2003 were authorized under two stock purchase plansapproved by GTSI’s Board of Directors. In February 2000, the Board ofDirectors approved a plan for the purchase of common stock with a limit of upto $5.25 million. In January 2002, the Board of Directors authorized theuse of up to an additional $5.0 million for the purchase of outstanding sharesof the Company’s common stock, provided the per share price did not exceed themarket price. As of December 31, 2004, $2.7 million remained available foruse in purchasing common stock. Common stock purchased for the Company’streasury are generally reissued upon the exercise of employee stock options andfor the employee stock purchase plan.

**9. Earnings Per Share**

Basicearnings per share are calculated by dividing net income by the weightedaverage shares outstanding during the period. Diluted earnings per share arecomputed similarly to basic earnings per share, except that it includes thedilutive effect of the assumed exercise of stock options. The following tablesets forth the computation of basic and diluted earnings per share (inthousands, except per share amounts) for the years ended December 31:
| ** **                                                                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Basic earnings per  share:                                                            |       |     |       |     |       |     |       |
| Net income                                                                            |       | $        | 10,264     |     | $          | 3,179    |       | $ | 9,533 |   |
| Weighted average shares outstanding                                                   |       | 8,664    |       | 8,349    |       | 8,302    |       |
| Basic earnings per share                                                              |       | $        | 1.18       |     | $          | 0.38     |       | $ | 1.15 |   |
| Diluted earnings  per share:                                                          |       |     |       |     |       |     |       |
| Net income                                                                            |       | $        | 10,264     |     | $          | 3,179    |       | $ | 9,533 |   |
| Weighted average shares outstanding                                                   |       | 8,664    |       | 8,349    |       | 8,302    |       |
| Incremental shares attributable to the assumed exercise  of outstanding stock options |       | 724      |       | 767      |       | 854      |       |
| Weighted average shares and equivalents                                               |       | 9,388    |       | 9,116    |       | 9,156    |       |
| Diluted earnings  per share                                                           |       | $        | 1.09       |     | $          | 0.35     |       | $ | 1.04 |   |

 

**10. Income Taxes**

Theprovision for income taxes consists of the following (in thousands):
| ** **                  | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| ** **                  | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current:                    |       |                                        |       |   |   |   |   |
| Federal                     |       | $                                           | 1,826      |   | $ | 1,373 |   | $ | 5,769 |   |
| State                       |       | 248                                         |       | 243 |   | 765 |   |
|                        |       | 2,074                                       |       | 1,616 |   | 6,534 |   |
| Deferred:                   |       |                                        |       |   |   |   |   |
| Federal                     |       | 3,858                                       |       | 427 |   | (372 | ) |
| State                       |       | 523                                         |       | 75 |   | (49 | ) |
|                        |       | 4,381                                       |       | 502 |   | (421 | ) |
| Total income tax  provision |       | $                                           | 6,455      |   | $ | 2,118 |   | $ | 6,113 |   |

 

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Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities and the amounts recorded for incometax purposes. The components of the deferred tax assets and liabilities are asfollows at December 31 (in thousands):
| ** **                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                         |       |     |       |     |       |
| Accounts receivable and inventory allowances |       | $        | 376        |     | $          | 270 |   |
| Accrued warranty                             |       | 1,047    |       | 1,760    |       |
| Bid and proposal costs                       |       | 433      |       | 466      |       |
| Vacation accrual                             |       | 499      |       | 440      |       |
| Depreciation                                 |       | —   |       | 965      |       |
| Rent abatement                               |       | 99       |       | 129      |       |
| Other reserves                               |       | 551      |       | 987      |       |
| Prepaid revenue                              |       | —   |       | 584      |       |
| Deferred revenue                             |       | 221      |       | —   |       |
| Total deferred tax assets                    |       | 3,226    |       | 5,601    |       |
| Deferred tax  liabilities:                   |       |     |       |     |       |
| Web site development costs                   |       | (35      | )          | (109     | )          |
| Software development costs                   |       | (2,463   | )          | (631     | )          |
| Depreciation                                 |       | (248     | )          | —   |       |
| Total deferred tax liabilities               |       | (2,746   | )          | (740     | )          |
| Net deferred tax  assets                     |       | $        | 480        |     | $          | 4,861 |   |

