**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10–Q**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2004**

 

**Commission File Number:     0–19394**

 

**GTSI CORP.**

(Exact name of registrant asspecified in its charter)

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.          YES  ý          NO  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the ExchangeAct).          YES  ý          NO  o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date:

 

| **Class**                      |   | **Shares  Outstanding at October 31, 2004** |
|--------------------------------|--------|---------------------------------------------|
| Common Stock, $0.005 par value |   | 8,808,869                                   |

 

 

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**GTSI Corp.**

**Form 10–Q for the Quarter Ended September 30, 2004**

 

**INDEX**

 
| **PART I – FINANCIAL  INFORMATION** |     |
|------------------------------------------|----------|
| ** **                               |     |
|                                     | Item 1.  | Financial Statements – |   |
|                                     |     |   |   |
|                                     |     | Consolidated Balance  Sheets as of September 30, 2004 (Unaudited) and December 31, 2003 |   |
|                                     |     |   |   |
|                                     |     | Consolidated  Statements of Operations for the Three and Nine Months Ended September 30,  2004 and 2003 (Unaudited) |   |
|                                     |     |   |   |
|                                     |     | Consolidated  Condensed Statements of Cash Flows for the Nine Months Ended September 30,  2004 and 2003 (Unaudited) |   |
|                                     |     |   |   |
|                                     |     | Notes  to Consolidated Condensed Financial Statements (Unaudited) |   |
|                                     |     |   |   |
|                                     | Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                     |     |   |   |
|                                     | Item  3. | Quantitative  And Qualitative Disclosures About Market Risk |   |
|                                     |     |   |   |
|                                     | Item 4.  | Controls and  Procedures |   |
|                                     |     |   |   |
| **PART II – OTHER  INFORMATION**    |     |
| ** **                               |     |
|                                     | Item 6.  | Exhibits  and Reports on Form 8-K |   |
|                                     |     |
| **SIGNATURES**                           |     |

 

2

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**PART I.FINANCIAL INFORMATION**

 

**Item 1.                  Financial Statements**

 

**GTSICORP.**

**CONSOLIDATED BALANCESHEETS**

(Inthousands, except share data)

** **
| ** **                                                                                                                                                                                              | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                              | ** ** | **(Unaudited)**         | ** ** | **(Audited)**          | ** ** |
| ASSETS                                                                                                                                                                                                  | ** ** | ** **              | ** ** | ** **             | ** ** |
| Current assets:                                                                                                                                                                                         | ** ** | ** **              | ** ** | ** **             | ** ** |
| Cash                                                                                                                                                                                                    |       | $                       | 136        |                   | $          | 177 |   |
| Accounts  receivable, net                                                                                                                                                                               |       | 208,182                 |       | 172,370                |       |
| Lease  receivables                                                                                                                                                                                      |       | 18,551                  |       | 9,618                  |       |
| Merchandise  inventories                                                                                                                                                                                |       | 84,393                  |       | 55,987                 |       |
| Other current  assets                                                                                                                                                                                   |       | 13,342                  |       | 15,490                 |       |
| Total current  assets                                                                                                                                                                                   |       | 324,604                 |       | 253,642                |       |
| Property and  equipment, net                                                                                                                                                                            |       | 14,165                  |       | 10,670                 |       |
| Other assets                                                                                                                                                                                            |       | 2,420                   |       | 4,449                  |       |
| Total assets                                                                                                                                                                                            |       | $                       | 341,189    |                   | $          | 268,761 |   |
|                                                                                                                                                                                                    |       |                    |       |                   |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                              |       |                    |       |                   |       |
| Current  liabilities:                                                                                                                                                                                   |       |                    |       |                   |       |
| Notes payable to  banks                                                                                                                                                                                 |       | $                       | —     |                   | $          | 2,813 |   |
| Accounts payable                                                                                                                                                                                        |       | 225,221                 |       | 152,435                |       |
| Accrued  liabilities                                                                                                                                                                                    |       | 16,682                  |       | 11,168                 |       |
| Deferred revenue                                                                                                                                                                                        |       | 5,978                   |       | 8,323                  |       |
| Accrued warranty  liabilities                                                                                                                                                                           |       | 4,197                   |       | 4,555                  |       |
| Total current  liabilities                                                                                                                                                                              |       | 252,078                 |       | 189,294                |       |
| Other  liabilities                                                                                                                                                                                      |       | 1,148                   |       | 1,522                  |       |
| Total  liabilities                                                                                                                                                                                      |       | 253,226                 |       | 190,816                |       |
|                                                                                                                                                                                                    |       |                    |       |                   |       |
| Commitments and  contingencies                                                                                                                                                                          |       |                    |       |                   |       |
|                                                                                                                                                                                                    |       |                    |       |                   |       |
| Stockholders’  equity                                                                                                                                                                              |       |                    |       |                   |       |
| Preferred stock  - $0.25 par value, 680,850 shares authorized; none issued or outstanding                                                                                                               |       | —                  |       | —                 |       |
| Common stock -  $0.005 par value, 20,000,000 shares authorized; 9,806,084 issued and  8,781,885 outstanding at September 30, 2004; and 9,806,084 issued and 8,505,045  outstanding at December 31, 2003 |       | 49                      |       | 49                     |       |
| Capital in  excess of par value                                                                                                                                                                         |       | 46,676                  |       | 45,911                 |       |
| Retained  earnings                                                                                                                                                                                      |       | 47,649                  |       | 40,131                 |       |
| Treasury stock,  1,024,199 shares at September 30, 2004 and 1,301,039 shares at December 31,  2003, at cost                                                                                             |       | (6,411                  | )          | (8,146                 | )          |
| Total  stockholders’ equity                                                                                                                                                                        |       | 87,963                  |       | 77,945                 |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                        |       | $                       | 341,189    |                   | $          | 268,761 |   |
|                                                                                                                                                                                                         |            |                         |            |                        |            |  |  |  |  |

 

The accompanying notes are an integral part ofthese financial statements.

