**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended March 31, 2007**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from                     to**

**CommissionFile Number:     0-19394**

**GTSI CORP.**

(Exact name of registrantas specified in its charter)

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

 

**703-502-2000**

(Registrant’s 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  x  NO  o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

o            Yes         x           No

Thenumber of shares of common stock, $0.005 par value, outstanding as of April 30,2007 was 9,619,231.

 

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**GTSI CORP.**

**Form 10—Q for the Quarter EndedMarch 31, 2007**

**INDEX**
|                                          | ** **                                                                                                         | ** ** | ** ** |
|------------------------------------------|--------------------------------------------------------------------------------------------------------------------|------------|------------|
| **PART  I — FINANCIAL INFORMATION** |                                                                                                               |       |
| ** **                               |                                                                                                               |       |
| ITEM 1.                                  | Financial  Statements —                                                                                       |       |       |
|                                     |                                                                                                               |       |       |
|                                     | Condensed Consolidated Balance Sheets as of March 31,  2007 (Unaudited) and December 31, 2006                      |       | 1          |
|                                     |                                                                                                               |       |       |
|                                     | Unaudited Condensed Consolidated Statements of  Operations for the Three Months Ended March 31, 2007 and 2006 |       | 2          |
|                                     |                                                                                                               |       |       |
|                                     | Unaudited Condensed Consolidated Statements of Cash  Flows for the Three months Ended March 31, 2007 and 2006 |       | 3          |
|                                     |                                                                                                               |       |       |
|                                     | Notes to Unaudited Condensed Consolidated Financial  Statements                                                    |       | 4          |
|                                     |                                                                                                               |       |       |
| ITEM 2.                                  | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |       | 12         |
|                                     |                                                                                                               |       |       |
| ITEM 3.                                  | Quantitative and Qualitative Disclosures About Market  Risk                                                        |       | 18         |
|                                     |                                                                                                               |       |       |
| ITEM 4.                                  | Controls and Procedures                                                                                            |       | 18         |
|                                     |                                                                                                               |       |       |
| **PART  II — OTHER INFORMATION**    |                                                                                                               |       |
| ** **                               | ** **                                                                                                         |       |       |
| ITEM 6.                                  | Exhibits                                                                                                           |       | 19         |
|                                     |                                                                                                               |       |       |
| **SIGNATURES**                           | ** **                                                                                                         |       | 19         |

 

** **

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**PART I. FINANCIAL INFORMATION**

###### **ITEM 1.   FINANCIAL STATEMENTS**

**GTSI CORP.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(in thousands, except share and per share data)
| ** **                                                                                                                                                                                      | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                                      | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                                                                                                                      |       |               |       |                  |       |
| Current assets:                                                                                                                                                                                 |       |               |       |                  |       |
| Cash                                                                                                                                                                                            |       | $                  | 797        |                  | $          | 705 |   |
| Accounts  receivable, net                                                                                                                                                                       |       | 150,021            |       | 222,072               |       |
| Inventory                                                                                                                                                                                       |       | 26,040             |       | 35,691                |       |
| Deferred costs                                                                                                                                                                                  |       | 12,364             |       | 22,188                |       |
| Other current  assets                                                                                                                                                                           |       | 8,912              |       | 9,651                 |       |
| Total current  assets                                                                                                                                                                           |       | 198,134            |       | 290,307               |       |
| Depreciable  assets, net                                                                                                                                                                        |       | 13,321             |       | 13,627                |       |
| Long-term receivables  and other assets                                                                                                                                                         |       | 23,838             |       | 26,747                |       |
| Total assets                                                                                                                                                                                    |       | $                  | 235,293    |                  | $          | 330,681 |   |
|                                                                                                                                                                                            |       |               |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                  |       |               |       |                  |       |
| Current liabilities:                                                                                                                                                                            |       |               |       |                  |       |
| Borrowings under  credit facility                                                                                                                                                               |       | $                  | 752        |                  | $          | 30,912 |   |
| Accounts payable                                                                                                                                                                                |       | 96,985             |       | 142,217               |       |
| Financed lease  debt, current portion                                                                                                                                                           |       | 15,351             |       | 16,546                |       |
| Accrued  liabilities                                                                                                                                                                            |       | 17,378             |       | 23,194                |       |
| Deferred revenue                                                                                                                                                                                |       | 5,275              |       | 7,241                 |       |
| Total current  liablilites                                                                                                                                                                      |       | 135,741            |       | 220,110               |       |
| Long-term debt                                                                                                                                                                                  |       | 10,000             |       | 10,000                |       |
| Long-term  financed lease debt                                                                                                                                                                  |       | 14,224             |       | 18,758                |       |
| Other liabilities                                                                                                                                                                               |       | 5,170              |       | 5,130                 |       |
| Total  liabilities                                                                                                                                                                              |       | 165,135            |       | 253,998               |       |
|                                                                                                                                                                                            |       |               |       |                  |       |
| Commitments and  contingencies                                                                                                                                                                  |       | —             |       | —                |       |
|                                                                                                                                                                                            |       |               |       |                  |       |
| Stockholders’ equity                                                                                                                                                                       |       |               |       |                  |       |
| Common stock -  $0.005 par value, 20,000,000 shares authorized; 9,806,084 issued and  9,559,119 outstanding at March 31, 2007; 9,806,084 issued and 9,512,019  outstanding at December 31, 2006 |       | 49                 |       | 49                    |       |
| Capital in  excess of par value                                                                                                                                                                 |       | 45,359             |       | 45,110                |       |
| Retained  earnings                                                                                                                                                                              |       | 26,591             |       | 33,717                |       |
| Treasury stock,  246,965 shares at March 31, 2007 and 294,065 shares at December 31, 2006, at  cost                                                                                             |       | (1,841             | )          | (2,193                | )          |
| Total  stockholders’ equity                                                                                                                                                                |       | 70,158             |       | 76,683                |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                |       | $                  | 235,293    |                  | $          | 330,681 |   |

 

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

1

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** **

**GTSI CORP.**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 (in thousands,except share and per share data)
| ** **                                                 | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **March 31,**               | ** ** |
| ** **                                                 | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                                       |       |                             |       |   |   |
| SALES                                                      |       | $                                | 144,082    |   | $ | 148,279 |   |
|                                                       |       |                             |       |   |   |
| COST OF SALES,  exclusive of depreciation and amortization |       | 124,685                          |       | 129,978 |   |
|                                                       |       |                             |       |   |   |
| GROSS MARGIN                                               |       | 19,397                           |       | 18,301 |   |
|                                                       |       |                             |       |   |   |
| SELLING, GENERAL  & ADMINISTRATIVE EXPENSES            |       | 27,142                           |       | 29,606 |   |
|                                                       |       |                             |       |   |   |
| LOSS FROM  OPERATIONS                                      |       | (7,745                           | )          | (11,305 | ) |
|                                                       |       |                             |       |   |   |
| INTEREST AND  OTHER INCOME                                 |       |                             |       |   |   |
| Lease-related income, net                                  |       | 1,719                            |       | 2,378 |   |
| Interest and other income, net                             |       | 458                              |       | 240 |   |
| Interest expense                                           |       | (1,380                           | )          | (1,341 | ) |
| Interest and other income, net                             |       | 797                              |       | 1,277 |   |
|                                                       |       |                             |       |   |   |
| LOSS BEFORE  INCOME TAXES                                  |       | (6,948                           | )          | (10,028 | ) |
|                                                       |       |                             |       |   |   |
| INCOME TAX  BENEFIT (PROVISION)                            |       | —                           |       | — |   |
|                                                       |       |                             |       |   |   |
| NET LOSS                                                   |       | $                                | (6,948     | ) | $ | (10,028 | ) |
|                                                       |       |                             |       |   |   |
|                                                       |       |                             |       |   |   |
| LOSS PER SHARE                                             |       |                             |       |   |   |
| Basic                                                      |       | $                                | (0.73      | ) | $ | (1.08 | ) |
| Diluted                                                    |       | $                                | (0.73      | ) | $ | (1.08 | ) |
|                                                       |       |                             |       |   |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING             |       |                             |       |   |   |
| Basic                                                      |       | 9,475                            |       | 9,288 |   |
| Diluted                                                    |       | 9,475                            |       | 9,288 |   |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements.