 

Thefollowing is a reconciliation of the statutory U.S. income tax rate to theCompany’s effective tax rate:
| ** **                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                  | ** ** | **  2004  **            | ** ** | **  2003  ** | ** ** | **  2002  ** | ** ** |
| Statutory rate                              |       |                                        | 34.5       | % |   |   | 34.0 | % |   |   | 34.0 | % |   |
| State income  taxes, net of federal benefit |       |                                        | 3.3        |   |   |   | 4.0 |   |   |   | 4.6 |   |   |
| Other                                       |       |                                        | 0.8        |   |   |   | 2.0 |   |   |   | 0.5 |   |   |
| Effective tax  rate                         |       |                                        | 38.6       | % |   |   | 40.0 | % |   |   | 39.1 | % |   |

 

A tax benefit from theexercise of stock options of $0.9 million, $1.1 million, and $0.7 million wasrecorded for the years ended December 31, 2004, 2003 and 2002,respectively.

**11. Impairment Charge**

During 2003 the Companyrecorded an impairment charge related to a highly customized enterpriseresource planning (“ERP”) system. The Company changed its strategy and beganimplementing a standard ERP system to compress the delivery time and providesignificant value sooner. Due to this change in strategy, the Company wrote-off$6.0 million of capitalized customization expenses determined to have no futureeconomic value.

 

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**12.   Interest and Other Income, Net**

Interest and other income, net comprises the followingfor the years ended December 31 (in thousands):
| ** **                                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income from  prompt payment of vendor invoices |       | $        | 1,390      |     | $          | 2,243    |       | $ | 3,567 |   |
| Interest income  from lease receivables        |       | 3,745    |       | 526      |       | 930      |       |
| Other interest  income                         |       | 399      |       | 254      |       | 320      |       |
| Other income                                   |       | 346      |       | 96       |       | 381      |       |
| Total interest and other income                |       | 5,880    |       | 3,119    |       | 5,198    |       |
| Less interest and  other expense               |       | (311     | )          | (287     | )          | (678     | )          |
| Total interest  and other income, net          |       | $        | 5,569      |     | $          | 2,832    |       | $ | 4,520 |   |

 

**13.   401(k) Plan**

Effective April 1991,GTSI adopted the Employees’ 401(k) Investment Plan (the “Plan”), a savingsand investment plan intended to be qualified under Section 401 of theInternal Revenue Code of 1986, as amended (the “Code”). All employees of theCompany who are at least 21 years of age are eligible to participate. The Planis voluntary and allows participating employees to make pretax contributions,subject to limitations under the Code, of a percentage (not to exceed 30%) oftheir total compensation. Employee contributions are fully vested at all times.GTSI matches employee contributions 50% of the first five percent of eligiblepay. In 2004, 2003 and 2002, the Company contributed approximately $1.0million, $1.0 million and $0.9 million to the Plan, respectively.

**14.   Commitments and Contingencies**

*Product Warranties*

GTSIoffers extended warranties on certain products which are generally covered forthree or five years beyond the warranty provided by the manufacturer. Productsunder extended warranty require repair or replacement of defective parts at nocost to the customer. The Company records warranty liabilities at the time ofsale for the estimated costs that may be incurred under its extended warrantycontracts. The following table summarizes the activity related to productwarranty liabilities for the years ended December 31 (in thousands):
| ** **                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Accrued  warranties at beginning of year   |       | $        | 4,555      |     | $          | 4,404 |   |
| Charges made  against warranty liabilities |       | (2,074   | )          | (5,004   | )          |
| Adjustments to warranty  reserves          |       | (1,659   | )          | 1,038    |       |
| Accruals for  additional warranties sold   |       | 1,607    |       | 4,117    |       |
| Accrued warranties at  end of year         |       | $        | 2,429      |     | $          | 4,555 |   |