 

3

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**GTSICORP.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(Unaudited)

(Inthousands, except per share data)

 
| ** **                           | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| SALES                                |       | $                                     | 330,645    |                                 | $          | 273,066 |   | $ | 748,257 |   | $ | 641,661 |   |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| COST OF SALES                        |       | 283,922                               |       | 245,569                              |       | 661,915 |   | 575,333 |   |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| GROSS MARGIN                         |       | 46,723                                |       | 27,497                               |       | 86,342 |   | 66,328 |   |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| OPERATING  EXPENSES                  |       | 30,404                                |       | 22,640                               |       | 76,723 |   | 63,955 |   |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| INCOME FROM  OPERATIONS              |       | 16,319                                |       | 4,857                                |       | 9,619 |   | 2,373 |   |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| INTEREST AND  OTHER INCOME           |       |                                  |       |                                 |       |   |   |   |   |
| Interest and  other income           |       | 1,021                                 |       | 939                                  |       | 2,931 |   | 2,534 |   |
| Interest expense                     |       | (63                                   | )          | (99                                  | )          | (122 | ) | (217 | ) |
| Interest and  other income, net      |       | 958                                   |       | 840                                  |       | 2,809 |   | 2,317 |   |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| INCOME BEFORE  INCOME TAXES          |       | 17,277                                |       | 5,697                                |       | 12,428 |   | 4,690 |   |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| INCOME TAX  PROVISION                |       | 6,823                                 |       | 2,227                                |       | 4,909 |   | 1,834 |   |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| NET INCOME                           |       | $                                     | 10,454     |                                 | $          | 3,470 |   | $ | 7,519 |   | $ | 2,856 |   |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| EARNINGS PER  SHARE                  |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                |       | $                                     | 1.21       |                                 | $          | 0.42 |   | $ | 0.88 |   | $ | 0.34 |   |
| Diluted                              |       | $                                     | 1.13       |                                 | $          | 0.39 |   | $ | 0.80 |   | $ | 0.31 |   |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                |       | 8,646                                 |       | 8,238                                |       | 8,592 |   | 8,352 |   |
| Diluted                              |       | 9,255                                 |       | 8,986                                |       | 9,355 |   | 9,088 |   |
|                                      |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part ofthese financial statements.

 

4

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**GTSICORP.**

**CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS**

(Unaudited)

(Inthousands)

 

 
| ** **                                                                        | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                        | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                            | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net income                                                                        |       | $                                    | 7,519      |   | $ | 2,856 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |       | 8,933                                |       | 15,147 |   |
| Net cash  provided by operating activities                                        |       | 16,452                               |       | 18,003 |   |
|                                                                              |       |                                 |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                            |       |                                 |       |   |   |
| Cost of property  and equipment                                                   |       | (5,699                               | )          | (7,816 | ) |
| Net cash used in  investing activities                                            |       | (5,699                               | )          | (7,816 | ) |
|                                                                              |       |                                 |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                            |       |                                 |       |   |   |
| Payments of bank  notes, net                                                      |       | (12,813                              | )          | (7,539 | ) |
| Payments to  acquire treasury stock                                               |       | —                               |       | (3,969 | ) |
| Proceeds from  exercises of stock options                                         |       | 1,589                                |       | 909 |   |
| Proceeds from  Employee Stock Purchase Plan                                       |       | 430                                  |       | 489 |   |
| Net cash used in  financing activities                                            |       | (10,794                              | )          | (10,110 | ) |
|                                                                              |       |                                 |       |   |   |
| NET (DECREASE)  INCREASE IN CASH                                                  |       | (41                                  | )          | 77 |   |
| CASH AT BEGINNING  OF PERIOD                                                      |       | 177                                  |       | 32 |   |
| CASH AT END OF  PERIOD                                                            |       | $                                    | 136        |   | $ | 109 |   |
|                                                                              |       |                                 |       |   |   |
| Supplemental  disclosures of cash flow information:                               |       |                                 |       |   |   |
| Cash paid during  the period for:                                                 |       |                                 |       |   |   |
| Interest                                                                          |       | $                                    | 117        |   | $ | 232 |   |
| Income taxes                                                                      |       | $                                    | 1,018      |   | $ | 327 |   |

 

The accompanying notes are an integral part ofthese financial statements.

 

5

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**GTSICORP.**

**NOTESTO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

(Unaudited)

 

**1.  Basis of Presentation**

 

The accompanying unauditedinterim consolidated condensed financial statements of GTSI Corp. (“GTSI” orthe “Company”) have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission for quarterly reports on Form 10-Q and,therefore, omit or condense certain note disclosures and other informationrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. These financial statements should therefore be read in conjunction withthe audited consolidated financial statements and accompanying notes for theyear ended December 31, 2003 included in GTSI’s Annual Report on Form10-K.  The consolidated financialstatements include the accounts of GTSI and its wholly owned subsidiary, TLI.  All significant intercompany transactions andbalances have been eliminated.  Investmentsin which the Company owns 20% to 50% are accounted for using the equity methodof accounting.  In the opinion ofmanagement, all adjustments (which include normal recurring adjustments, exceptas disclosed herein) necessary for a fair presentation of interim periodresults have been included.  The resultsof operations for the three and nine month periods ended September 30, 2004 arenot necessarily indicative of the results that may be expected for the fullyear, or future periods.  GTSI hashistorically experienced significant seasonal fluctuations in operations as aresult of government buying and funding patterns.  These patterns historically have had apositive effect on GTSI’s sales and net income during the quarter endedSeptember 30th  (the federalgovernment’s fiscal year end).  Certainprior period amounts have been reclassified to conform to the current periodpresentation.

