**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10–Q**

 

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

 

**For the quarterly period endedMarch 31, 2005**

 

**Commission File Number:      0–19394**

 

**GTSICORP.**

(Exact name of registrant as 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 markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.         YES  ý         NO  o

 

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

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:

 
| **Class**                       | ** ** | **Shares Outstanding at April 30, 2005** |
|---------------------------------|------------|------------------------------------------|
| Common  Stock, $0.005 par value |       | 9,049,393                                |

 

 

----

 

**GTSI CORP.**

**Form 10–Qfor the Quarter Ended March 31, 2005**

 

**INDEX**

 
| **PART I – FINANCIAL  INFORMATION** |                                                                                                             |
|------------------------------------------|------------------------------------------------------------------------------------------------------------------|
|                                     |                                                                                                             |   |
| ITEM 1.                                  | FINANCIAL STATEMENTS –                                                                                      |   |
|                                     |                                                                                                             |   |
|                                     | Consolidated Balance Sheets  as of March 31, 2005 (Unaudited) and December 31, 2004                              |   |
|                                     |                                                                                                             |   |
|                                     | Consolidated  Statements of Operations for the Three Months Ended March 31, 2005 and 2004  (Unaudited)           |   |
|                                     |                                                                                                             |   |
|                                     | Condensed  Consolidated Statements of Cash Flows for the Three Months Ended March 31,  2005 and 2004 (Unaudited) |   |
|                                     |                                                                                                             |   |
|                                     | Notes  to Condensed Consolidated Financial Statements (Unaudited)                                                |   |
|                                     |                                                                                                             |   |
| ITEM  2.                                 | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                      |   |
|                                     |                                                                                                             |   |
| ITEM  3.                                 | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                      |   |
|                                     |                                                                                                             |   |
| ITEM 4.                                  | CONTROLS AND  PROCEDURES                                                                                         |   |
|                                     |                                                                                                             |   |
| **PART II – OTHER  INFORMATION**    |                                                                                                             |
|                                     |                                                                                                             |   |
| ITEM 1.                                  | LEGAL PROCEEDINGS                                                                                                |   |
|                                     |                                                                                                             |   |
| ITEM 6.                                  | EXHIBITS  AND REPORTS ON FORM 8-K                                                                                |   |
|                                     |                                                                                                             |
| **SIGNATURES**                           |                                                                                                             |
|                                     |                                                                                                             |
| **EXHIBIT INDEX**                        |                                                                                                             |

 

1

----

 

**PART I.FINANCIAL INFORMATION**

 

###### **ITEM1.****                                                    ****FINANCIAL STATEMENTS**

 

**GTSICORP.**

**CONSOLIDATEDBALANCE SHEETS**

(Inthousands, except share data)

 
| ** **                                                                                                                                                                                          | ** ** | **(Unaudited)**     | ** ** | ** **             | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                          | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
| **ASSETS**                                                                                                                                                                                          | ** ** | ** **          | ** ** | ** **             | ** ** |
| Current assets:                                                                                                                                                                                     | ** ** | ** **          | ** ** | ** **             | ** ** |
| Cash                                                                                                                                                                                                |       | $                   | 23,972     |                   | $          | 397 |   |
| Accounts  receivable, net                                                                                                                                                                           |       | 126,942             |       | 202,742                |       |
| Leases  receivable, net                                                                                                                                                                             |       | 4,505               |       | 7,864                  |       |
| Merchandise  inventories                                                                                                                                                                            |       | 42,170              |       | 59,184                 |       |
| Other current  assets                                                                                                                                                                               |       | 14,340              |       | 9,616                  |       |
| Total current  assets                                                                                                                                                                               |       | 211,929             |       | 279,803                |       |
| Property and  equipment, net                                                                                                                                                                        |       | 15,511              |       | 15,183                 |       |
| Other assets                                                                                                                                                                                        |       | 1,172               |       | 1,400                  |       |
| Total assets                                                                                                                                                                                        |       | $                   | 228,612    |                   | $          | 296,386 |   |
|                                                                                                                                                                                                |       |                |       |                   |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                      |       |                |       |                   |       |
| Current  liabilities:                                                                                                                                                                               |       |                |       |                   |       |
| Notes payable to  banks                                                                                                                                                                             |       | $                   | —     |                   | $          | 1,179 |   |
| Accounts payable                                                                                                                                                                                    |       | 117,019             |       | 173,218                |       |
| Accrued  liabilities                                                                                                                                                                                |       | 13,182              |       | 14,734                 |       |
| Deferred revenue                                                                                                                                                                                    |       | 6,253               |       | 9,216                  |       |
| Accrued warranty  liabilities                                                                                                                                                                       |       | 2,015               |       | 2,429                  |       |
| Total current  liabilities                                                                                                                                                                          |       | 138,469             |       | 200,776                |       |
| Other  liabilities                                                                                                                                                                                  |       | 3,373               |       | 3,473                  |       |
| Total liabilities                                                                                                                                                                                   |       | 141,842             |       | 204,249                |       |
|                                                                                                                                                                                                |       |                |       |                   |       |
| Commitments and  contingencies                                                                                                                                                                      |       |                |       |                   |       |
|                                                                                                                                                                                                |       |                |       |                   |       |
| Stockholders’  equity                                                                                                                                                                          |       |                |       |                   |       |
| Common stock -  $0.005 par value, 20,000,000 shares authorized; 9,806,084 issued and  9,046,893 outstanding at March 31, 2005; and 9,806,084 issued and 8,987,643  outstanding at December 31, 2004 |       | 49                  |       | 49                     |       |
| Capital in  excess of par value                                                                                                                                                                     |       | 46,890              |       | 46,817                 |       |
| Retained  earnings                                                                                                                                                                                  |       | 44,584              |       | 50,395                 |       |
| Treasury stock,  759,191 shares at March 31, 2005 and 818,441 shares at December 31, 2004, at  cost                                                                                                 |       | (4,753              | )          | (5,124                 | )          |
| Total  stockholders’ equity                                                                                                                                                                    |       | 86,770              |       | 92,137                 |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                    |       | $                   | 228,612    |                   | $          | 296,386 |   |

 

The accompanying notes are an integral part ofthese financial statements.