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**GTSI CORP.**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

 
| ** **                                                                      | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                      | ** ** | **March 31,**               | ** ** |
| ** **                                                                      | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                      |       |                             |       |   |   |
| Net loss                                                                        |       | $                                | (6,948     | ) | $ | (10,028 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities |       | 38,194                           |       | 53,141 |   |
| Net cash  provided by operating activities                                      |       | 31,246                           |       | 43,113 |   |
|                                                                            |       |                             |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                      |       |                             |       |   |   |
| Purchase of  depreciable assets                                                 |       | (654                             | )          | (639 | ) |
| Net cash used in  investing activities                                          |       | (654                             | )          | (639 | ) |
|                                                                            |       |                             |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITES:**                                       |       |                             |       |   |   |
| Payments on  credit facility                                                    |       | (30,161                          | )          | (48,014 | ) |
| Payments of  deferred financing costs                                           |       | (570                             | )          | (225 | ) |
| Proceeds from  financed lease debt                                              |       | —                           |       | 8,110 |   |
| Proceeds from  equity transactions                                              |       | 231                              |       | 131 |   |
| Net cash used in  financing activities                                          |       | (30,500                          | )          | (39,998 | ) |
|                                                                            |       |                             |       |   |   |
| NET INCREASE IN  CASH                                                           |       | 92                               |       | 2,476 |   |
|                                                                            |       |                             |       |   |   |
| CASH AT  BEGINNING OF PERIOD                                                    |       | 705                              |       | 27 |   |
|                                                                            |       |                             |       |   |   |
| CASH AT END OF  PERIOD                                                          |       | $                                | 797        |   | $ | 2,503 |   |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements.

3

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**GTSI CORP.**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**1. Basis of Presentation**

The accompanyingunaudited interim condensed consolidated financial statements of GTSI Corp. andits subsidiaries (“GTSI” or the “Company”) have been prepared pursuant to therules and regulations of the Securities and Exchange Commission for quarterlyreports on Form 10-Q and, therefore, omit or condense certain note disclosuresand other information required by U.S. generally accepted accounting principlesfor complete financial statements.  Thesefinancial statements should therefore be read in conjunction with the auditedconsolidated financial statements and accompanying notes for the year endedDecember 31, 2006 included in GTSI’s Annual Report on Form 10-K.

In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements reflect all adjustments of a normal recurring nature (except asdisclosed herein) considered necessary to present fairly GTSI’s financialposition as of March 31, 2007 and its results of operations and cash flows forthe three months ended March 31, 2007.

The results of operationsfor the three months ended March 31, 2007 are not necessarily indicative of theresults that may be expected for the full year, or future periods.  GTSI has historically experienced significantseasonal fluctuations in operations as a result of government buying andfunding patterns.  These patterns historicallyhave had a negative effect on GTSI’s sales and net loss during the quarterended March 31. Certain prior period amounts have been reclassified to conformto the current period presentation.

**2. NewAccounting Pronouncements**

In June 2006, theFinancial Accounting Standards Board (“FASB”) Emerging Issues Task Force (“EITF”)reached a consensus on EITF No. 06-3, *HowSales Taxes Collected from Customers and Remitted to Governmental AuthoritiesShould Be Presented in the Income Statement (That Is, Gross Versus NetPresentation)* (EITF 06-3). The EITF reached a consensus that acompany should disclose its accounting policy (i.e., gross or net presentation)regarding presentation of taxes within the scope of this issue. The EITF alsoconcluded that once the new standard is effective (January 1, 2007), a companyshould disclose the amount of such taxes for periods in which these taxesincluded in gross revenues are considered material. The Company collects andremits sales and property taxes on products and services that it purchases andsells under its contracts with customers, and reports such amounts under thenet method in its consolidated statements of operations. Accordingly, there areno sales and property taxes included in gross revenue and therefore disclosurewill not be required.

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

In February 2007, theFASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities* (“FAS 159”).  This statement gives entities the option toreport most financial assets and liabilities at fair value, with changes infair value recorded in earnings. This statement, which is effective for fiscalyears beginning after November 15, 2007, is not expected to have a materialimpact on the Company’s consolidated financial position or results ofoperations.

On January 1,2007, the Company adopted FASB Interpretation No. 48,*Accountingfor Uncertainty in Income Taxes*. See Note 9 for further discussion.

**3.Stock-Based Compensation**

*Stock Incentive Plans*

The Company has twostockholder approved combination incentive and non-statutory stock incentiveplans: the 1994 Stock Option Plan, as amended (“1994 Plan”), and the Amendedand Restated 1996 Stock Incentive Plan (“1996 Plan”). The Company has anotherstockholder approved plan, the 1997 Non-Officer Stock Option Plan

4

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(“1997 Plan”), whichprovides for the granting of non-statutory stock options to employees (otherthan officers and directors). In addition, GTSI has utilized an incentivepermitted under NASDAQ marketplace rules that allows a company withoutstockholder approval to offer stock options to prospective employees as aninducement to join GTSI.

*Valuation Assumptions*

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

|                           | ** ** | **For the three months ended March 31,** | ** ** |
|---------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                | ** ** | **2007**                                                               | ** ** | **2006** | ** ** |
| Expected  volatility      |       | 43.8                                                                   | %          | 50.1 | % |
| Expected  dividends       |       | —                                                                 |       | — |   |
| Expected term  (in years) |       | 4.4                                                                    |       | 4.8 |   |
| Risk free interest rate   |       | 4.7                                                                    | %          | 4.6 | % |

 