 

**2.  Stock-Based Compensation**

 

The Company accounts forstock-based compensation using the intrinsic value method of accounting inaccordance with Accounting Principles Board Opinion No. 25 “Accounting forStock Issued to Employees” and related Interpretations.  Accordingly, no compensation cost for stockoptions granted to employees was reflected in net income, as all optionsgranted had an exercise price equal to the fair market value of the Company’scommon stock on the date of the grant. The following table illustrates, in accordance with the provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 148 “Accounting forStock-Based Compensation –Transition and Disclosure” the effect on net incomeand earnings per share if compensation costs for the Company’s stock optionshad been

 

6

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determined based on the fair value methodconsistent with the provisions of SFAS No. 123 “Accounting for Stock-BasedCompensation” (in thousands, except per share data):

 
| ** **                                                                                                                                    | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income – as  reported                                                                                                                |       | $                                     | 10,454     |                                 | $          | 3,470 |   | $ | 7,519 |   | $ | 2,856 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (591                                  | )          | (233                                 | )          | (1,728 | ) | (631 | ) |
| Net income – pro  forma                                                                                                                  |       | $                                     | 9,863      |                                 | $          | 3,237 |   | $ | 5,791 |   | $ | 2,225 |   |
|                                                                                                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Earnings per  share – as reported                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                                                                                                                         |       | $                                     | 1.21       |                                 | $          | 0.42 |   | $ | 0.88 |   | $ | 0.34 |   |
| Diluted                                                                                                                                       |       | $                                     | 1.13       |                                 | $          | 0.39 |   | $ | 0.80 |   | $ | 0.31 |   |
| Earnings per share  – pro forma                                                                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                                                                                                                         |       | $                                     | 1.14       |                                 | $          | 0.39 |   | $ | 0.67 |   | $ | 0.27 |   |
| Diluted                                                                                                                                       |       | $                                     | 1.07       |                                 | $          | 0.36 |   | $ | 0.62 |   | $ | 0.24 |   |

 

On March 18, 2004, themembers of the Company’s Board of Directors formally waived the right grantedto them by the May 14, 2003 stockholder approval of extending the exerciseprice for certain options granted to its non-employee directors followingcessation from the Company.  Therefore,there is no longer any potential compensation expense impact related to suchstock option extensions.

 

During the nine months endedSeptember 30, 2004, the Company recorded a charge of approximately $290,000,net of taxes, for stock-based compensation to non-employees based on the fairvalue method.  No stock compensationexpense was included in net income for the nine months ended September 30,2003.

 

**3.  Sales of Lease Receivables**

 

The Company sells productsto certain customers under sales-type lease arrangements.  The Company accounts for its sales-typeleases according to the provisions of SFAS No. 13, “Accounting for Leases,” andaccordingly, recognizes current and long-term lease receivables, net ofunearned finance income, on the accompanying balance sheets.  The Company periodically sells leasereceivables to various unrelated financing companies.  The Company accounts for its sales of leasereceivables in accordance with SFAS No. 140 “Accounting for the Transfers andServicing of Financial Assets and Extinguishments of Liabilities – aReplacement of FASB Statement No. 125.”

 

**4.  Capitalized Software**

 

GTSI is implementing anenterprise resource planning (“ERP”) system to replace its current fulfillmentsystem.  Implementation of the ERP systemis designed to improve management’s information and gain operatingefficiencies.  As of September 30, 2004,the Company has capitalized $8.2 million of costs related to this project,reported as Property and equipment, net. Approximately $1.2 million and $4.3 million were capitalized in thethree and nine month periods ended September 30, 2004, respectively.  As of September 30, 2004 and December 31, 2003capitalized software, net of amortization, equaled $8.0 million and $3.9million, respectively.

 

7

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**5.  Notes Payable to Banks**

 

The Company has a $125million credit facility with a group of banks (“Credit Facility”).  The Credit Facility includes a revolving lineof credit (“Revolver”) and a provision for inventory financing of vendorproducts (“Wholesale Financing Facility”). The Credit Facility, unless terminated earlier, will continue after theinitial maturity date of February 28, 2005 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.  Borrowingunder the Revolver is limited to 85% of eligible accounts receivable.  The Revolver is secured by substantially allof the Company’s assets.  Borrowing underthe Wholesale Financing Facility is limited to 100% of the value of theinventory.  The Wholesale Financing Facilityis secured by the underlying inventory. The Credit Facility carries an interest rate indexed to LIBOR plus 1.75percentage points.  On July 29, 2004 theCompany signed a second amendment to the Revolver to add its subsidiary, TLI,as a borrower.  The Credit Facility alsocontains certain covenants as well as provisions specifying compliance withcertain quarterly and annual financial ratios. At September 30, 2004, GTSI was in compliance with all financial covenantsset forth in the Credit Facility and had available credit of $20.0 million.

 

**6.  Accrued Liabilities**

 

In accordance with SFAS No.140 “Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities,” the Company extinguished $10.1 million in agedaccrued liabilities during the three months ended September 30, 2004, asmanagement concluded that these accrued liabilities were no longer valid.  The extinguishment of these liabilitiesresulted in a non-cash increase to gross margin of $10.1 million and an increaseto net income of $6.1 million after taxes were applied.