 

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):
| ** **                                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred warranty  revenue at beginning of year  |       | $        | 2,819      |     | $          | 1,996 |   |
| Deferred warranty  revenue recognized            |       | (1,384   | )          | (1,213   | )          |
| Revenue deferred  for additional warranties sold |       | 1,163    |       | 2036     |       |
| Deferred warranty  revenue at end of year        |       | $        | 2,598      |     | $          | 2,819 |   |

 

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*Lease Commitments*

TheCompany conducts its operations from leased real properties, which includeoffices and warehouses. These obligations expire at various dates through 2008.Most of the leases contained renewal options at inception, some of which havebeen exercised. Rent expense for the years ended December 31, 2004, 2003and 2002 was approximately $2.4 million, $2.5 million and $2.0 million,respectively. Future minimum lease payments under operating leases that hadinitial or remaining non-cancelable lease terms in excess of one year at December 31,2004 are as follows (in thousands):
| 2005                          |   | $      | 2,943  |   |
|-------------------------------|--------|--------|--------|--------|
| 2006                          |   | 2,397  |   |
| 2007                          |   | 1,414  |   |
| 2008                          |   | 1,286  |   |
| Thereafter                    |   | — |   |
| Total minimum  lease payments |   | $      | 8,040  |   |

 

*Letter of Credit*

GTSI was obligated under an operating lease to provideits landlord with a letter of credit in the amount of $0.8 million at December 31,2004 and $1.0 million at December 31, 2003, as a security deposit for alltenant improvements associated with the lease.

At December 31, 2004,GTSI was obligated under a customer contract to provide a second letter ofcredit in the amount of $1.75 million to guarantee the performance by companyof all obligations under this agreement. This obligation will expire on August 31,2005.

*Contingencies*

In December of 2004,the Company became aware that a potential payroll tax liability existed foremployees working in GTSI’s office in Germany. Management determined that a taxliability was probable and, as a result, the Company accrued approximately $0.8million in accrued liabilities.

*Legal Proceedings*

The Company is occasionally involved in variouslawsuits, claims, and administrative proceedings arising in the normal courseof business. The Company believes that any liability or loss associated withsuch matters, individually or in the aggregate, will not have a materialadverse effect on the Company’s financial condition or results of operations.

As previously reported inthe Company’s periodic filings with the SEC, in November 2003, GTSI wasserved with a $25 million lawsuit, with treble damages, related to an allegedbreach of contract due to the termination of Ichiban, Inc., a formersubcontractor. This suit follows the Company’s earlier lawsuit against theformer subcontractor. In November 2004, plaintiff modified the claimeliminating treble damages. Management continues to believe the claim iswithout merit and intends to vigorously defend this lawsuit, but the ultimateoutcome of this matter is uncertain. Management is unable to estimate theamount GTSI may have to pay, if any, related to this matter. No amounts havebeen accrued as of December 31, 2004.

**15.   Segment Reporting**

GTSIengages in business activities as one operating segment that provides hardware,software and services primarily to the U. S. Federal Government. The Company’schief operating decision maker evaluates 

47

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performanceand determines resource allocation based on GTSI’s consolidated sales andoperating results. The following table summarizes the Company’s sales for theyears ended December 31 (in thousands):
| **Sales**                            | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Hardware                             |       | $          | 834,144    |     | $          | 692,543  |       | $        | 673,700    |   |
| Software                             |       | 155,724    |       | 154,468  |       | 196,400  |       |
| Resold  third-party service products |       | 66,618     |       | 91,211   |       | 50,808   |       |
| Services                             |       | 19,662     |       | 15,896   |       | 13,822   |       |
| Total                                |       | $          | 1,076,148  |     | $          | 954,118  |       | $        | 934,730    |   |

 

*Major Customers*

All of GTSI’s sales areearned from United States’ entities. Sales to multiple agencies and departmentsof the U.S. Federal Government, either directly or through system integrators,accounted for approximately 95%, 98% and 97% of the Company’s consolidatedsales during 2004, 2003, and 2002, respectively.