*StockOptions*

A summary ofoption activity under the Company’s stock incentive plans as of March 31, 2007and changes during the three-month period then ended is presented below:
| ** **                      | ** ** | ** **              | ** ** | ** **                | ** ** | **Weighted**    | ** ** | ** **              | ** ** |
|---------------------------------|------------|-------------------------|------------|---------------------------|------------|-----------------|------------|-------------------------|------------|
| ** **                      | ** ** | ** **              | ** ** | ** **                | ** ** | **Average**     | ** ** | **Aggregate**           | ** ** |
| ** **                      | ** ** | ** **              | ** ** | **Weighted**              | ** ** | **Remaining**   | ** ** | **Intrinsic**           | ** ** |
| ** **                      | ** ** | **Shares**              | ** ** | **Average Exercise** | ** ** | **Contractual** | ** ** | **Value**               | ** ** |
| ** **                      | ** ** | **(in thousands)** | ** ** | **Price**                 | ** ** | **Term**        | ** ** | **(in thousands)** | ** ** |
| Outstanding at  January 1, 2007 |       | 2,105                   |       | $                         | 7.93       |            |       |                    |       |   |
| Granted                         |       | 45                      |       | $                         | 9.73       |            |       |                    |       |   |
| Exercised                       |       | (47                     | )          | $                         | 4.90       |            |       |                    |       |   |
| Forfeited                       |       | (59                     | )          | $                         | 7.29       |            |       |                    |       |   |
| Canceled                        |       | (13                     | )          | $                         | 10.72      |            |       |                    |       |   |
| Outstanding at  March 31, 2007  |       | 2,031                   |       | $                         | 8.04       |            | 4.59       |                    | $          | 6,004 |   |
| Exercisable at March  31, 2007  |       | 1,223                   |       | $                         | 8.64       |            | 3.39       |                    | $          | 2,888 |   |

 

The weighted-averagegrant-date fair value of options granted during the three months ended March31, 2007 and 2006 was $4.05 and $3.16, respectively.  The total intrinsic value of optionsexercised during the three months ended March 31, 2007 and 2006 was $0.3 millionand $0.4 million, respectively.  During the three months ended March 31, 2007and 2006, 47,100 shares and 122,500 shares, respectively, of stock options wereexercised under the Company’s stock option plans. The Company hashistorically issued shares from treasury stock to satisfy option exercises. Due to the full valuation allowance on theCompany’s deferred tax assets, no tax benefit for the exercise of stock optionswas recognized during the three months ended March 31, 2007 and 2006.

*Restricted Shares*

During the three monthsended March 31, 2007, there were no restricted stock awards granted. During thethree months ended March 31, 2006, approximately 1,667 restricted stock awardswere granted. During the three months ended March 31, 2007 and 2006, $0.1million was recorded as stock compensation expense for restricted stock.

The fair value ofnonvested shares of restricted stock is determined based on the closing tradingprice of the

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Company’s shares on thegrant date. A summary of the status of Company’s nonvested shares as of March31, 2007, and changes during the three months ended March 31, 2007, ispresented below:

|                               | ** ** | ** **              | ** ** | **Weighted**                  | ** ** |
|-------------------------------|------------|-------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **Shares**              | ** ** | **Average Grant-**       | ** ** |
| ** **                    | ** ** | **(in thousands)** | ** ** | **Date Fair Value** | ** ** |
|                          |       |                    |       |                          |       |
| Nonvested at  January 1, 2007 |       | 68                      |       | $                             | 7.47       |   |
| Granted                       |       | —                  |       |                          |       |
| Forfeited                     |       | —                  |       |                          |       |
| Restricted lapse              |       | —                  |       |                          |       |
| Nonvested at March 31,  2007  |       | 68                      |       | $                             | 7.47       |   |

 

*Unrecognized Compensation*

As of March 31, 2007,there was $3.3 million of total unrecognized compensation cost related tononvested stock-based awards, which consisted of unrecognized compensation of$2.9 million related to stock options and $0.4 million related to restrictedstock awards.  The cost for unrecognizedcompensation related to stock options and restricted stock awards is expectedto be recognized over a weighted average period of 3.0 years and 3.2 years,respectively.

**4. Lease and Other Receivables**

The Company leasescomputer hardware, generally under sales-type leases, in accordance with FAS13. In connection with those leases, the Company sometimes sells relatedservices, software and maintenance to its customers. The terms of thereceivables from the sale of these related services are often similar to theterms of the leases of computer hardware; that is, receivables are interestbearing and are often due over a period of time that corresponds with the termsof the leased computer hardware.

The Company’sinvestments in sales-type lease receivables were as follows as of (inthousands):

|                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Future minimum  lease payments receivable |       | $                  | 27,909     |                  | $          | 26,307 |   |
| Unguaranteed  residual values             |       | 10,516             |       | 10,516                |       |
| Unearned income                           |       | (5,581             | )          | (6,485                | )          |
|                                      |       | $                  | 32,844     |                  | $          | 30,338 |   |

 

The Company’sinvestment in other receivables was as follows as of (in thousands):

|                                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Future minimum  payments receivable |       | $                  | 7,643      |                  | $          | 14,464 |   |
| Unearned income                     |       | (1,848             | )          | (2,415                | )          |
|                                |       | $                  | 5,795      |                  | $          | 12,049 |   |

 

**5. Transferred Receivables and Financed Lease Debt**

For the three monthsended March 31, 2007, the Company did not transfer any financing receivables tothird parties that did not meet the sale criteria under FAS 140. For the threemonths ended March 31, 2006, the Company transferred financing receivables of$8.1 million to third parties in transactions that did not meet the salecriteria under FAS 140. These amounts are included in cash flows from financingactivities in the condensed consolidated statement of cash flows. Accordingly, as payments are made on these receivables directly to the thirdparty financing company by our customers, the related reduction of thesereceivables and financed lease debt is a 

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non-cash transaction andexcluded from the statement of cash flows. As a result financed lease debt andthe related receivables decreased by $5.7 million for the first three months of2007.

The Company recognizedinterest expense on financed lease debt in the amount of $0.6 million and $0.8million for the three months ended March 31, 2007 and 2006, respectively.

**6. CreditFacility and Term Loan**

During 2006, the Companyobtained a $135 million credit agreement with a group of lenders (the “CreditFacility”). This Credit Facility replaced GTSI’s former credit facility, whichexpired on May 31, 2006. The gross outstanding balance of the CreditFacility as of March 31, 2007 was $2.4 million and is included on theaccompanying balance sheet, net of the Company’s lockbox cash accounts that areaccessed by the lenders to pay down the Credit Facility outstanding balance,which was $1.6 million as of March 31, 2007.

The Credit Facilityprovides access to capital through June 2, 2010, with borrowings securedby substantially all of the assets of the Company. The Facility matures in fullon June 2, 2010. Borrowing under the Credit Facility at any time islimited to the lesser of $135 million or a collateral-based borrowing base lessoutstanding obligations. The Credit Facility subjects GTSI to certain covenantslimiting its ability to (i) incur debt; (ii) make guarantees; (iii) makerestricted payments, purchases or investments; (iv) enter into certaintransactions with affiliates; (v) acquire real estate and (vi) enterinto sale and leaseback transactions. The Credit Facility carries an interestrate generally indexed to the Prime Rate plus 0.25% plus margin. As of March31, 2007, GTSI had remaining available credit under the Credit Facility of$28.2 million.

The Credit Facilitycontains negative financial performance covenants, including a minimum EBITDAcovenant for each period, information covenants and certain affirmativecovenants. On March 30, 2007, the Company executed the third amendment tothe Credit Facility, which removed the minimum EBITDA covenant atMarch 31, 2007 and revised the minimum EBITDA covenant for futuremeasurement periods. The Company currently relies on its Credit Facility as itsprimary vehicle to finance its operations.

At March 31, 2007, theCompany had a subordinated secured long-term loan of $10 million (the “TermLoan”). The debt covenants and maturity date on the Term Loan are the same asthe Credit Facility and no payments of principal are due until June 2,2010. The interest rate on the Term Loan is Prime plus 5.25% per annum and isdue monthly. This agreement contains a prepayment penalty which is equal to thegreater of (i) all interest payable on the Term Loan that would be payablefrom the Third Amendment Effective Date through the date which is twelve (12)months after the Third Amendment Effective Date, less interest paid through currentor (ii) 1% of the amount prepaid.