 

During the three monthsended September 30, 2004, the Company conducted a comprehensive review of itsaccrued liabilities.  As a result of thisreview, management concluded that an additional $0.7 million in aged accruedpayables were no longer valid liabilities. The Company reversed these liabilities, resulting in a $0.7 millionincrease in gross margin and a $0.4 million increase in net income.  Management will continue to conduct such areview of its accrued liabilities on a quarterly basis.

 

8

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**7.  Earnings Per Share**

 

Basic earnings per share arecalculated by dividing net income by the weighted average shares outstandingduring the period.  Diluted earnings pershare are computed similarly to basic earnings per share, except that it includesthe dilutive effect of the assumed exercise of stock options.  The following table sets forth the computationof basic and diluted earnings per share (in thousands, except per shareamounts):

 
| ** **                                                                            | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Basic earnings  per share:                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Net income                                                                            |       | $                                     | 10,454     |                                 | $          | 3,470 |   | $ | 7,519 |   | $ | 2,856 |   |
| Weighted average  shares outstanding                                                  |       | 8,646                                 |       | 8,238                                |       | 8,592 |   | 8,352 |   |
| Basic earnings  per share                                                             |       | $                                     | 1.21       |                                 | $          | 0.42 |   | $ | 0.88 |   | $ | 0.34 |   |
|                                                                                  |       |                                  |       |                                 |       |   |   |   |   |
| Diluted earnings  per share:                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Net income                                                                            |       | $                                     | 10,454     |                                 | $          | 3,470 |   | $ | 7,519 |   | $ | 2,856 |   |
| Weighted average  shares outstanding                                                  |       | 8,646                                 |       | 8,238                                |       | 8,592 |   | 8,352 |   |
| Incremental  shares attributable to the assumed exercise of outstanding stock options |       | 609                                   |       | 748                                  |       | 763 |   | 736 |   |
| Weighted average  shares and equivalents                                              |       | 9,255                                 |       | 8,986                                |       | 9,355 |   | 9,088 |   |
| Diluted earnings  per share                                                           |       | $                                     | 1.13       |                                 | $          | 0.39 |   | $ | 0.80 |   | $ | 0.31 |   |

 

**8.  Commitments and Contingencies**

 

*Product Warranties*

GTSI offers extendedwarranties on certain products which are generally covered for three or fiveyears beyond the warranty provided by the manufacturer.  Products under extended warranty requirerepair or replacement of defective parts at no cost to the customer.  The Company records warranty liabilities atthe time of sale for the estimated costs that may be incurred under itsextended warranty contracts.  Thefollowing table summarizes the activity related to product warranty liabilitiesfor the nine months ended September 30, 2004 and 2003 (in thousands):

 
| ** **                                 | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|
| ** **                                 | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Accrued  warranties at beginning of period |       | $                                    | 4,555      |   | $ | 4,404 |   |
| Charges made  against warranty liabilities |       | (1,829                               | )          | (4,145 | ) |
| Accruals for  additional warranties sold   |       | 1,471                                |       | 3,204 |   |
| Accrued  warranties at end of period       |       | $                                    | 4,197      |   | $ | 3,463 |   |

 

9

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Revenue from extendedwarranty contracts is recorded as deferred revenue and subsequently recognizedover the term of the contract.  Thefollowing table summarizes the activity related to the deferred warranty revenuefor the nine months ended September 30, 2004 and 2003 (in thousands):

 
| ** **                                        | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                        | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Deferred  warranty revenue at beginning of period |       | $                                    | 2,819      |   | $ | 1,996 |   |
| Deferred  warranty revenue recognized             |       | (1,025                               | )          | (945 | ) |
| Revenue deferred  for additional warranties sold  |       | 862                                  |       | 1,471 |   |
| Deferred warranty  revenue at end of period       |       | $                                    | 2,656      |   | $ | 2,522 |   |

 

*Contingent Insurance Settlement*

During the three monthsended September 30, 2004, the Company recorded a charge of approximately $0.7million in Cost of Sales for the loss of inventory.  The Company has filed a comprehensive claimwith its insurance carrier.  Managementbelieves it is reasonably possible that the Company will recover a portion orall of this claim, net of a $50,000 deductible. However, management is unable at this time to estimate such a recovery.  Should the Company be successful in itscollection efforts, any proceeds collected will be treated as a gain forfinancial statement purposes.  Inaccordance with SFAS No. 5 “Accounting for Contingencies,” no gain contingencyhas been accrued as of September 30, 2004.

 

*Legal Proceedings*

The Company is occasionallyinvolved in various lawsuits, claims, and administrative proceedings arising inthe normal course of business.  TheCompany believes that any liability or loss associated with such matters,individually or in the aggregate, will not have a material adverse effect onthe Company’s financial condition or results of operations.

 

In November 2003, GTSI wasserved with a $25 million lawsuit, with treble damages, related to thetermination of a former subcontractor. This suit follows the Company’s earlier lawsuit against the   former subcontractor.  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 the amount GTSI may have to pay, ifany, related to this matter.  No amountshave been accrued as of September 30, 2004.

 

**9.  Subsequent Events**

 

The Company anticipatescompleting all pertinent documentation supporting the creation of a new wholly-ownedsubsidiary – GTSI Financial Services, Inc. during the fourth quarter of 2004.

 

During October 2004, seniormanagement was informed that certain integrated hardware components weremissing from certain hardware delivered on a customer order.  This matter is currently under investigationby the Company’s management and it is not clear where or when the loss occurredthrough the supply chain.  Depending uponthe results of this investigation, the Company may incur a future charge of upto $600,000.  As of September 30, 2004,no amounts have been recorded in the consolidated financial statements.