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

Thefollowing summary illustrates selected quarterly financial data for the twoyears ended December 31, 2004. GTSI has historically experiencedsignificant seasonal fluctuations in its operations as a result of government buyingand funding patterns. Results of any one or more quarters are not necessarilyindicative of annual results or continuing trends.
| ** **                         | ** ** | **2004**                                                           | ** ** |
|------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Q1**                                                             | ** ** | **Q2** | ** ** | **Q3*** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| ** **                         | ** ** | **(in thousands, except per share data)** | ** ** |
| Sales                              |       | $                                                                  | 178,623    |   | $ | 238,990 |   | $ | 330,645 |   | $ | 327,890 |   | $ | 1,076,148 |   |
| Gross margin                       |       | $                                                                  | 18,082     |   | $ | 21,537 |   | $ | 46,723 |   | $ | 35,663 |   | $ | 122,005 |   |
| Net (loss) income                  |       | $                                                                  | (1,381     | ) | $ | (1,553 | ) | $ | 10,454 |   | $ | 2,744 |   | $ | 10,264 |   |
| Basic (loss) earnings per share    |       | $                                                                  | (0.16      | ) | $ | (0.18 | ) | $ | 1.21 |   | $ | 0.31 |   | $ | 1.18 |   |
| Diluted (loss) earnings  per share |       | $                                                                  | (0.16      | ) | $ | (0.18 | ) | $ | 1.13 |   | $ | 0.29 |   | $ | 1.09 |   |

 
| ** **                         | ** ** | **2003** | ** ** |
|------------------------------------|------------|----------|------------|
| ** **                         | ** ** | **Q1**   | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| Sales                              |       | $        | 178,858    |   | $ | 189,737 |   | $ | 273,066 |   | $ | 312,457 |   | $ | 954,118 |   |
| Gross margin                       |       | $        | 16,074     |   | $ | 22,756 |   | $ | 27,497 |   | $ | 30,457 |   | $ | 96,784 |   |
| Net (loss) income                  |       | $        | (1,763     | ) | $ | 1,149 |   | $ | 3,470 |   | $ | 323 |   | $ | 3,179 |   |
| Basic (loss) earnings per share    |       | $        | (0.21      | ) | $ | 0.14 |   | $ | 0.42 |   | $ | 0.04 |   | $ | 0.38 |   |
| Diluted (loss) earnings  per share |       | $        | (0.21      | ) | $ | 0.13 |   | $ | 0.39 |   | $ | 0.04 |   | $ | 0.35 |   |

 

*** See note 7.**

**17.   Subsequent Events**

On February 11, 2005 GTSI and its landlordexecuted a second amendment to the lease for the Company’s headquarters toreduce the letter of credit from $0.8 million to $0.2 million.

On March 3, 2005, the Company’s Board ofDirectors approved the acceleration of the vesting of unvested stock optionswith a strike price above $10.05 previously awarded to employees, officers anddirectors under GTSI’s stock option plans (see Note 8). Forfeiture of theseaccelerated options occurs on the date of termination, if the individual’stermination date from GTSI is prior to the original vesting date of suchoptions. The vesting of these options was accelerated to avoid recognizingcompensation expense in future financial statements upon the adoption of SFAS123R.

48

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

None.

**ITEM 9A.   CONTROLSAND PROCEDURES**

As of the end of the period covered by this report,based on our management’s evaluation, with the participation of GTSI’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedisclosure controls and procedures (as defined in Rules13a-15(e) or15d –15(e) under the Securities Exchange Act of 1934, as amended) our ChiefExecutive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures are effective in ensuring that informationrequired to be disclosed by us in reports filed or submitted under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms.