The Company defers loanfinancing costs and recognizes these costs throughout the term of the loans.Deferred financing costs as of March 31, 2007 and December 31, 2006 were$4.7 million and $4.5 million, respectively.

**7. ContractTermination Costs**

In 2006, the Companyimplemented a reduction in workforce to eliminate duplication within theorganization and move out of activities which have failed to yield adequateprofitability. These actions resulted in excess office space for which theCompany recorded a charge in 2006 of $0.2 million for the consolidation offacilities. These amounts are included in selling, general & administrativeexpenses on the accompanying Statement of Operations.

Contract termination costreserve activities for the three months ended March 31, 2007 was as follows (inthousands):

| Contract termination  liability as of December 31, 2006 |   | $   | 122 |   |
|---------------------------------------------------------|--------|-----|-----|--------|
| Less: cash  payments                                    |   | (15 | )   |
| Less: revision  to estimate                             |   | (57 | )   |
| Contract termination  liability as of March 31, 2007    |   | $   | 50  |   |

 

7

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** **

**8. LossPer Share**

Basic loss per share iscalculated by dividing net loss by the weighted average number of sharesoutstanding during the period, which includes shares of restricted stock thatare fully vested.  Diluted loss per shareis computed similarly to basic loss per share, except that the weighted averagenumber of shares outstanding are increased to include equivalents, when theireffect is dilutive.

Anti-dilutive employeestock options totaling 274,774 and 229,428 shares respectively were excludedfor the three months ended March 31, 2007 and 2006.  Unvested restricted stock units totaling 68,417and 51,665 shares, respectively, have been excluded for the three months endedMarch 31, 2007 and 2006.

The followingtable sets forth the computation of basic and diluted loss per share (inthousands):

|                                                                               | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                    | ** ** | **March 31,**               | ** ** |
| ** **                                                                    | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Basic loss per  share:                                                        |       |                             |       |   |   |
| Net loss                                                                      |       | $                                | (6,948     | ) | $ | (10,028 | ) |
| Weighted average number of shares outstanding                                 |       | 9,475                            |       | 9,288 |   |
| Basic loss per share                                                          |       | $                                | (0.73      | ) | $ | (1.08 | ) |
|                                                                          |       |                             |       |   |   |
| Diluted loss per  share:                                                      |       |                             |       |   |   |
| Net loss                                                                      |       | $                                | (6,948     | ) | $ | (10,028 | ) |
| Weighted average number of shares outstanding                                 |       | 9,475                            |       | 9,288 |   |
| Incremental shares attributable to the exercise of  outstanding stock options |       | N/A                              |       | N/A |   |
| Weighted average number of shares and equivalents                             |       | 9,475                            |       | 9,288 |   |
| Diluted loss per  share                                                       |       | $                                | (0.73      | ) | $ | (1.08 | ) |

 

**9. IncomeTaxes**

Effective January 1,2007, the Company adopted the provisions of FASB Interpretation No. 48,*Accounting for Uncertainty in Income Taxes* (“FIN 48”).FIN 48 clarifies the accounting for income taxes by prescribing a minimum probabilitythreshold that a tax position must meet before a financial statement benefit isrecognized. As a result of the implementation of FIN 48, the Company recognizedan increase to liabilities for uncertain tax positions totaling $0.2 millionthrough an adjustment to the beginning balance of retained earnings on theCondensed Consolidated Balance Sheet. At the beginning of 2007, GTSI hadapproximately $0.6 million of total gross unrecognized tax benefits.  Of this total, approximately $0.1 million (netof indirect federal and state benefits) represents the amount of unrecognizedtax benefits that, if recognized, would favorably affect the effective incometax rate in any future periods.

There were no increasesto gross unrecognized tax benefits during the first quarter of 2007.

GTSI is subject to U.S.federal income tax as well as income tax of multiple states and localjurisdictions. The Company’s federal tax years that remain subject toexamination are 2003 and forward. Currently, the federal returns for tax years 2003, 2004 and 2005 areunder examination.  It is reasonablypossible that all unrecognized tax benefits as of December 31, 2006 will beeliminated during the next twelve months. These uncertainties relate to anticipated federal income tax adjustments.

GTSI’s practice is torecognize interest and/or penalties related to uncertain tax positions inincome tax expense. The Company had $0.2 million accrued for interest and lessthan $0.1 million accrued for penalties at the beginning of 2007. During thefirst quarter of 2007, the increase to accrued interest and penalties wasimmaterial.

8

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Interest will continue toaccrue on certain issues for the remainder of 2007; however these amounts arenot expected to be material.

Since Companymanagement believes that it is not more likely than not that its deferred taxassets will be realized, the Company has recorded a full valuation allowanceagainst its net deferred tax assets and is not anticipating the release of thisvaluation allowance during the current year, except to the extent that deferredtax assets are ultimately utilized within the current year.  

**10. Commitmentsand Contingencies**

*Product Warranties*

GTSI offersextended warranties on certain products which are generally covered for threeor five years 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 liabilities(in thousands):

|                                            | ** ** | **Three months ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **March 31,**               | ** ** |
| ** **                                 | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Accrued  warranties at beginning of period |       | $                                | 855        |   | $ | 849 |   |
| Charges made  against warranty liabilities |       | (87                              | )          | (115 | ) |
| Adjustments to warranty  reserves          |       | (216                             | )          | 170 |   |
| Accruals for  additional warranties sold   |       | —                           |       | 37 |   |
| Accrued warranties at  end of period       |       | $                                | 552        |   | $ | 941 |   |

 

Revenue and costof sales from extended warranty contracts is recorded as deferred revenue anddeferred costs, respectively, and subsequently recognized over the term of thecontract.  The following table summarizesthe activity related to the deferred warranty revenue (in thousands):

|                                                   | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **March 31,**               | ** ** |
| ** **                                        | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Deferred warranty  revenue at beginning of period |       | $                                | 506        |   | $ | 1,361 |   |
| Deferred  warranty revenue recognized             |       | (140                             | )          | (283 | ) |
| Revenue deferred  for additional warranties sold  |       | 33                               |       | 67 |   |
| Deferred warranty  revenue at end of period       |       | $                                | 399        |   | $ | 1,145 |   |

 

*Lettersof Credit*

GTSI was obligated underan operating lease to provide its landlord with a letter of credit in theamount of $0.2 million at March 31, 2007 and December 31, 2006, as a securitydeposit for all tenant improvements associated with the lease.

As of March 31, 2007, theCompany had an outstanding letter of credit, scheduled to expire in June 2007,to a customer in the amount of $4.6 million to guarantee the performance by theCompany of its obligations under the contract. GTSI provided one of its vendorsa $3.0 million letter of credit as collateral for extending credit of $15.0million.

*Employment Agreements*

On February 15, 2006 theCompany entered into a transition agreement with its former CEO (the “Transition

9

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Agreement”). TheTransition Agreement provides for a payment of $1.1 million to be paid out overthe course of 18 months, as well as reimbursement for certain benefits andlegal fees.  As a result, the Companyrecorded severance expense of $1.2 million in selling, general &administrative expenses during the quarter ended March 31, 2006. The balance ofthe severance liability related to these severance payments, which is includedin accrued liabilities, is $0.3 million as of March 31, 2007.