 

2

----

 

**GTSICORP.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(Unaudited)

(Inthousands, except per share data)

 
| ** **                                      | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                      | ** ** | **2005**                          | ** ** | **2004** | ** ** |
|                                            |       |                              |       |   |   |
| SALES                                           |       | $                                 | 157,001    |   | $ | 178,623 |   |
|                                            |       |                              |       |   |   |
| COST OF SALES                                   |       | 138,922                           |       | 160,541 |   |
|                                            |       |                              |       |   |   |
| GROSS MARGIN                                    |       | 18,079                            |       | 18,082 |   |
|                                            |       |                              |       |   |   |
| SELLING, GENERAL  & ADMINISTRATIVE EXPENSES |       | 28,291                            |       | 21,697 |   |
|                                            |       |                              |       |   |   |
| LOSS FROM  OPERATIONS                           |       | (10,212                           | )          | (3,615 | ) |
|                                            |       |                              |       |   |   |
| INTEREST AND  OTHER INCOME                      |       |                              |       |   |   |
| Interest and  other income                      |       | 773                               |       | 1,370 |   |
| Interest and  other expense                     |       | (44                               | )          | (37 | ) |
| Interest and  other income, net                 |       | 729                               |       | 1,333 |   |
|                                            |       |                              |       |   |   |
| LOSS BEFORE  INCOME TAXES                       |       | (9,483                            | )          | (2,282 | ) |
|                                            |       |                              |       |   |   |
| INCOME TAX  BENEFIT                             |       | (3,673                            | )          | (901 | ) |
|                                            |       |                              |       |   |   |
| NET LOSS                                        |       | $                                 | (5,810     | ) | $ | (1,381 | ) |
|                                            |       |                              |       |   |   |
| LOSS PER SHARE                                  |       |                              |       |   |   |
| Basic                                           |       | $                                 | (0.65      | ) | $ | (0.16 | ) |
| Diluted                                         |       | $                                 | (0.65      | ) | $ | (0.16 | ) |
|                                            |       |                              |       |   |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING            |       |                              |       |   |   |
| Basic                                           |       | 9,002                             |       | 8,556 |   |
| Diluted                                         |       | 9,002                             |       | 8,556 |   |

 

The accompanying notes are an integral part ofthese financial statements.

 

3

----

 

**GTSICORP.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

(Inthousands)

 
| ** **                                                                      | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                      | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Net loss                                                                        |       | $                                 | (5,810     | ) | $ | (1,381 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities |       | 31,395                            |       | 37,143 |   |
| Net cash  provided by operating activities                                      |       | 25,585                            |       | 35,762 |   |
|                                                                            |       |                              |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                      |       |                              |       |   |   |
| Purchase of  property and equipment                                             |       | (1,181                            | )          | (1,901 | ) |
| Net cash used in  investing activities                                          |       | (1,181                            | )          | (1,901 | ) |
|                                                                            |       |                              |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                      |       |                              |       |   |   |
| Payments of bank  notes, net                                                    |       | (1,179                            | )          | (12,813 | ) |
| Proceeds from  exercises of stock options                                       |       | 350                               |       | 338 |   |
| Net cash used in  financing activities                                          |       | (829                              | )          | (12,475 | ) |
|                                                                            |       |                              |       |   |   |
| NET INCREASE IN  CASH                                                           |       | 23,575                            |       | 21,386 |   |
| CASH AT  BEGINNING OF PERIOD                                                    |       | 397                               |       | 177 |   |
| CASH AT END OF  PERIOD                                                          |       | $                                 | 23,972     |   | $ | 21,563 |   |
|                                                                            |       |                              |       |   |   |
| CASH PAID DURING  THE PERIOD FOR:                                               |       |                              |       |   |   |
| Interest                                                                        |       | $                                 | 149        |   | $ | 21 |   |
| Income taxes                                                                    |       | $                                 | 14         |   | $ | 1,018 |   |

 

The accompanying notes are an integral part ofthese financial statements.

 

4

----

 

**GTSICORP.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited)

 

**1.  Basis of Presentation**

 

The accompanying unaudited interim condensedconsolidated financial statements of GTSI Corp. (“GTSI” or the “Company”) havebeen prepared pursuant to the rules and regulations of the Securities andExchange Commission for quarterly reports on Form 10-Q and, therefore, omit orcondense certain note disclosures and other information required by accountingprinciples generally accepted in the United States of America for completefinancial statements.  These financialstatements should therefore be read in conjunction with the audited consolidatedfinancial statements and accompanying notes for the year ended December 31,2004 included in GTSI’s Annual Report on Form 10-K.  The consolidated financial statements includethe accounts of GTSI and its wholly owned subsidiaries. All intercompanytransactions and balances have been eliminated. Investments in which the Company does not control the investee but hasthe ability to exercise significant influence over its operating and financialpolicies are accounted for using the equity method of accounting.  In the opinion of management, all adjustments(which are of a normal recurring nature) necessary for a fair presentation ofinterim period results have been included. The results of operations for the three month period ended March 31,2005 are not necessarily indicative of the results that may be expected for thefull year, or future periods.  GTSI hashistorically experienced significant seasonal fluctuations in operations as aresult of government buying and funding patterns.  These patterns historically have had anegative effect on GTSI’s sales and net income during the quarter ended March31. Certain prior period amounts have been reclassified to conform to thecurrent period presentation.