There was no change in ourinternal control over financial reporting during our fourth quarter of fiscal2004 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

**INTERNAL CONTROL REPORT OF MANAGEMENT**

The management of GTSI is responsible for establishingand maintaining adequate internal control over financial reporting. GTSI’sinternal control system was designed to provide reasonable assurance to theCompany’s management and Board of Directors regarding the preparation and fairpresentation of published financial statements.

All internal control systems, no matter how welldesigned, have inherent limitations. Therefore, even those systems determinedto be effective can provide only reasonable assurance with respect to financialstatement preparation and presentation.

GTSI’s management assessed the effectiveness of theCompany’s internal control over financial reporting as of December 31,2004. In making this assessment, it used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control—Integrated Framework.*Basedon our assessment we believe that, as of December 31, 2004, the Company’sinternal control over financial reporting is effective based on those criteria.

GTSI’sindependent registered public accounting firm has issued an audit report on ourassessment of the Company’s internal control over financial reporting. Thisreport appears on page 50.
|  | Management of  GTSI Corp. |
|--|---------------------------|

 

49

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**Report of Independent Registered Public AccountingFirm onInternal Control over Financial Reporting**

The Board of Directors and Stockholders of GTSI Corp.:

We have audited management’s assessment, included inthe accompanying Internal Control Report of Management, that GTSI Corp.maintained effective internal control over financial reporting as of December 31,2004, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). GTSI Corp.’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining an understandingof internal control over financial reporting, evaluating management’sassessment, testing and evaluating the design and operating effectiveness ofinternal control, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’s assessment that GTSICorp. maintained effective internal control over financial reporting as of December 31,2004, is fairly stated, in all material respects, based on the COSO criteria. Also,in our opinion, GTSI Corp. maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2004, basedon****the COSO criteria**.**

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the 2004 consolidated financialstatements of GTSI Corp and financial statement schedule and our report dated March 11,2005 expressed an unqualified opinion thereon.
|                     | /s/ Ernst & Young LLP |
|---------------------|--------------------------------|
| McLean, VA          |                           |
| March 11, 2005 |                           |

 

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**PART III**

**ITEM 10.   DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

The information requiredby this Item is incorporated by reference to the sections of the Registrant’sdefinitive Proxy Statement for the Annual Meeting of Stockholders scheduled tobe held on April 21,2005 (the “Proxy Statement”) entitled “Proposal 1—Election of Directors,”“Executive Officers,” “Common Stock Ownership of Principal Stockholders andManagement—Section 16(a) Beneficial Ownership Reporting Compliance,” “Codeof Ethics,” “Audit Fees,” and “Audit Committee.” The Proxy Statement will befiled with the Commission within 120 days after December 31, 2004.

**ITEM 11.  **EXECUTIVE COMPENSATION

The information requiredby this Item is incorporated by reference to the sections of the ProxyStatement entitled “Election of Directors—Compensation of Directors” and “ExecutiveCompensation and Other Information.”

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

The information requiredby this Item is incorporated by reference to the section of the Proxy Statemententitled “Common Stock Ownership of Principal Stockholders and Management.”

**ITEM 13.   CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

The information requiredby this Item is incorporated by reference to the sections of the ProxyStatement entitled “Proposal 1—Election of Directors—Class 1 Nominees,” “Compensationof Directors,” “Executive Compensation and Other Information—EmploymentAgreements and Termination of Employment and Change of Control Arrangements”And “Certain Relationships and Related Transactions.”

**ITEM 14.  **PRINCIPAL ACCOUNTING FEES ANDSERVICES

The information required by this Item is incorporatedby reference to the sections of the Proxy Statement entitled “Audit Committee”and “Audit Fees.”