In 2006, GTSI enteredinto an employment agreement with the Company’s current President and ChiefExecutive Officer. This agreement provides for payments of 12 months of basesalary plus bonus equal to the previous year’s bonus payments upon terminationof employment. In addition, GTSI has change in control agreements with 16 executivesand key employees. These arrangements provide for payments of as much as 18months of total target compensation and continuation of benefits upon theoccurrence of specified events. As of March 31, 2007, no accruals have been recordedfor these agreements.

*Contingencies*

Currently, and from timeto time, GTSI is involved in litigation incidental to the conduct of itsbusiness.  As of March 31, 2007, GTSI isnot a party to any lawsuit or proceeding that, in the opinion of management, islikely to have a material adverse effect on its financial position or resultsof operations.

**11. Related Party Transactions**

GTSI serves as theofficial mentor to Eyak Technology, LLC (“Eyak”), providing assistance andexpertise in many key business areas. In 2002, GTSI made a $0.4 millioninvestment in Eyak and assumed a 37% ownership of the company. GTSI also has adesignee on Eyak’s Board of Directors. The investment in Eyak is accounted forunder the equity method and adjusted for earnings or losses as reported in thefinancial statements of Eyak and dividends received from Eyak. At March 31,2007 and December 31, 2006, the investment balance for Eyak was $1.4 million. Forthe quarters ended March 31, 2007 and 2006, equity in earnings (losses) was$0.1 million and less than $(0.1) million, respectively. GTSI also receives afee from Eyak based on sales from products sold at cost by GTSI to Eyak. Fees recordedby the Company, which are recognized when Eyak sells to third party customers are$0.4 million and $0.3 million for the quarter ended March 31, 2007 and 2006,respectively, which are included in sales in the accompanying consolidatedstatements of operations. The following table summarizes Eyak’s unauditedfinancial information for the periods presented in the accompanying BalanceSheet and Statement of Operations (in thousands):

|                   | ** ** | **For the Quarter ended** | ** ** |
|-------------------|------------|------------------------------------------|------------|
| ** **        | ** ** | **March 31,**                       | ** ** |
| ** **        | ** ** | **2007**                                 | ** ** | **2006** | ** ** |
| Revenues          |       | $                                        | 38,802     |   | $ | 19,589 |   |
| Gross margin      |       | $                                        | 3,675      |   | $ | 2,382 |   |
| Net income (loss) |       | $                                        | 346        |   | $ | (104 | ) |

 

|                         | ** ** | **March 31,** | ** ** | **December**      | ** ** |
|-------------------------|------------|--------------------|------------|-------------------|------------|
| ** **              | ** ** | **2007**           | ** ** | **31, 2006** | ** ** |
| Current assets          |       | $                  | 48,536     |              | $          | 54,911 |   |
| Noncurrent  assets      |       | $                  | 279        |              | $          | 423 |   |
| Current  liabilities    |       | $                  | 45,110     |              | $          | 51,411 |   |
| Noncurrent  liabilities |       | $                  | —     |              | $          | 114 |   |
| Member’s equity    |       | $                  | 3,705      |              | $          | 3,809 |   |

 

**12. Subsequent Events**

On April 4, 2007 theCompany announced the retirement of M. Dendy Young as Chairman of the Board andas Director effective as of  the AnnualStockholder’s Meeting, which was held May 3, 2007.   On May 3, 2007, John Toups was named theChairman of the Board, effective immediately.

At the May 3, 2007 AnnualMeeting of Stockholders, the stockholders approved amendments to the Company’s1996 Stock Incentive Plan, which has been renamed the Amended and Restated 2007Stock Incentive Plan (“2007 Plan”), to increase the number of shares of CommonStock authorized for issuance by 1,000,000 and to authorize the award of stockappreciation rights (“SARs”).  InFebruary 2007, the Board of Directors proposed a grant of 928,386

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SARs and 351,932restricted stock awards to certain officers. These grants were subject to Stockholder approval of the grant and the2007 Plan, which occurred on May 3, 2007 Plan. Based on the grant date fair value, the Company will recognizeapproximately $1.5 million in stock-based compensation related to these awards in2007 beginning in the second quarter.

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**ITEM 2.   MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The following discussionand analysis is provided to increase the understanding of, and should be readin conjunction with, our unaudited condensed consolidated financial statementsand notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q andour consolidated financial statements and notes in our Annual Report on Form10-K for the year ended December 31, 2006. We use the terms “GTSI,” “we,” “our,” and “us” to refer to GTSI Corp.and its subsidiaries.

**DisclosureRegarding Forward-Looking Statements**

Readers are cautionedthat this Quarterly Report on Form 10-Q contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, as amended,and Section 21E of the Securities Exchange Act of 1934, as amended, relating toour operations that are based on our current expectations, estimates, forecastsand projections.  Words such as “expect,”“plan,” “believe,” “anticipate,”  “intend”and similar expressions are intended to identify these forward-lookingstatements.  These statements are notguarantees of future performance and are subject to risks, uncertainties andassumptions that are difficult to predict. Therefore, actual results in future periods may differ materially fromthose expressed or projected in any forward-looking statements because of anumber of risks and uncertainties, including:

·                  Previously disclosed materialweaknesses in our internal control over financial reporting;

·                  The uncertainty surrounding ourability to meet the covenants under our Credit Agreement in future periods;

·                  Our exposure to inventory risks;

·                  Continuing net losses, if we fail toalign costs with our sales levels;

·                  Our reliance on a small number oflarge transactions for significant portions of our sales and gross margins;

·                  Our ability to shift our businessmodel from a reseller of products to a high-end solutions provider;

·                  Potential additional expenses tocomply with the changing regulations of corporate governance and publicdisclosure;

·                  Our ability to attract and retaintalented employees;

·                  Our quarterly sales and cash flowsare volatile, which makes our future financial results difficult to forecast;

·                  Unsatisfactory performance by thirdparties with which we work could hurt our reputation, operating results andcompetitiveness;

·                  Any issue that compromises ourrelationship with agencies of the Federal government would cause serious harmto our business;

·                  Competition and loss of market share;

·                  Our qualifications as a smallbusiness for new contract awards; and

·                  Changesin Federal government fiscal spending.

For a detaileddiscussion of risk factors affecting GTSI’s business and operations, see Item1A, Risk Factors in our Annual Report on Form 10-K for the year ended December31, 2006. We undertake no obligation to revise or update any forward-lookingstatements for any reason.

**Overview**

GTSI has more than 20years of experience in selling IT products and solutions primarily to U.S.Federal Government customers.  We believeour key differentiators to be our strong brand among government customers,extensive contract portfolio and wide variety of vendors.

The vast majority of theIT solutions we offer to our customers have a strong product component, andmany are entirely product-based.  Weconnect IT’s leading vendors, products and services inside the core technologyareas most critical to government success by partnering with global IT leaderssuch as Panasonic, HP, Cisco and Sun Microsystems.  In our traditional reseller capacity, weprovide government with products for workgroup computing, such as workstationsand desktops; mobility computing and communications, such as wireless-equipped notebooksand PDAs; core computing, such as servers, high-end computing, and storagesystems; networking products; and a

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wide range ofperipherals.