 

10

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**Item 2.                  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The following discussion andanalysis is provided to increase the understanding of, and should be read inconjunction with, our unaudited consolidated condensed financial statements andnotes included in this Quarterly Report on Form 10-Q and our consolidatedfinancial statements and notes in our Annual Report on Form 10-K for the yearended December 31, 2003.  We use theterms “GTSI,” “we,” “our,” and “us” to refer to GTSI Corp. and its subsidiary.

 

**Disclosure Regarding Forward-LookingStatements**

 

Readers are cautioned that thisQuarterly Report on Form 10-Q contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section21E of the Securities Exchange Act of 1934, as amended, relating to ouroperations that are based on our current expectations, estimates andprojections.  Words such as “expect,” “believe,”“anticipate,”  “intend” and similarexpressions are used to identify these forward-looking statements.  These statements are not guarantees of futureperformance and involve risks, uncertainties and assumptions that are difficultto predict.  Actual results may differmaterially from what is expressed or projected in these forward-lookingstatements.  The reasons for this includethe following risk factors:

 

•                  Price and product competition in the ITindustry;

•                  Our reliance on our vendor partners tomanufacture our products;

•                  Our ability to hire and retain talentedemployees;

•                  Fluctuations in our gross margins and profitability;

•                  Significant seasonal fluctuations as a resultof government buying and funding patterns;

•                  Changes in the structure, composition, buyingpatterns or procurement practices of the government;

•                  Whether or not we are able to qualify asa  small business at the time of ourrecertification; and

•                  Our ability to execute change and implementprocess improvements.

 

**Overview**

 

GTSI is a recognized ITsolutions leader, providing products and services primarily to federalgovernment customers worldwide.  One ofour key differentiators is the extensive number of contract vehicles we have inour portfolio.  For over two decades GTSIhas served the public sector by partnering with global IT leaders such asPanasonic, Sun Microsystems, HP, Cisco and Microsoft.  We seek to deliver maximum value through ourbroad range of products, customer service and ISO 9002-registeredlogistics.  Through our Technology Teams,we deliver “best of breed” products and services to help our customers realizestrong value for their IT investments. Our corporate headquarters and distribution center are located inNorthern Virginia in close proximity to Washington Dulles Internationalairport.

 

Our annual revenue forfiscal year 2003 increased $286.3 million, or 42.9%, since our fiscal year 2000.  We expect our revenue to continue to grow andto exceed $1 billion during our 2004 fiscal year.  Our strategic growth plan is designed to capitalizeon the government’s heightened demand for IT services and it is our goal to doubleour revenue to $2 billion by 2007.

 

GTSI qualified as a “smallbusiness” under several of the GWACs and BPAs it holds based on our size statusat the time of the contracts’ original award. As a company with small business status, GTSI has a number of benefitsincluding being able to compete for small business set-aside contracts,

 

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qualifying as a small business subcontractor,bidding pursuant to small purchase procedures directed to non-manufacturersmall businesses, and offering government agencies an avenue to meet theirinternal small business purchase goals.

 

As discussed in more detailthroughout our MD&A:

 

•                  Our sales during the third quarter of 2004marked the largest quarterly sales in the history of the Company at $330.6million, an increase of 38.4% from second quarter.

•                  Our gross margin increased 69.9% during thethird quarter from the same period last year.

•                  Our net income for the nine months endedSeptember 30, 2004 increased $4.6 million to $7.5 million.

•                  Our balance sheet remains solid, with nolong-term debt

 

**Critical Accounting Estimates**

 

Our unaudited consolidatedfinancial statements are based on the selection of accounting policies and theapplication of significant accounting estimates, some of which requiremanagement to make significant assumptions. We believe that some of the more critical estimates and relatedassumptions that affect our financial condition and results of operations arein the areas of revenue recognition, allowance for doubtful accounts,merchandise inventories, long-lived assets, warranties, and stock-basedcompensation.  For more information oncritical accounting estimates, see the MD&A included in our Form 10-K forthe year ended December 31, 2003.  Wehave discussed the application of these critical accounting estimates with ourBoard of Directors and Audit Committee.

 

During the nine months endedSeptember 30, 2004, we did not change or adopt new accounting policies that hada material effect on our consolidated financial condition and results ofoperations.

 

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**Historical Results of Operations**

 

The following tableillustrates the unaudited percentage of sales represented by items in ourconsolidated condensed statements of operations for the periods presented.

 
| ** **                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| Sales                                |       | 100.0                                 | %          | 100.0                                | %          | 100.0 | % | 100.0 | % |
| Cost of sales                        |       | 85.9                                  |       | 89.9                                 |       | 88.5 |   | 89.7 |   |
| Gross margin                         |       | 14.1                                  |       | 10.1                                 |       | 11.5 |   | 10.3 |   |
| Operating  expenses:                 |       |                                  |       |                                 |       |   |   |   |   |
| Selling, general  and administrative |       | 9.0                                   |       | 8.0                                  |       | 9.9 |   | 9.7 |   |
| Depreciation and  amortization       |       | 0.2                                   |       | 0.3                                  |       | 0.3 |   | 0.3 |   |
| Total operating  expenses            |       | 9.2                                   |       | 8.3                                  |       | 10.2 |   | 10.0 |   |
| Income from  operations              |       | 4.9                                   |       | 1.8                                  |       | 1.3 |   | 0.3 |   |
| Interest income,  net                |       | 0.3                                   |       | 0.3                                  |       | 0.4 |   | 0.4 |   |
| Income before  taxes                 |       | 5.2                                   |       | 2.1                                  |       | 1.7 |   | 0.7 |   |
| Income tax  provision                |       | 2.0                                   |       | 0.8                                  |       | 0.7 |   | 0.3 |   |
| Net income                           |       | 3.2                                   | %          | 1.3                                  | %          | 1.0 | % | 0.4 | % |