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**PART IV**

**ITEM 15.   EXHIBITS,FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON FORM 8-K:**

**(a)   Financial Statements**
| The consolidated financial  statements of GTSI Corp. and subsidiaries filed are as follows: |   |
|---------------------------------------------------------------------------------------------|--------|
| Consolidated  Balance Sheets as of December 31, 2004 and 2003                          |   |
| Consolidated  Statement of Operations for 2004 –  2002                                 |   |
| Consolidated  Statements of Changes in Stockholders’ Equity for 2004 – 2002       |   |
| Consolidated  Statements of Cash Flows for 2004 –  2002                                |   |
| Notes  to Consolidated Financial Statements                                                 |   |

 

**FinancialStatement Schedules**
| The financial statement schedules  of GTSI Corp. and subsidiaries filed are as follows:                                                                   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Schedule II—Valuation  and Qualifying Accounts for 2004 –  2002                                                                                 |   |
| All other  schedules are omitted because they are not applicable, or the required  information is shown in the financial statements or the notes thereto. |   |

 

**Exhibits**

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

**(b)   **Reports on Form 8-K:****

On November 2, 2004,GTSI furnished a report on Form 8-K under Item 2 relating to its pressrelease of financial information for the three and nine month periods ended September 30,2004, and monthly sales.

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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 signedon March 15, 2005 on its behalf by the undersigned thereunto dulyauthorized.
|        | **GTSI CORP.** |
|--------|----------------|
|   | By:            | /s/ M. DENDY YOUNG |   |
|   |           | M. Dendy Young |
|   |           | *Chairman and Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed on March 11, 2005 by the following persons on behalf of theregistrant and in the capacities indicated.
| /s/ M.  DENDY YOUNG                                 |   |
|-----------------------------------------------------|--------|
| M. Dendy Young                                      |   |
| *Chairman and Chief Executive Officer*              |   |
| *(Principal Executive Officer)*                     |   |
| /s/ THOMAS A. MUTRYN                                |   |
| Thomas A. Mutryn                                    |   |
| *Senior Vice President and Chief Financial Officer* |   |
| *(Principal Financial and Accounting Officer)*      |   |
| /s/ THOMAS HEWITT                                   |   |
| Thomas Hewitt                                       |   |
| *Director*                                          |   |
| /s/ LEE JOHNSON                                     |   |
| Lee Johnson                                         |   |
| *Director*                                          |   |
| /s/ JOSEPH KEITH KELLOGG, JR.                       |   |
| Joseph Keith Kellogg, Jr.                           |   |
| *Director*                                          |   |
| /s/ STEVEN KELMAN                                   |   |
| Steven Kelman                                       |   |
| *Director*                                          |   |
| /s/ JAMES J. LETO                                   |   |
| James J. Leto                                       |   |
| *Director*                                          |   |
| /s/ BARRY REISIG                                    |   |
| Barry Reisig                                        |   |
| *Director*                                          |   |

53

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| /s/ LAWRENCE J. SCHOENBERG |   |
|----------------------------|--------|
| Lawrence J. Schoenberg     |   |
| *Director*                 |   |
| /s/ JOHN M. TOUPS          |   |
| John M. Toups              |   |
| *Director*                 |   |
| /s/ DANIEL R. YOUNG        |   |
| Daniel R. Young            |   |
| *Director*                 |   |

 

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**GTSI CORP.VALUATION AND QUALIFYING ACCOUNTS(In thousands)SCHEDULE II**
| **Years Ended December 31,** | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| *Allowance for Doubtful Accounts*           |       |       |       |     |       |     |       |
| Balance at beginning of period              |       | $          | 699        |     | $          | 834      |       | $        | 1,413      |   |
| Balance at end of  period                   |       | $          | 1,009      |     | $          | 699      |       | $        | 834        |   |

 