 

**2.  New Accounting Pronouncements**

 

In December 2004, the FASB issued Statementof Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004) “Share-BasedPayment” (“FAS 123R”), which is a revision of FASB Statement No. 123, “Accountingfor Stock-Based Compensation” (“FAS 123”). FAS 123R supersedes AccountingPrinciples Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB25”) and its related implementation guidance. Generally, the approach toaccounting in FAS 123R requires all share-based payments to employees,including grants of employee stock options, to be recognized in the financialstatements based on the grant-date fair value of the award.  As permitted by FAS 123, the Companycurrently accounts for share-based payments to employees using the intrinsicvalue provisions of APB 25 and, as such, generally recognizes no compensationcosts for employee stock options. Accordingly, the adoption of FAS 123R’s fairvalue method may have a significant impact on the Company’s results ofoperations, although it will have no impact on GTSI’s overall financialposition. The impact of adoption of FAS 123R cannot be predicted at this timebecause it will depend on levels of share-based payments granted in the future.However, had the Company adopted FAS 123R in prior periods, the impact of thatstandard would have approximated the impact of FAS 123 as described in thedisclosure of pro forma net income and earnings per share in Note 3 to GTSI’scondensed consolidated financial statements. FAS123R also requires the benefitsof tax deductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow as required undercurrent literature. This requirement will reduce net operating cash flows andincrease net financing cash flow in periods after adoption.

 

In April 2005, the SEC adopted a new rulethat amends the compliance date for FAS 123R to be effective as of thebeginning of the first annual reporting period that begins after June 15, 2005and GTSI will

 

5

----

 

adopt the standard beginning January 1, 2006.The Statement offers several alternatives for implementation.  At this time, management plans to use themodified prospective transition method. The Company is also evaluating theimpact of FAS 123R to its employee stock purchase plan (“ESPP”)and may amendthe ESPP to decrease the current 15% upfront purchase discount to employees.

 

**3.  Stock-Based Compensation**

 

The Company accounts for stock-basedcompensation using the intrinsic value method of accounting in accordance withAPB 25 and related Interpretations. Accordingly, no compensation cost for stockoptions granted to employees was reflected in net income, as all optionsgranted had an exercise price equal to the fair market value of the Company’scommon stock on the date of the grant. The following table illustrates, in accordance with the provisions ofSFAS No. 148 “Accounting for Stock-Based Compensation – Transition andDisclosure” the effect on net income and earnings per share if compensationcosts for the Company’s stock options had been determined based on the fairvalue method consistent with the provisions of FAS 123 (in thousands, exceptper share data):

 
| ** **                                                                                                                                    | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Net loss – as  reported                                                                                                                  |       | $                                 | (5,810     | ) | $ | (1,381 | ) |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (682                              | )          | (769 | ) |
| Net loss – pro  forma                                                                                                                    |       | $                                 | (6,492     | ) | $ | (2,150 | ) |
|                                                                                                                                          |       |                              |       |   |   |
| Loss per share –  as reported                                                                                                            |       |                              |       |   |   |
| Basic                                                                                                                                         |       | $                                 | (0.65      | ) | $ | (0.16 | ) |
| Diluted                                                                                                                                       |       | $                                 | (0.65      | ) | $ | (0.16 | ) |
|                                                                                                                                          |       |                              |       |   |   |
| Loss per share –  pro forma                                                                                                              |       |                              |       |   |   |
| Basic                                                                                                                                         |       | $                                 | (0.72      | ) | $ | (0.25 | ) |
| Diluted                                                                                                                                       |       | $                                 | (0.72      | ) | $ | (0.25 | ) |

 

**4.  Leases Receivable**

 

The Company sells products to certaincustomers under sales-type lease arrangements typically for terms of two orthree years.  The Company accounts forits sales-type leases according to the provisions of SFAS No. 13 “Accountingfor Leases” and, accordingly, recognizes current and long-term leasesreceivable, net of unearned finance income, on the accompanying balancesheets.  GTSI periodically sells leasesreceivable to various unrelated financing companies and accounts for thesesales in accordance with SFAS No. 140 “Accounting for the Transfers andServicing of Financial Assets and Extinguishments of Liabilities – aReplacement of FASB Statement 125.” During the quarter ended March 31, 2005,$10.3 million of leases receivable were funded.

 

**5.  Capitalized Software**

 

GTSI is implementing an enterprise resourceplanning (“ERP”) system to replace its current fulfillment system.  Implementation of the ERP system is designedto improve management’s information and gain operating efficiencies.  As of March 31, 2005, the Company hascapitalized $10.2 million of costs related to this project, reported asProperty and equipment, net. Approximately $0.7 million was capitalized in

 

6

----

 

the three month period ended March 31,2005.  As of March 31, 2005 and December31, 2004 capitalized software, net of amortization, equaled $9.7 million and$9.1 million, respectively.

 

**6.  Credit Facility**

 

The Company has a $125 million creditfacility which contains certain covenants as well as provisions specifyingcompliance with certain monthly and annual financial ratios.  At March 31, 2005, GTSI was in compliancewith all financial covenants set forth in the credit facility and had availablecredit of $92.4 million. See note 9, Subsequent events.