 

The following tables set forth, for theperiods indicated, the approximate sales by product, by contract vehicle and byvendor, along with related percentages of total sales.

 
| ** **                        | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| **Contract  Vehicles**            | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                              |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| GSA Schedules                     |       | $                                    | 105.7      |                                | 32.0       | % | $ | 77.6 |   | 28.4 | % | $ | 202.7 |   | 27.1 | % | $ | 183.4 |   | 28.6 | % |
| IDIQ Contracts                    |       | 127.6                                |       | 38.6                                |       | 119.8 |   | 43.9 |   | 293.6 |   | 39.2 |   | 282.0 |   | 43.9 |   |
| Open Market                       |       | 72.9                                 |       | 22.1                                |       | 50.5 |   | 18.5 |   | 168.7 |   | 22.5 |   | 106.0 |   | 16.5 |   |
| Subcontracts and  Other Contracts |       | 24.4                                 |       | 7.3                                 |       | 25.2 |   | 9.2 |   | 83.3 |   | 11.2 |   | 70.3 |   | 11.0 |   |
| Total                             |       | $                                    | 330.6      |                                | 100.0      | % | $ | 273.1 |   | 100.0 | % | $ | 748.3 |   | 100.0 | % | $ | 641.7 |   | 100.0 | % |

 
| ** **         | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| **Top 5  Vendors** | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|               |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Panasonic          |       | $                                    | 65.7       |                                | 19.9       | % | $ | 48.4 |   | 17.7 | % | $ | 136.2 |   | 18.2 | % | $ | 116.8 |   | 18.2 | % |
| Sun Microsystems   |       | 40.3                                 |       | 12.2                                |       | 38.9 |   | 14.2 |   | 98.0 |   | 13.1 |   | 93.4 |   | 14.6 |   |
| HP                 |       | 47.7                                 |       | 14.4                                |       | 39.0 |   | 14.3 |   | 97.4 |   | 13.0 |   | 97.8 |   | 15.2 |   |
| Cisco              |       | 50.1                                 |       | 15.2                                |       | 32.2 |   | 11.8 |   | 94.0 |   | 12.6 |   | 70.7 |   | 11.0 |   |
| Microsoft          |       | 28.9                                 |       | 8.7                                 |       | 19.3 |   | 7.1 |   | 44.9 |   | 6.0 |   | 51.2 |   | 8.0 |   |
| Other              |       | 97.9                                 |       | 29.6                                |       | 95.3 |   | 34.9 |   | 277.8 |   | 37.1 |   | 211.8 |   | 33.0 |   |
| Total              |       | $                                    | 330.6      |                                | 100.0      | % | $ | 273.1 |   | 100.0 | % | $ | 748.3 |   | 100.0 | % | $ | 641.7 |   | 100.0 | % |

 

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| ** **  | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| **Product** | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|        |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Hardware    |       | $                                    | 247.0      |                                | 74.7       | % | $ | 201.4 |   | 73.7 | % | $ | 573.7 |   | 76.7 | % | $ | 443.0 |   | 69.0 | % |
| Software    |       | 69.0                                 |       | 20.9                                |       | 44.2 |   | 16.2 |   | 115.3 |   | 15.4 |   | 128.0 |   | 20.0 |   |
| Services*   |       | 14.6                                 |       | 4.4                                 |       | 27.5 |   | 10.1 |   | 59.3 |   | 7.9 |   | 70.7 |   | 11.0 |   |
| Total       |       | $                                    | 330.6      |                                | 100.0      | % | $ | 273.1 |   | 100.0 | % | $ | 748.3 |   | 100.0 | % | $ | 641.7 |   | 100.0 | % |

 

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*For the three months ended September 30, 2004and 2003, services included approximately $11.7 million and $23.5 million ofresold, third-party services and maintenance contracts, respectively.  Services also include approximately $2.9million and $4.0 million of consulting and other services for the three monthsended September 30, 2004 and 2003, respectively, that we provided eitherthrough our own business resources or through our alliance partners.  For the nine months ended September 30, 2004and 2003, services included approximately $48.4 million and $58.9 million ofresold, third-party services and maintenance contracts, respectively.  Services also include approximately $10.8million and $11.6 million of consulting and other services for the nine monthsended September 30, 2004 and 2003, respectively, that we provided eitherthrough our own business resources or through our alliance partners.

 

**Three Months Ended September 30,2004 Compared With the Three Months Ended September 30, 2003**

 

*Sales.*  Salesconsist of revenue from product shipments and services rendered net ofallowances for customer returns and credits. Sales for the third quarter of 2004 increased $57.6 million, or 21.1%,compared to the same period in 2003. Sales in every contract category except Subcontracts and Other Contractsexperienced growth during the third quarter of 2004 compared to the same periodlast year.  The increase in sales isattributed to the efforts of our expanded sales force.  Sales under the GSA Schedule increased $28.1million to $105.7 million while Open Market sales increased $22.4 million, or44.4%.  Sales under the IDIQ Contractscategory increased $7.8 million to $127.6 million for the quarter endedSeptember 30, 2004.  Approximately 75% ofour sales are derived from the sale of hardware.  Hardware and software sales increased $45.6million and $24.8 million, respectively, during the three months endedSeptember 30, 2004, compared to the same period last year primarily due to unitvolume growth.  Services revenue declinedby 46.9% principally due to reductions in the number of resold third partyservices provided.