To help our customersacquire, manage and refresh this technology in a strategic andapplication-appropriate manner, GTSI has created a mix of financial servicescapable of managing the entire technology lifecycle.  We offer leasing arrangements to allowgovernment agencies to acquire access to technology as an evenly distributedcost, rather than the much more budget-sensitive and discontinuous capitalexpenditures.  This model is in highdemand from our customers, and we believe it represents a distinctiveadvantage.  We expect to continue toexpand our sales from leasing arrangements for IT products and solutions in2007.

As discussed in more detailthroughout our MD&A for the three months ended March 31, 2007 compared tothe three months ended March 31, 2006:

·                  Total sales decreased $4.2 million;

·                  Gross margin as a percentage of salesincreased 1.1%;

·                  Lossbefore income taxes for the three months ended March 31, 2007 decreased $3.1million.

We are looking forward toimprovements in operational and financial performance through improved marginpercentages.  We will work to improveexecution of the current business and deliver high value solutions.  We believe there are significantopportunities to increase our relatively low market share within the governmentIT market as we pursue a distinctive business model combining the concepts of avalue added provider of complex IT solutions with a traditional reseller.

**CriticalAccounting Estimates and Policies**

Our unaudited condensedconsolidated financial statements are based on the selection of accountingpolicies and the application of significant accounting estimates, some of whichrequire management to make significant assumptions.  We believe that some of the more criticalestimates and related assumptions that affect our financial condition andresults of operations pertain to revenue recognition, financing receivables,valuation of inventory, capitalized internal use software, estimated payablesand income taxes. For more information on critical accounting estimates andpolicies see the MD&A included in our Annual Report on Form 10-K for theyear ended December 31, 2006.  We havediscussed the application of these critical accounting estimates and policieswith the Audit Committee of our Board of Directors.

Effective January 1,2007, the Company adopted the provisions of FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* (“FIN 48”).FIN 48 clarifies the accounting for income taxes by prescribing a minimumprobability threshold that a tax position must meet before a financialstatement benefit is recognized. As a result of the implementation of FIN 48, werecognized an increase to liabilities for uncertain tax positions totaling $0.2million through an adjustment to the beginning balance of retained earnings onthe Condensed Consolidated Balance Sheet. At the adoption date of January 1,2007, GTSI had approximately $0.6 million of total gross unrecognized taxbenefits.  Of this total, approximately$0.1 million (net of indirect federal and state benefits) represents the amountof unrecognized tax benefits that, if recognized, would favorably affect theeffective income tax rate in any future periods.

**Historical Results of Operations**

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

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|                                                | ** ** | **Three months ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **March 31,**               | ** ** |
| ** **                                     | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Sales                                          |       | 100.0                            | %          | 100.0 | % |
| Cost of sales                                  |       | 86.5                             | %          | 87.7 | % |
| Gross margin                                   |       | 13.5                             | %          | 12.3 | % |
| Selling,  general, and administrative expenses |       | 18.9                             | %          | 19.9 | % |
| (Loss) income  from operations                 |       | (5.4                             | )%         | (7.6 | )% |
| Interest and  other income, net                |       | 0.6                              | %          | 0.8 | % |
| (Loss) income  before taxes                    |       | (4.8                             | )%         | (6.8 | )% |
| Income tax  benefit (provision)                |       | —                           |       | — |   |
| Net (loss) income                              |       | (4.8                             | )%         | (6.8 | )% |

 

The followingtables indicate, for the periods indicated, the approximate sales by type andvendor along with related percentages of total sales (in millions).
| ** **                           | ** ** | **Three months ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **March 31,**               | ** ** |
| **Sales by Type**          | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Hardware                             |       | $                                | 108.9      |   | 75.6 | % | $ | 114.8 |   | 77.4 | % |
| Software                             |       | 12.1                             |       | 8.4 | % | 12.9 |   | 8.7 | % |
| Resold  third-party service products |       | 11.5                             |       | 8.0 | % | 8.5 |   | 5.7 | % |
| Services                             |       | 11.6                             |       | 8.0 | % | 12.1 |   | 8.2 | % |
| Total                                |       | $                                | 144.1      |   | 100.0 | % | $ | 148.3 |   | 100 | % |

 
| ** **                    | ** ** | **Three months ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **March 31,**               | ** ** |
| **Sales by Vendor** | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Panasonic                     |       | $                                | 23.6       |   | 16.4 | % | $ | 33.6 |   | 22.7 | % |
| Cisco                         |       | 17.2                             |       | 11.9 | % | 24.7 |   | 16.7 | % |
| Sun Microsystems              |       | 14.0                             |       | 9.7 | % | 10.1 |   | 6.8 | % |
| HP                            |       | 32.6                             |       | 22.6 | % | 16.2 |   | 10.9 | % |
| Microsoft                     |       | 11.6                             |       | 8.0 | % | 2.9 |   | 2.0 | % |
| Others, net of  reserves      |       | 45.1                             |       | 31.3 | % | 60.8 |   | 41.0 | % |
| Total                         |       | $                                | 144.1      |   | 100.0 | % | $ | 148.3 |   | 100.0 | % |

 

**ThreeMonths Ended March 31, 2007 Compared With the Three Months Ended March 31, 2006**

*Sales*

Sales consist of revenue fromproducts delivered and services sold or rendered, net of allowances forcustomer returns. Sales for the first quarter of 2007 decreased $4.2 million,or 2.9%, compared to the same period in 2006. Reasons for the sales decline areconsistent with the trends we experienced during 2006 where our continued focuson a smaller number of higher margin sales, largely related to our integratedsolutions engagements, has led to a decline in total sales.

An analysis of sales bytype shows that resold third-party service product sales increased for thethree months ended March 31, 2007 to $11.5 million from $8.5 million for thethree months ended March 31, 2006. All other categories decreased quarter overquarter, most predominantly the $5.9 million decline in hardware sales.

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Sales from Panasonic andCisco, two of our top five vendors, declined $10.0 million and $7.5 million,respectively, for the three months ended March 31, 2007 as compared to the sameperiod in 2006. These decreases were offset by increased sales from SunMicrosystems, HP, and Microsoft of $3.9 million, $16.4 million, and $8.7million, respectively.  HP sales increasedsignificantly due to a significant hardware sale in the first quarter of 2007.Overall, sales from our top five vendors increased $11.5 million quarter overquarter, despite our decrease in total sales for the period, which isconsistent with our ongoing efforts to strengthen our partnerships with keyvendors.

*GrossMargin*

Gross margin increased$1.1 million, or 5.7%, from $18.3 million for the three-month period endedMarch 31, 2006 to $19.4 million for the three months ended March 31, 2007.  Gross margin as a percentage of salesincreased 1.1% for the first quarter of 2007, as compared to the first quarterof 2006.  This increase in gross marginpercentage is consistent with our continued focus on higher margin sales,mostly related to large dollar orders and integrated solutions engagements.

*Selling,General & Administrative Expenses*

During the three monthsended March 31, 2007, selling, general & administrative (“SG&A”)expenses decreased $2.5 million, or 9.1%, from the same period in2006. Commission expense decreased $1.0 million due to decreased sales inthe first quarter of 2007 and the implementation of a new commission plan for2007.  Salaries and benefits decreased$0.4 million due to a lower headcount from the same period in 2006.