 

**7.  Earnings Per Share and Capital Structure**

 

*EPS*

Basic earnings per share are calculated bydividing net income or loss by the weighted average shares outstanding duringthe period.  Diluted earnings per shareare computed similarly to basic earnings per share, except that the weightedaverage shares outstanding are increased to include equivalents, when theireffect is dilutive.  The following tablesets forth the computation of basic and diluted earnings per share (inthousands, except per share amounts):

 
| ** **                                                                            | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Basic earnings  per share:                                                            |       |                              |       |   |   |
| Net loss                                                                              |       | $                                 | (5,810     | ) | $ | (1,381 | ) |
| Weighted average  shares outstanding                                                  |       | 9,002                             |       | 8,556 |   |
| Basic loss per  share                                                                 |       | $                                 | (0.65      | ) | $ | (0.16 | ) |
|                                                                                  |       |                              |       |   |   |
| Diluted earnings  per share:                                                          |       |                              |       |   |   |
| Net loss                                                                              |       | $                                 | (5,810     | ) | $ | (1,381 | ) |
| Weighted average  shares outstanding                                                  |       | 9,002                             |       | 8,556 |   |
| Incremental  shares attributable to the assumed exercise of outstanding stock options |       | N/A                               | *          | N/A | *  |
| Weighted average  shares and equivalents                                              |       | 9,002                             |       | 8,556 |   |
| Diluted loss per  share                                                               |       | $                                 | (0.65      | ) | $ | (0.16 | ) |

 

----

* For the three-month periods ended March 31, 2005 and 2004 there wereapproximately 572 and 924 shares, respectively, of potentially dilutive optionsthat are not included because the net losses for the quarters make their impactantidilutive.

 

*Shares Exercised*

During the threemonths ended March 31, 2005 and the year ended December 31, 2004, 59,250 and397,492, respectively, of stock options were exercised under the Company’sstock option plan. These shares were issued from treasury stock.

 

7

----

 

**8.  Commitments and Contingencies**

 

*Product Warranties*

GTSI offers extended warranties on certainproducts which are generally covered for three or five years beyond thewarranty provided by the manufacturer. Products under extended warranty require repair or replacement ofdefective parts at no cost to the customer. The Company records warranty liabilities at the time of sale for theestimated costs that may be incurred under its extended warrantycontracts.  The following tablesummarizes the activity related to product warranty liabilities (in thousands):

 
| ** **                                 | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|
| ** **                                 | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Accrued  warranties at beginning of period |       | $                                 | 2,429      |   | $ | 4,555 |   |
| Charges made  against warranty liabilities |       | (319                              | )          | (538 | ) |
| Adjustments to  warranty reserves          |       | (196                              | )          | — |   |
| Accruals for  additional warranties sold   |       | 101                               |       | 478 |   |
| Accrued  warranties at end of period       |       | $                                 | 2,015      |   | $ | 4,495 |   |

 

Revenue from extended warranty contracts isrecorded as Deferred revenue 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,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                        | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Deferred  warranty revenue at beginning of period |       | $                                 | 2,599      |   | $ | 2,819 |   |
| Deferred  warranty revenue recognized             |       | (367                              | )          | (338 | ) |
| Revenue deferred  for additional warranties sold  |       | 53                                |       | 285 |   |
| Deferred  warranty revenue at end of period       |       | $                                 | 2,285      |   | $ | 2,766 |   |

 

*Contingent Insurance Settlement*

During 2004, senior management was informedthat certain integrated hardware components were missing from certain hardwaredelivered on a customer order. Although the investigation of this matter hasbeen completed, the Company’s management was unable to determine where or whenthe loss occurred in the supply chain. While GTSI filed a comprehensive claimof $0.6 million with its insurance carrier, management currently believes thatit is remote that the Company will receive payment for its claim.

 

*Letters of Credit*

GTSI was obligated under an operating leaseto provide its landlord with a letter of credit in the amount of $0.2 millionat March 31, 2005 and $0.8 million at December 31, 2004, as a security depositfor all tenant improvements associated with the lease.

 

As of March 31, 2005, GTSI had an outstandingletter of credit to a customer in the amount of $1.75 million to guarantee theperformance by Company of all obligations under a specific contract.  This letter of credit is scheduled to expireon August 31, 2005.

 

*Legal Proceedings*

The Company is occasionally involved invarious lawsuits, claims, and administrative proceedings arising in the normalcourse of business. The Company believes that any liability or loss associatedwith such matters, individually or in the aggregate, will not have a materialadverse effect on the Company’s financial condition or results of operations.

 

8

----

 

In the $25 million lawsuit filed against GTSIpreviously reported in the Company’s periodic reports filed with the SEC, thecase went to trial in March 2005.  Following presentation of theplaintiff’s case, the Court granted GTSI’s motion to strike.  A finalorder entering judgment in favor of GTSI is scheduled to be entered on May 6,2005.  Thereafter, GTSI expects that the plaintiff will appeal the Court’sruling.  Management continues to believe the claim is without meritand intends to vigorously defend any appeal, but the ultimate outcome of thismatter remains uncertain. Management is unable to estimate the amount GTSI mayhave to pay, if any, related to this matter. No amounts have been accrued as ofMarch 31, 2005.

 

**9.  Subsequent Events**

 

On April 27, 2005 the Company and its lenderssigned a fourth amendment to the Company’s credit facility to increase the sizeof the facility from $125 million to $165 million. In addition to existingparticipants GE Commercial Distribution Finance Corporation and SunTrust Bank,Wachovia Bank and M&T Bank are also participating in the lender syndicate.This credit facility amendment will provide additional floor planning capacityas GTSI grows sales going into busy season and will provide the revolvingcredit facility the Company needs to accommodate seasonal working capitalneeds.

 

The supply chain management phase of our ERPsystem became operational in mid-April 2005, replacing our legacy system.Management was pleased with the smooth transition to GTSI’s new system.

 

At its regularly scheduled quarterly meeting,GTSI’s Board of Directors approved an increase to the Company’s sharerepurchase program. The increased authorization was for $7.3 million which,combined with the remaining $2.7 million available under previousauthorizations, results in $10 million available for repurchase. When theCompany repurchases shares, it will do so on the open market, through blocktrades or otherwise. The amount of share repurchases, and the timing ofpurchases, will be based upon capital requirements, general business conditionsand other factors. The Company may hold the repurchased shares in treasury forgeneral corporate purchases, including issuances under GTSI’s employee stockpurchase plan.