 

*Backlog. *We recognize an order as backlog when we receive and accept a writtencustomer purchase order.  Our totalbacklog includes orders that have not shipped (“unshipped backlog”) as well asorders that have shipped but cannot be recognized as revenue at the periodend.  Total backlog increased 12.6% from$228.3 million at September 30, 2003 to $257.0 million at September 30,2004.  Unshipped backlog at September 30,2004, was approximately $239.6 million compared to $203.7 million at September30, 2003.  Backlogs fluctuatesignificantly from period to period due to the seasonality of governmentordering patterns and fluctuations in inventory availability of various products.

 

*Gross Margin. *Gross margin is sales less cost of sales, which includes product cost,freight, warranty maintenance cost and certain other expenses related to thecost of acquiring products.  Reportedgross margin increased $19.2 million in the quarter ended September 30, 2004from the same quarter in 2003.  Grossmargin percentages vary over time and may change significantly depending on themix of customer’s use of available contract vehicles and the mix of productsold.  Gross margin percentage in thethird quarter of 2004 increased to 14.1% of total sales from 10.1% of totalsales in the same period in 2003 of which three percentage points were due tothe $10.1 million reduction in Cost of Sales resulting from the non-cash extinguishmentof aged accrued liabilities.  During thethree months ended September 30, 2004 there was a $0.7 million increase to Costof Sales for the loss of inventory, which was offset by

 

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a $0.7 million reversal of aged accruedliabilities determined to no longer be valid. Management performs these typesof reviews on a periodic basis throughout the year.

 

*Operating Expenses. *Total operating expenses for the three months ended September 30, 2004increased $7.8 million from $22.6 million in the same period in 2003.  This increase is chiefly related to increasedcosts associated with new hires supporting our strategic growth plan and our additionalconsultant expense to support our Section 404 Sarbanes-Oxley Act (“SOX 404”) programand ERP system initiative.  Expressed asa percentage of total sales, total operating expenses increased from 8.3% to9.2% during the three months ended September 30, 2004.

 

**Nine Months Ended September 30,2004 Compared With the Nine Months Ended September 30, 2003**

 

*Sales. *Sales for the first nine months of 2004 were $748.3 million, comparedto $641.7 million in the first nine months of 2003, an increase of $106.6million, or 16.6%.  The majority of thisincrease is due to the 59.2% increase in Open Market procurements resultingfrom the efforts of the Company’s expanded sales force.  Sales in every contract category haveincreased from the nine months ended September 30, 2003 to 2004.  Sales of hardware increased $130.7 million,or 29.5%, to $573.7 million for the nine months ended September 30, 2004 due toan increase in networking equipment and larger server sales.  Sales of software and services declined $12.7and $11.4, respectively, during the nine month period ended September 30, 2004from the same period of 2003.  Thedecrease in software was primarily due to the expiration of a contract withMicrosoft during 2004.

 

*Gross Margin. *Gross margin as a percentage of sales increased from 10.3% for the ninemonths ended September 30, 2003 to 11.5% in the current period.  This increase was predominantly due to thereduction in Cost of Sales resulting from the non-cash extinguishment ofaccrued liabilities.  Without the impactof this extinguishment, gross margin would have been 10.2% as a percentage ofsales.

 

*Operating Expenses.*Total operating expenses for the nine monthsended September 30, 2004 increased $12.8 million from the same period in2003.  This increase was primarily relatedto our compensation expense associated with increased headcount company-wideand additional consultant expense to support our SOX 404 program and ERP systeminitiative.  Total operating expensesremained flat as a percentage of sales at approximately 10% for the nine monthperiods ended September 30, 2004 and 2003.

 

*Income Tax. *We recorded a tax provision of $4.9 million for the first nine monthsof 2004, of which $4.0 million is due to the reversal of accrued liabilities,based on our expected annual effective tax rate of approximately 39.5%.   During the nine months ended September 30,2003, we recorded a tax provision of $1.8 million at an effective rate of 39.1%.

 

**Liquidity and Capital Resources**

 

*Cash flows for the nine monthsended September 30,*

* *
| **(in  millions)**                     | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Cash provided by  operating activities |       | $        | 16.5       |     | $          | 18.0       |       | $ | (1.5 | ) |
| Cash used in  investing activities     |       | $        | (5.7       | )        | $          | (7.8       | )          | $ | (2.1 | ) |
| Cash used in  financing activities     |       | $        | (10.8      | )        | $          | (10.1      | )          | $ | 0.7 |   |

 

Cash provided by operatingactivities for the nine months ended September 30, 2004 was $16.5

 

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million, a decrease of $1.5 million from cashprovided for the nine months ended September 30, 2003.  This decrease was primarily a result of changesin assets and liabilities, offset by a $4.6 million increase in net income.  Changes in assets and liabilities included adecrease in accounts payable during the nine months ended September 30, 2004compared to the same period of 2003 as a result of more product lines goingthrough the Wholesale Financing Facility which required more timely payments tovendors. Accounts receivable increased due to the increase in sales in 2004.These changes were offset by a decrease in the use of cash related to inventoryand other assets partly related to a decrease in pre-positioned inventory andmerchandise inventory at September 30, 2004.

 

Investing activities used $2.1million less cash during the nine months ended September 30, 2004, compared to thesame period in 2003 due to $1.3 million less capital expenditures on the developmentand implementation of our ERP system and $0.8 million less for equipment andother fixed asset purchases.