These decreases wereoffset by increases of $0.7 million in consulting and temporary expenses due toour ongoing remediation efforts surrounding our internal control processes and$0.4 million increase in accounting fees due to increased audit fees.

*Interestand Other Income, Net*

Interest and otherincome net of interest and other expense, decreased $0.5 million, during thethree months ended March 31, 2007 compared to the same period in 2006. This decrease was primarily due to the $0.7 million decrease in lease relatedincome and $0.6 million increase in lease related expenses offset by a $0.6million gain on lease dispositions.

*Income Taxes*

As a result of our fullvaluation allowance on our deferred tax assets, we did not report any incometax benefit during the three months ended March 31, 2007 and 2006, despite our$6.9 million and $10.0 million loss before income taxes, respectively. SinceCompany management believes that it is not more likely than not that its deferredtax assets will be realized, the Company has recorded a full valuationallowance against its net deferred tax assets and is not anticipating therelease of this valuation allowance during the current year, except to theextent that deferred tax assets are ultimately utilized within the currentyear.

**Seasonal Fluctuations**

Historically in excess of92% of our annual sales have been earned from departments and agencies of theU.S. Federal Government, either directly or indirectly through systemintegrators to which GTSI is a sub-contractor. We have historicallyexperienced, and expect to continue to experience, significant seasonalfluctuations in our operations as a result of government buying and fundingpatterns, which also affect the buying patterns of GTSI’s prime contractorcustomers.  These buying and funding patterns historically have had asignificant positive effect on our bookings in the third quarter endedSeptember 30 each year (the Federal govern­ment’s fiscal year end), andconsequently on sales and net income in the third and fourth quarters of eachyear. Conversely, sales during the first quarter of our fiscal year havetraditionally been the weakest for GTSI, consisting of less than 20% of ourannual sales. Our SG&A expenses are more level throughout the year,although our sales commissions programs generally result in marginallyincreased expenses in the fourth quarter of our fiscal year.  As a result,GTSI has historically shown a net loss for the period ended March 31.

Quarterly financial resultsare also affected by the timing of contract awards and the receipt of productsby our customers.  The seasonality of our business, and theunpredictability of the factors affecting such seasonality, makes GTSI’squarterly and annual financial results difficult to predict and subject tosignificant fluctuation.

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**Liquidityand Capital Resources**

*Cashflows for the three months ended March 31,*
| **(in millions)**                 | ** ** | **2007** | ** ** | **2006** | ** ** | **Difference** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------------|------------|
|                                   |       |     |       |     |       |           |       |
| Cash provided by  operating activities |       | $        | 31.2       |     | $          | 43.1           |       | $ | (11.9 | ) |
| Cash used in  investing activities     |       | $        | (0.7       | )        | $          | (0.6           | )          | $ | (0.1 | ) |
| Cash used in financing  activities     |       | $        | (30.5      | )        | $          | (40.0          | )          | $ | 9.5 |   |

 

During the three monthsended March 31, 2007, our cash balance increased $0.1 million from our December31, 2006 balance. GTSI’s current assets decreased $92.2 million as of March 31,2007 when compared to our December 31, 2006 balance. This decrease is due todecreased accounts receivable of $72.1 million, inventory of $9.7 million, anddeferred costs of $9.8 million as of March 31, 2007.

Our capital expendituresremained consistent during the three months ended March 31, 2007 and 2006,primarily from the costs associated with future release of GEMS in 2008.

Cash used in financingactivities decreased $9.5 million for the three months ended March 31, 2007, ascompared with the same period in 2006, predominantly due to an $8.1 milliondecrease in proceeds from financed lease debt, offset by a $17.9 million decreasein net repayments under the Credit Facility.

*Credit Facility and Term Loan*

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

The Credit Facilityprovides access to capital through June 2, 2010 with borrowings secured bysubstantially all of the assets of the Company. Borrowing under the CreditFacility at any time is limited to the lesser of $135 million or acollateral-based borrowing base less outstanding obligations. The CreditFacility subjects GTSI to certain covenants limiting its ability to(i) incur debt; (ii) make guarantees; (iii) make dividends andother restricted payments, purchases or investments; (iv) enter intocertain transactions with affiliates; (v) acquire real estate and(vii) enter into sale and leaseback transactions. The Credit Facilitycarries an interest rate generally indexed to the prime rate plus 0.25% plusmargin. As of March 31, 2007 we had available credit under the Credit Facilityof $28.2 million.

The Credit Facilitycontains negative financial performance covenants, including a minimum EBITDAcovenant for each period, information covenants and certain affirmativecovenants. On March 30, 2007, the Company executed the third amendment tothe Credit Facility, which removed the minimum EBITDA covenant atMarch 31, 2007 and revised the minimum EBITDA covenant for futuremeasurement periods. The Company currently relies on its Credit Facility as itsprimary vehicle to finance its operations.

During 2006, we alsoobtained a subordinated secured long-term loan of $10 million (the “Term Loan”).The debt covenants and maturity date on the Term Loan are the same as theCredit Facility. The interest rate on the Term Loan is Prime plus 5.25% perannum and is due monthly. This agreement contains a prepayment penalty which isequal to the greater of (i) all interest payable on theTerm Loan that would be payable from the Third Amendment Effective Date throughthe date which is twelve (12) months after the Third Amendment Effective Date,less interest paid through current or (ii) 1% of the amount prepaid.

*Liquidity*

Our working capital as ofMarch 31, 2007 decreased approximately $7.8 million from our working capital atDecember 31, 2006. GTSI’s current assets decreased $92.2 million as of March31, 2007 when compared to our December 31, 2006 balance. This decrease is dueto decreased accounts receivable of $72.1 million, inventory of $9.7 million,and deferred costs of $9.8 million as of March 31, 2007. Current liabilitiesdecreased $84.4 million from December 31, 2006 due to decreased borrowings 

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under the Credit Facilityof $30.2 million, accounts payable of $45.2 million, and accrued liabilities of$5.8 million offset by decreased financed lease debt of $1.2 million.

As the Company continuesto improve its credit worthiness, we are not being required to extend lettersof credit with our vendors as collateral for lines of credit.  As of April 30, 2007, we no longer hadoutstanding letters of credit extended to our vendors, which has increased ouravailability within our Credit Facility and Term Loan.

Our treasury stock isgenerally reissued upon exercise of employee stock options and for the employeestock purchase plan. No shares of common stock were purchased during the threemonths ended March 31, 2007 for treasury stock. Although $5.1 million remains authorized by our Board of Directors forshare repurchases, the terms of our Credit Agreement restrict us frompurchasing our stock until 2010.

*CapitalRequirements*

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. GTSI recordeda net loss of $6.9 million for the three months ended March 31, 2007. Despitethis fact, we were able to maintain positive cash flow from operations due toour intense collection efforts during the quarter.

**NewAccounting Pronouncements**

In June 2006, theFinancial Accounting Standards Board (“FASB”) Emerging Issues Task Force (“EITF”)reached a consensus on EITF No. 06-3, *HowSales Taxes Collected from Customers and Remitted to Governmental AuthoritiesShould Be Presented in the Income Statement (That Is, Gross Versus NetPresentation)* (EITF 06-3). The EITF reached a consensus that acompany should disclose its accounting policy (i.e., gross or net presentation)regarding presentation of taxes within the scope of this issue. The EITF alsoconcluded that once the new standard is effective (January 1, 2007), a companyshould disclose the amount of such taxes for periods in which these taxesincluded in gross revenues are considered material. The Company collects andremits sales taxes on products and services that it purchases and sells underits contracts with customers, and reports such amounts under the net method inits consolidated statements of operations. The Company has determined thatdisclosure will not be required.