 

9

----

 

**ITEM 2.****    ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion and analysis isprovided to increase the understanding of, and should be read in conjunctionwith, our unaudited condensed consolidated financial statements and notesincluded in this Quarterly Report on Form 10-Q and our consolidated financialstatements and notes in our Annual Report on Form 10-K for the year endedDecember 31, 2004.  We use the terms “GTSI,”“we,” “our,” and “us” to refer to GTSI Corp. and its subsidiaries.

 

**Disclosure RegardingForward-Looking Statements**

 

Readers are cautioned that this QuarterlyReport on Form 10-Q contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, relating to our operations thatare based on our current expectations, estimates, forecasts andprojections.  Words such as “expect,” “plan,”“believe,” “anticipate,”  “intend” andsimilar 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:

•                  The seasonality of our business makes ourfuture financial results less predictable, which may adversely affect our stockprice;

•                  Fluctuations in our gross margins;

•                  Any issue that compromises our relationshipwith agencies of the federal government would cause serious harm to ourbusiness;

•                  Our ability to recruit, retain and motivatetalented employees;

•                  Our exposure to inventory risks;

•                  Infrastructure failures could have a materialadverse effect on our business;

•                  Our qualifications as a small business fornew contract awards;

•                  Our reliance on our vendor relationships andthe availability of products; and

•                  Changes in federal government fiscalspending.

 

For a detailed discussion of risk factorsaffecting GTSI’s business and operations, see Item 1, Business, “Risk Factors”in our Annual Report on Form 10-K for the year ended December 31, 2004. Weundertake no obligation to revise or update any forward-looking statements forany reason.

 

**Overview**

 

GTSI is a recognized IT solutions leader,providing products and services primarily to federal government customersworldwide.  One of our keydifferentiators is the extensive number of contract vehicles we have in ourportfolio.  For more than two decadesGTSI has served the public sector by partnering with global IT leaders such asPanasonic, HP, Sun Microsystems, Cisco and Microsoft to provide cutting edgetechnology to the government. Several years ago we created a sales divisionfocused on growing our integrator business and expanding sales of our managedservices offerings. Today we seek to deliver maximum value through our broadrange of products and services.

 

During 2004 we increased our headcount bymore than 20% in order to invest in our infrastructure to support our strategicgoal of doubling revenue. At year-end we had a total of approximately 850

 

10

----

 

employees. During the first quarter of 2005,our headcount has stabilized.  We will beselectively hiring during 2005 to further build customer and technology salesteams and to ensure we have the IT, human resources, operations, marketing andother support resources required to meet our goals.

 

Our corporate headquarters and distributioncenter are located in Chantilly, Virginia. Another of our differentiators isour ISO 9001:2000 certified distribution center which offers many benefits andservices, including integration and testing of up to 1,500 systemssimultaneously, outstanding logistic capabilities with immediate web access toshipment-tracking information, and expansive storage and warehousing toeliminate our customers’ shipping deadline worries. We also offer a number ofservices at our distribution center, including custom asset tagging andpackaging, custom image copying to create and deploy any number of identicallyconfigured systems, and recovery disk creation to protect against the impact ofhard drive failure.

 

As discussed in more detail throughout ourMD&A for the three months ended March 31, 2005 compared to March 31, 2004:

 

•                  Total sales declined $21.6 million;

•                  Gross margin as a percentage of salesincreased 1.4 percentage points;

•                  Net loss for the three months ended March 31,2005 was $5.8 million, predominantly related to a 30% increase in SG&Aexpenses from our additional headcount; and

•                  Our balance sheet remains solid, withcontinuing increases in working capital and no long-term debt.

 

**Critical Accounting Estimates**

 

Our unaudited condensed consolidatedfinancial statements are based on the selection of accounting policies and theapplication of significant accounting estimates, some of which requiremanagement to make significant assumptions. We believe that some of the more critical estimates and related assumptionsthat affect our financial condition and results of operations are in the areasof merchandise inventories, long-lived assets, warranties, contingencies, andrevenue recognition. For more information on critical accounting estimates, seethe MD&A included in our Annual Report on Form 10-K for the year endedDecember 31, 2004.  We have discussed theapplication of these critical accounting estimates with the Audit Committee ofour Board of Directors.

 

Duringthe three months ended March 31, 2005, we did not change or adopt any newaccounting estimates or policies that had a material effect on our consolidatedfinancial condition or results of operations.

 

11

----

 

**Historical Results of Operations**

 

The following table illustrates the unauditedpercentage of sales represented by items in our consolidated statements ofoperations for the periods presented.

 
| ** **                                      | ** ** | **Three months ended  March 31.** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                      | ** ** | **2005**                          | ** ** | **2004** | ** ** |
|                                            |       |                              |       |   |   |
| Sales                                           |       | 100.0                             | %          | 100.0 | % |
| Cost of sales                                   |       | 88.5                              |       | 89.9 |   |
| Gross margin                                    |       | 11.5                              |       | 10.1 |   |
| Selling, general  & administrative expenses |       | 18.0                              |       | 12.1 |   |
| Loss from  operations                           |       | (6.5                              | )          | (2.0 | ) |
| Interest and  other income, net                 |       | 0.5                               |       | 0.7 |   |
| Loss before  income taxes                       |       | (6.0                              | )          | (1.3 | ) |
| Income tax  benefit                             |       | (2.3                              | )          | (0.5 | ) |
| Net loss                                        |       | (3.7                              | )%         | (0.8 | )% |

 

The following tables indicate, for theperiods indicated (dollars in millions), the approximate sales by contractvehicle, vendor and product category along with related percentages of totalsales.