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

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**EXHIBIT INDEX**
| Exhibit  Number | ** ** | ** **                                                                                                                                                                                                                                      | ** ** | **Description** |   |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|--------|
| 3.1             |       | Restated Certificate of Incorporation(1)                                                                                                                                                                                                        |       |
| 3.2             |       | Bylaws, as amended(4)                                                                                                                                                                                                                           |       |
| 10.1            |       | GTSI Employees’ 401(k) Investment Plan, and  amendments No. 1, 2 and 3 thereto (filed herewith)*                                                                                                                                 |
| 10.2            |       | Employee Stock Purchase Plan, as amended to date*(4)                                                                                                                                                                                            |       |
| 10.3            |       | 1994 Stock Option Plan, as amended to date*(3)                                                                                                                                                                                                  |       |
| 10.4            |       | 1996 Stock Option Plan, as amended to date*(4)                                                                                                                                                                                                  |       |
| 10.5            |       | 1997 Non-Officer Stock Option Plan, as amended to  date*(3)                                                                                                                                                                                     |       |
| 10.6            |       | Lease dated August 11, 1995 between the Company  and Security Capital Industrial Trust, and Amendments for distribution center  facility(5)                                                                                                |       |
| 10.7            |       | Lease dated December 10, 1997 between the  Company and Petula Associates, Ltd. and Amendment for headquarters  facility(5)                                                                                                                 |       |
| 10.8            |       | Employment Agreement dated January 1, 2001  between the Registrant and M. Dendy Young*(1)                                                                                                                                                  |       |
| 10.9            |       | Offer Letter dated June 28, 2001 between the  Registrant and Terri Allen*(2)                                                                                                                                                               |       |
| 10.10           |       | Non-Qualified Stock Option Agreement effective  July 31, 2001 between the Registrant and Terri Allen*(3)                                                                                                                                   |       |
| 10.11           |       | Credit Facilities Agreement, dated as of  October 23, 2003, among the Registrant, certain lenders named in such  agreement, and GE Commercial Distribution Finance Corporation, as a Lender  and as Agent(6)                               |       |
| 10.12           |       | First Amendment to Credit Facilities Agreement,  dated March 12, 2004, among the Company, certain lenders named in such  agreement, and GE Commercial Distribution Finance Corporation, as a Lender  and as Agent (filed herewith)         |       |
| 10.13           |       | Second Amendment to Credit Facilities Agreement,  dated as of July 29, 2004, among the Company, certain lenders named in  such agreement and GE Commercial Distribution Finance Corporation, as a  Lender and as Agent(5)                  |       |
| 10.14           |       | Third Amendment to Credit Facilities Agreement,  dated as of November 22, 2004, among the Company, certain lenders named  in such agreement and GE Commercial Distribution Finance Corporation, as a  Lender and as Agent (filed herewith) |       |
| 10.15           |       | Offer Letter dated December 31, 2002 between  the Registrant and Thomas Mutryn*(3)                                                                                                                                                         |       |
| 10.16           |       | Non-Qualified Stock Option Agreement effective  January 28, 2003 between the Registrant and Thomas Mutryn*(3)                                                                                                                              |       |
| 10.17           |       | 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.  (filed herewith)                                   |       |
| 10.18           |       | GTSI Corp. Long Term Incentive Plan*(7)                                                                                                                                                                                                         |       |
| 10.19           |       | GTSI 2005 Executive Incentive Compensation Plan*  (filed herewith)                                                                                                                                                                              |       |
| 10.20           |       | Form of GTSI Change of Control Agreement*  (filed herewith)                                                                                                                                                                                |       |
| 14.1            |       | Code of Ethics(6)                                                                                                                                                                                                                               |       |
| 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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*                    Managementcontracts and compensatory plans and arrangements required to be filed pursuantto Item 15 (c).

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(1)          Incorporated byreference to the Registrant’s Annual Report on Form 10-K for theyear ended December 31, 2000.

(2)          Incorporated byreference to the Registrant’s Annual Report on Form 10-K for theyear ended December 31, 2001.

(3)          Incorporated byreference to the Registrant’s Annual Report on Form 10-K for theyear ended December 31, 2002.

(4)          Incorporated byreference to the Registrant’s Quarterly Report on Form 10-Q for theperiod ended June 30, 2004.

(5)          Incorporated byreference to the Registrant’s Quarterly Report on Form 10-Q for theperiod ended September 30, 2004.

(6)          Incorporated byreference to the Registrant’s Annual Report on Form 10-K for theyear ended December 31, 2003.

(7)          Incorporated byreference to Appendix B of the Registrant’s 2004 Proxy Statement.

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