In September 2007,the FASB issued SFAS No. 157, Fair Value Measurement, (“FAS 157”), whichestablishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements.FAS 157 is effective for interim periods beginning after November 15,2007. We are in the process of evaluating the adoption of FAS 157.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities.” This statement gives entities the option to carry mostfinancial assets and liabilities at fair value, with changes in fair valuerecorded in earnings. This statement, which will be effective as of the firstfiscal year beginning after November 15, 2007, is not expected to have amaterial impact on our consolidated financial position or results ofoperations.

On January 1, 2007, weadopted FASB Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes. *See Note 9for further discussion.

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

GTSI had a $135 millionCredit Facility indexed at the Prime Rate plus 0.25% plus margin as of March31, 2007. GTSI also had a Term Loan of $10 million indexed at Prime plus 5.25%as of March 31, 2007. The Credit Facility and Term Loan expose us to marketrisk from changes in interest rates. For purposes of specific risk analysis, weuse sensitivity analysis to determine the effects that market risk exposuresmay have.

Our results of operationsare affected by changes in interest rates due to the impact those changes haveon borrowings under our credit facilities. If interest rates increase, our debtservice obligations on the variable rate indebtedness would increase eventhough the amount borrowed remained the same, which would require more cash toservice our indebtedness. The effect of a 5% increase in interest rates wouldhave resulted in additional interest expense during the three months endedMarch 31, 2007 of $0.4 million based on our average monthly balances. We havenot used derivative instruments to alter the interest rate characteristics ofour borrowings. At March 31, 2007 we had $12.4 million of variable rate debtsubject to interest.

Included in our long-termdebt are amounts related to lease transactions. We have reported these amountsas long-term financed lease debt. These amounts will amortize over the periodof the lease instruments with no cash affect to the Company. The balances ofthese liabilities were $14.2 million and $18.8 million at March 31, 2007 andDecember 31, 2006, respectively. A change in interest rates would resultin no additional interest expense related to financed lease debt.

**ITEM 4. CONTROLS AND PROCEDURES**

**Evaluationof Disclosure Controls and Procedures**

An evaluation was carriedout under the supervision and with the participation of our management,including the Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rules 13a-15(e) or 15d-15(e) under theSecurities Exchange Act of 1934, as amended, (the “Exchange Act”) as of March31, 2007. Our disclosure controls and procedures are designed to(i) ensure that information required to be disclosed by us in reports wefile or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms and (ii) is accumulated and communicatedto GTSI’s management including our principal executive officer and ourprincipal financial officer, as appropriate to allow timely decisions regardingrequired disclosures. Based on this evaluation, our Chief Executive Officer andChief Financial Officer concluded that, because of the material weaknessespreviously disclosed in our 2005 Form 10-K/A, our disclosure controls andprocedures were not effective as of March 31, 2007.

**Changes in Internal Control OverFinancial Reporting**

There was no change inour internal control over financial reporting during the three months endedMarch 31, 2007 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.  We continue to remediate material weaknessespreviously disclosed in our 2005 Form 10-K/A and expect to complete theseefforts by the end of the third quarter 2007.

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**PART II. OTHER INFORMATION**

**ITEM 6.  EXHIBITS**

The exhibits set forth in the Exhibit Index are filedas part of this Quarterly Report on Form 10-Q.

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|            | ** **   | ** ** |   | **GTSI Corp.**                                    |       |
|------------|--------------|------------|--------|---------------------------------------------------|------------|
| ** ** | ** **   | ** ** |   | ** **                                        | ** ** |
| ** ** | ** **   | ** ** |   | ** **                                        | ** ** |
| Date       | May 15, 2007 |       |   | /s/ JAMES J.  LETO                                |       |
|       |         |       |   | James J. Leto                                     |       |
|       |         |       |   | President and Chief Executive Officer             |
|       |         |       |   |                                              |       |
|       |         |       |   |                                              |       |
| Date       | May 15, 2007 |       |   | /s/ JOE RAGAN                                     |       |
|       |         |       |   | Joe Ragan                                         |       |
|       |         |       |   | Senior Vice President and Chief Financial Officer |

 

 

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**EXHIBIT INDEX**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                      |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | Credit Agreement dated as of June 2, 2006 between  GTSI Corp., SunTrust Bank and Bank of America (1)                                                                 |
|            |       |                                                                                                                                                                 |
| 10.2            |       | Credit Agreement dated as of June 2, 2006 between  GTSI Corp., and Crystal Capital Fund, L.P. (1)                                                                    |
|            |       |                                                                                                                                                                 |
| 10.3            |       | First Amendment to Credit Agreement dated as of July  13, 2006 between GTSI Corp., SunTrust Bank and Bank of America (2)                                             |
|            |       |                                                                                                                                                                 |
| 10.4            |       | First Amendment to Credit Agreement dated as of July  13, 2006 between GTSI Corp. and Crystal Capital Fund, L.P. (2)                                                 |
|            |       |                                                                                                                                                                 |
| 10.5            |       | Second Amendment to Credit Agreement dated as of  November 30, 2006 between GTSI Corp. the Lenders, the other Borrower Parties,  and SunTrust Bank. (3)              |
|            |       |                                                                                                                                                                 |
| 10.6            |       | Second Amendment to Credit Agreement dated as of  November 30, 2006 between GTSI Corp.. the Lenders, the other Borrower  Parties, and Crystal Capital Fund, L.P. (3) |
|            |       |                                                                                                                                                                 |
| 10.7            |       | Third Amendment to Credit Agreement dated as of  March 30, 2007 between GTSI Corp. the Lenders, the other Borrower Parties,  and SunTrust Bank. (4)                  |
|            |       |                                                                                                                                                                 |
| 10.8            |       | Third Amendment to Credit Agreement dated as of  March 30, 2007 between GTSI Corp.. the Lenders, the other Borrower Parties,  and Crystal Capital Fund, L.P. (4)     |
|            |       |                                                                                                                                                                 |
| 10.9            |       | Amended and Restated 1996 Stock Incentive Plan (5)                                                                                                                   |
| 10.10           |       | Amended and Restated 2007 Stock Incentive Plan  (filed herewith)                                                                                                     |
| 10.11           |       | Change in Control Agreement with James Leto (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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| (1) |   | Incorporated by reference to the Registrant’s  current report on Form 8-K dated June 2, 2006.                   |
|-----|--------|----------------------------------------------------------------------------------------------------------------------|
| (2) |   | Incorporated by reference to the Registrant’s  current report on Form 8-K dated July 13, 2006.                  |
| (3) |   | Incorporated by reference to the Registrant’s  current report on Form 8-K dated December 5, 2006.               |
| (4) |   | Incorporated by reference to the Registrant’s Annual  Report on Form 10-K for the year ended December 31, 2006. |
| (5) |   | Incorporated by reference to Appendix A of the  Registrant’s 2005 Proxy Statement                               |

 

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