 
| ** **                        | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| **Contract  Vehicles**            | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| GSA Schedules                     |       | $                                | 26.7       |   | 17.0 | % | $ | 42.2 |   | 23.6 | % |
| IDIQ Contracts                    |       | 60.0                             |       | 38.2 |   | 72.9 |   | 40.8 |   |
| Open Market                       |       | 47.7                             |       | 30.4 |   | 35.9 |   | 20.1 |   |
| Subcontracts and  Other Contracts |       | 22.6                             |       | 14.4 |   | 27.6 |   | 15.5 |   |
| Total                             |       | $                                | 157.0      |   | 100.0 | % | $ | 178.6 |   | 100.0 | % |

 
| ** **         | ** ** | **Three months ended March 31,** | ** ** |
|--------------------|------------|----------------------------------|------------|
| **Top 5  Vendors** | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Panasonic          |       | $                                | 39.4       |   | 25.1 | % | $ | 34.4 |   | 19.3 | % |
| HP                 |       | 19.8                             |       | 12.6 |   | 18.8 |   | 10.5 |   |
| Sun Microsystems   |       | 19.0                             |       | 12.1 |   | 20.3 |   | 11.4 |   |
| Cisco              |       | 18.5                             |       | 11.8 |   | 23.1 |   | 12.9 |   |
| Dell               |       | 4.7                              |       | 3.0 |   | 12.1 |   | 6.8 |   |
| Other              |       | 55.6                             |       | 35.4 |   | 69.9 |   | 39.1 |   |
| Total              |       | $                                | 157.0      |   | 100.0 | % | $ | 178.6 |   | 100.0 | % |

 
| ** **                           | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| **Product**                          | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Hardware                             |       | $                                | 123.0      |   | 78.3 | % | $ | 139.9 |   | 78.3 | % |
| Software                             |       | 15.1                             |       | 9.6 |   | 19.8 |   | 11.1 |   |
| Resold  third-party service products |       | 15.7                             |       | 10.0 |   | 17.8 |   | 10.0 |   |
| Services                             |       | 3.2                              |       | 2.1 |   | 1.1 |   | 0.6 |   |
| Total                                |       | 157.0                            |       | 100.0 | % | $ | 178.6 |   | 100.0 | % |

 

12

----

 

**Three Months Ended March 31, 2005Compared With the Three Months Ended March 31, 2004**

 

*Sales*

Sales consist of revenue from productsdelivered and services sold or rendered, net of allowances for customer returnsand credits. Our revenue was weaker than we expected, primarily due to lowerbacklog at the beginning of the quarter, lower than expected bookings, and ahigher backlog at the end of the quarter. Sales for the first quarter of 2005declined $21.6 million, or 12.1%, compared to the same period in 2004. Salesdeclined in every contract category except Open Market during the first quarterof 2005 compared to the same period last year. Sales under the GSA Scheduledecreased $15.5 million, or approximately 37%, while IDIQ Contracts salesdecreased $12.9 million. These declines were partially offset by increased OpenMarket sales of $11.8 million to $47.7 million for the quarter ended March 31,2005.

 

During the last three years we have focusedon building stronger partnerships with our key vendors. Management plans tocontinue focusing our partner strategy in the future to improve our gross marginswhile increasing customer service. Sales of products from our top five vendorsaccounted for 64.6% and 60.9% of our revenues in the periods ended March 31,2005 and 2004, respectively. Sales of our top vendor, Panasonic, increased $5.0million during the three months ended March 31, 2005 compared to the sameperiod last year, representing one quarter of our sales during 2005. Sales ofCisco products decreased $4.6 million, or 20%, during the three months endedMarch 31, 2005 compared to March 31, 2004.

 

Services revenue during the three monthsended March 31, 2005 nearly tripled to $3.2 million, increasing $2.1 millionover our first quarter last year. Sales in all other product categoriesdecreased during the three months ended March 31, 2005, compared to March 31,2004. We plan to continue to grow our managed services practice to capturehigher margin opportunities and improve our sales mix. We believe total salesfor the three months ended June 30, 2005 will be comparable to those recognizedin the same period in 2004.

 

*Backlog*

We recognize an order as backlog when wereceive and accept a written customer purchase order.  Our total backlog includes orders that havenot shipped (“unshipped backlog”) as well as orders that have shipped butcannot be recognized as sales at the period end.  Total backlog increased $20.5 million, or23.6%, from $86.8 million at December 31, 2004 to $107.3 million at March 31,2005. The majority of this increase was due to the increase in unshippedbacklog to $101.1 million at March 31, 2005, compared to $81.5 million atDecember 31, 2004. Backlog fluctuates significantly from period to period dueto the seasonality of government ordering patterns and fluctuations ininventory availability of various products.

 

*Gross Margin*

Gross margin is Sales less Cost of sales,which includes product cost, freight, warranty maintenance cost and certainother expenses related to the cost of acquiring products. We experienced afavorable improvement by 1.4 percentage points of gross margin as a percentageof sales to 11.5% in the first quarter of 2005 from 10.1% in the first quarterof 2004. This improvement was due to a combination of product mix, increasedservices revenue, and centralized pricing initiatives implemented bymanagement. Gross margin percentages vary over time and may changesignificantly depending on our customers’ use of available contract vehiclesand the mix of products sold. We expect to continue to increase in our grossmargin as a percentage of sales by revamping our purchasing processes,improving our pricing processes and improving our mix. Gross margin dollarsremained flat at approximately $18 million for the three-month periods endedMarch 31, 2005 and 2004. Our gross margin is impacted by the receipt of vendor incentivefunds which are recorded as a reduction of Cost of sales. We expect vendorincentives during 2005 to be comparable to amounts received in 2004.