 

During the nine months endedSeptember 30, 2004, cash used in financing activities was $0.7 million morethan cash used during the nine months ended September 30, 2003.  Although we repaid $5.3 million more ofborrowings under our Credit Facility during the nine months ended September 30,2004, than in the same period in 2003, during 2004 we did not repurchase anyshares of common stock.  During the ninemonths ended September 30, 2003 we paid $4.0 million to repurchase shares oftreasury stock.  In addition, we receivedproceeds of $1.6 million from common stock options exercised during the ninemonths ended September 30, 2004, compared to $0.9 million received in the sameperiod of 2003.  Cash from the EmployeeStock Purchase Plan remained consistent between the periods and provided $0.4million and $0.5 million of proceeds for the nine month periods ended September30, 2004 and 2003, respectively.

 

*Bank Credit Facility*

We have a $125 millioncredit facility with a group of banks (the “Credit Facility”).  The Credit Facility includes a revolving lineof credit (the “Revolver”) and a provision for inventory financing of vendorproducts (the “Wholesale Financing Facility”). The Credit Facility, unless terminated earlier, will continue after theinitial maturity date of February 28, 2005 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.  Weplan to expand our credit facility upon renewal in 2005 to correspond with thegrowth of our business.  Borrowing underthe Revolver is limited to 85% of eligible accounts receivable.  The Revolver is secured by substantially allof GTSI’s assets.  Borrowing under theWholesale Financing Facility is limited to 100% of the value of ourinventory.  The Wholesale FinancingFacility is secured by the underlying inventory.  The Credit Facility carries an interest rateindexed to LIBOR plus 1.75 percentage points. On July 29, 2004 the Company signed a second amendment to the revolverto add its subsidiary, TLI, as a borrower. The Credit Facility also contains certain covenants as well asprovisions specifying compliance with certain quarterly and annual financialratios.  At September 30, 2004, we werein compliance with all financial covenants set forth in the Credit Facility andhad additional available credit on the Credit Facility of $20.0 million.

 

*Capital Resources andRequirements*

Our ongoing capitalrequirements depend on a variety of factors, including the extent to which weare able to fund the cash needs of our business from operations.  During the first quarter of 2004, we wereable to completely repay our notes payable to banks.  We anticipate that we will continue to relyprimarily on operating cash flow, vendor credit and our Wholesale FinancingFacility to finance our operating cash needs. We believe that such funds should be sufficient to satisfy our near termanticipated cash requirements for operations. Nonetheless, we may seek additional sources of capital, including obtainingpermanent financing over a longer term at fixed rates, to finance our workingcapital requirements.  GTSI believes thatsuch capital sources will be available to us on acceptable terms, if needed.  During the nine months ended September, 302004 we made capital expenditures of $6.0 million, primarily for consulting

 

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costs associated with the implementation ofour ERP system and the purchase of software for internal use.

 

**Outlook**

 

As of June 30, 2004, our sales volumesurpassed $1 billion for the trailing twelve months for the first time. Revenuefor the trailing twelve months at September 30, 2004 continued to be above $1billion.  We expect our annual sales to exceed$1 billion for our 2004 fiscal year.  Inaddition, we have developed a strategic growth plan to double our revenue,increase our productivity and our gross margins over the next three years.  In addition, we are selectively, butaggressively, hiring talented employees and expect our headcount to reach 850employees by the end of the year.  Weintend to finalize the pertinent documentation associated with the creation ofa financial leasing subsidiary during the fourth quarter designed to expand ourrevenue from lease arrangements for information technology products.  We are in the final phase of the designbuild-out and user acceptance testing of our ERP system which will enable us tointroduce the ERP capabilities throughout the organization early in 2005.  Detailed training programs will begin in thefourth quarter of 2004 to imbed the ERP system into the daily workings of theCompany.

 

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**item3.                  Quantitative andQualitative Disclosures About Market Risk**

 

The information required bythis item is hereby incorporated by reference to GTSI’s Annual Report on Form10-K for the year ended December 31, 2003. There have been no material changes in our market risk from thatdisclosed in our Form 10-K.

 

**Item4.                  Controls andProcedures**

 

As of the end of the periodcovered by this report, based on our management’s evaluation, with theparticipation of GTSI’s Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the disclosure controls and procedures (as defined inRules13a-15(e) or 15d – 15(e) under the Securities Exchange Act of 1934, asamended) our Chief Executive Officer and Chief Financial Officer have concludedthat our disclosure controls and procedures are effective in ensuring thatinformation required to be disclosed by us in reports filed or submitted underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms.

 

There was no change in ourinternal control over financial reporting during our third quarter of fiscal 2004that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II – OTHERINFORMATION**

 

**Item6.  Exhibits and Reports on Form 8-K:**

 

(a)                                  Exhibits:

Theexhibits set forth in the Exhibit Index are filed as part of the QuarterlyReport on Form 10-Q.

 

(b)                                 Reports on Form 8-K:

OnJuly 27, 2004, GTSI filed a report on Form 8-K under Item 12 relating to itspress release of financial information for the three month period ending June30, 2004, and monthly sales information.

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on November 5, 2004 on its behalf by the undersigned thereunto dulyauthorized.

 
| ** ** | **GTSI Corp.**                                     |
|------------|----------------------------------------------------|
|       |                                               |
|       | /s/ M. Dendy Young                                 |   |
|       | Dendy Young                                        |
|       | Chairman and Chief  Executive Officer              |
|       |                                               |
|       | /s/ Thomas A. Mutryn                               |   |
|       | Thomas A. Mutryn                                   |
|       | Senior Vice President and  Chief Financial Officer |

 

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**EXHIBITINDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                         |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2                |       | 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 (filed herewith) |
| 10.3                |       | Lease dated August 11,  1995 between the Company and Security Capital Industrial Trust, and  Amendments for distribution center facility (filed herewith)                                                                               |
| 10.4                |       | Lease dated December 10,  1997 between the Company and Petula Associates, Ltd. and Amendment for  headquarters facility (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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