 

13

----

 

*Selling, General &Administrative Expenses*

We have invested heavily in the business interms of headcount and technology to build a larger, more robust organizationto capitalize on the market opportunity we anticipate from the expandingfederal government IT budget. Selling, general & administrative expenses (“SG&A”)for the three months ended March 31, 2005 increased $6.6 million, or 30.4%,from the same period in 2004.  Thisincrease is primarily due to increased compensation and benefit costs for theadditional employees hired to support our strategic growth plan. An importantfactor in our business is that it takes some time for new sales professionalsto become fully productive. In addition, training expense increased $0.7million in 2005 compared to the same period in 2004, as we prepared our employeesfor the roll out of our ERP system in the second quarter of 2005. Expressed asa percentage of total sales, SG&A expenses increased from 12.1% in thefirst quarter of 2004 to 18.0% during the three months ended March 31, 2005.

 

*Interest and Other Income, Net*

Interest and other income, net of interestand other expense, decreased $0.6 million, or 45.3%, during the three monthsended March 31, 2005 compared to the same period in 2004. This decline wasprimarily due to lower lease interest income in 2005 due to the timing of whenleases were funded by external sources. Interest and other expense remainedrelatively flat, period over period. Management anticipates our lease sales toincrease over the next few years.

 

*Income Taxes*

Our Income tax benefit increased $2.8million, from $0.9 million for the three months ended March 31, 2004 to $3.7million for the three months ended March 31, 2005. The increase in this benefitis related to GTSI’s increased Loss before income taxes of $7.2 million quarterover quarter. This was slightly offset by the decrease in our estimated annualeffective tax rate from 39.5% for the period ended March 31, 2004 to 38.7% forthe same period in our current year.

 

**Seasonal Fluctuations**

 

Historicallyin excess of 95% of our annual sales have been earned from departments andagencies of the U.S. Federal Government, either directly or indirectly throughsystem integrators 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 fundingpatterns historically have had a significant positive effect on our bookings inthe third quarter ended September 30 each year (the federal government’s fiscalyear end), and consequently on sales and net income in the third and fourthquarters of each year. Conversely, sales during the first quarter of our fiscalyear has traditionally been the weakest for GTSI, consisting of less than 20%of our annual sales. Our SG&A expenses are more level throughout theyear.  As a result, GTSI has historicallyshown a net loss for the period ended March 31.

 

Quarterlyfinancial results are also affected by the timing of contract awards, thereceipt of products by the customer, and the addition of personnel or otherexpenses in anticipation of sales growth. We significantly expanded ourworkforce during 2004 in seeking to achieve our goal to increase sales to $2billion, which has added additional incremental expenses during the quarterended March 31, 2005. The seasonality of our business, and the unpredictabilityof the factors affecting such seasonality, makes GTSI’s quarterly and annualfinancial results difficult to predict and subject to significant fluctuation.

 

14

----

 

**Liquidityand Capital Resources**

 

*Cash flows for the three monthsended March 31,*

* *
| **(in  millions)**                     | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Cash provided by  operating activities |       | $        | 25.6       |     | $          | 35.8       |       | $ | (10.2 | ) |
| Cash used in  investing activities     |       | $        | (1.2       | )        | $          | (1.9       | )          | $ | (0.7 | ) |
| Cash used in  financing activities     |       | $        | (0.8       | )        | $          | (12.5      | )          | $ | (11.7 | ) |

 

Cash provided by operating activities for thethree months ended March 31, 2005 was $25.6 million, a decrease of $10.2million from cash provided for the three months ended March 31, 2004.  This decrease was due to $4.4 million lessnet income and a net change in assets and liabilities of $5.8 million.  Changes in assets and liabilities included adecrease in accounts payable during the three months ended March 31, 2005compared to the same period of 2004 as a result of more product lines goingthrough the wholesale financing facility, which required more timely paymentsto vendors, offset by a decrease in accounts receivable related mainly to lowerfirst quarter 2005 sales and a decrease in the use of cash related toinventory.

 

During the three months ended March 31, 2005,cash used in financing activities was $11.7 million less than cash used duringthe same period in 2004 predominantly due to lower payments under our creditfacility.

 

*Liquidity*

During the three months ended March 31, 2005,our cash balance increased $23.6 million over our 2004 fiscal year end, whileour long-term debt remained zero. Our working capital has steadily increased onboth an annual basis and as of the quarter ended March 31. As of the end of thefirst quarter of 2005, our working capital was $73.5 million, as compared to$64.6 million and $58.0 million for the same periods in 2004 and 2003,respectively. GTSI’s current assets are $67.9 million less as of March 31, 2005when compared to our prior fiscal balance. This decline is mainly due todecreased accounts receivable of $75.8 million related to lower first quartersales. At March 31, 2005 our current ratio was 1.5, slightly exceeding theindustry average. GTSI’s quick ratio at March 31, 2005 was 1.1, slightly belowthe industry average of 1.32.

 

In April 2005, at its regularly scheduledquarterly meeting, GTSI’s Board of Directors approved an increase to GTSI’sshare repurchase program. The increased authorization was for $7.3 millionwhich, combined with the remaining $2.7 million available under previousauthorizations, results in $10.0 million currently available for purchases oftreasury stock. Our treasury stock is generally reissued upon exercise ofemployee stock options and for the employee stock purchase plan. No commonstock was purchased by GTSI during the three months ended March 31, 2005.

 

*Bank Credit Facility*

We have a $125 million credit facility whichcontains covenants requiring compliance with certain quarterly and annualfinancial ratios.  At March 31, 2005, wewere in compliance with all financial covenants and had available credit on thecredit facility of $92.4 million. In April 2005, we executed a fourth amendmentto our credit facility increasing our revolving credit and floor planning from$125 million to $165 million. This will provide additional floor planningcapacity as we grow sales going into our busy season and will provide therevolving credit facility we need to accommodate seasonal working capitalneeds.

 

*Capital Resources andRequirements*

Our ongoing capital requirements depend on avariety of factors, including the extent to which we are able to fund the cashneeds of our business from operations. During the first quarter of 2005, we were

 

15

----

 

able to fully pay our Notes payable to banks.As of March 31, 2005 GTSI was obligated under two letters of credit totaling$1.9 million. The letter of credit for $1.75 million is scheduled to expire onAugust 31, 2005. Our contractual obligations under our operating leases as ofMarch 31, 2005 are consistent with our year end disclosure in Item 7, MD&A “ContractualObligations” of our 2004 Annual Report on Form 10-K. During the three monthsended March 31, 2005 and 2004 we made capital expenditures of $1.2 million and$4.1 million, respectively, primarily for consulting costs associated with theimplementation of our ERP system.

 

We anticipate that we will continue to relyprimarily on operating cash flow, vendor credit and our credit facility tofinance our operating cash needs. We believe that such funds should besufficient to satisfy our near term anticipated cash requirements foroperations.  Nonetheless, we may seekadditional sources of capital, including obtaining permanent financing over alonger term at fixed rates, to finance our working capital requirements.  GTSI believes that such capital sources willbe available to us on acceptable terms, if needed.

 

**New Accounting Pronouncements**

 

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No.123 (Revised 2004) “Share-Based Payment” (“FAS 123R”), which is a revision ofFASB Statement No. 123 “Accounting for Stock-Based Compensation” (“FAS 123”).  FAS 123R supersedes Accounting PrincipalBoard Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) andits related implementation guidance. Generally, the approach to accounting inFAS 123R requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the financial statements based onthe grant-date fair value of the award. As permitted by FAS 123, GTSI currently accounts for share-basedpayments to employees using the intrinsic value provisions of APB 25 and, assuch, generally recognizes no compensation costs for employee stock options.Accordingly, the adoption of FAS 123R’s fair value method may have asignificant impact on our results of operations, although it will have noimpact on our overall financial position. The impact of FAS 123R cannot be predicted at this time because it willdepend on levels of share-based payments granted in the future. However, had weadopted FAS 123R in prior periods, the impact of that standard would haveapproximated the impact of FAS 123 as described in the disclosure of pro formanet income and earnings per share in Note 3 to our consolidated financialstatements in Part I, Item 1 of this Form 10-Q. FAS 123R also requires thebenefits of tax deductions in excess of recognized compensation cost to bereported as a financing cash flow, rather than as an operating cash flow asrequired under current literature. This requirement will reduce net operatingcash flows and increase net financing cash flow in periods after adoption.

 

In April 2005, the SEC adopted a new rulethat amends the compliance date for FAS 123R to be effective as of thebeginning of the first annual reporting period that begins after June 15, 2005and we plan to adopt the standard beginning January 1, 2006.  The Statement offers several alternatives forimplementation.  Currently, managementplans to use the modified prospective transition method. We are also evaluatingthe impact of FAS 123R on our employee stock purchase plan and may amend ourESPP to decrease our current 15% upfront purchase discount to employees.

 

**Outlook**

 

We have initiated a strategic growth plandesigned to capitalize on the government’s heightened demand for IT servicesand we are seeking to double our revenue to $2 billion. During 2004 weincreased our headcount by approximately 20%, predominantly in our sales andmarketing organizations. Each salesperson and sales team is allocated quotasbased on our revenue and margin goals. It is our belief that

 

16

----

 

our investment in sales professionals willproduce greater sales dollars in the future as we will have more representationin a growing government IT marketplace. We are selectively hiring talented employees and expect our headcount toapproximate 900 employees by the end of 2005. We plan to expand our sales from leasearrangements for IT products and solutions and continue to increase thepercentage of our sales from providing services in 2005.

 

The supply chain management phase of our ERPsystem became operational in mid-April 2005, replacing our legacy system. Althoughthe implementation of our ERP system has consumed resources, divertedmanagement’s attention and increased our training costs, we expect ourimplementation will provide the foundation and resources necessary to supportincreased deliveries from our vendors and shipment of products to ourcustomers. In addition, we anticipate the functionality of our ERP will reducethe lag time between order placement and shipment. We were pleased with thesmooth cutover to our new system; however, we anticipate some minor disruptionsand short-term productivity issues as our teams get up to speed on newprocesses. This adjustment period may impact near-term sales and bookings.

 

Several other initiatives are underway toposition GTSI to reach our strategic plan goal of increased productivity,including proactive supply-chain management; customer and vendor profitabilityassessments; and order management improvements. Management is also evaluatingvarious CRM solutions, including the future use of our existing CRM platform.If we select a new CRM Solution, we may incur an impairment charge for thewrite-off of our existing CRM software. Utilization of a robust CRM platform isexpected to allow us to more effectively cross-sell and up-sell additionalproducts, services and warranties based on our customers’ needs and orderingpatterns.

 

We believe we can make significantimprovements to net income during the next three years. We anticipate highindustry growth in the areas of storage, networking and physical security translatinginto additional sales for GTSI. Our gross margin improvement activities areproducing results which we expect to sustain through revamping our purchasingorganization and continuing to improve our pricing processes through use ofmarket based pricing and deal profitability assessments. Improved marginpercentages are expected to increase bottom line growth. We are aggressivelytracking productivity issues, with the goal to realize significant progress inthe months ahead. These productivity improvements are expected to lowerSG&A expense as a percentage of sales and improve net income margins.

 

17

----

 

**ITEM 3.****    ****QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The information required by this item ishereby incorporated by reference to GTSI’s Annual Report on Form 10-K for theyear ended December 31, 2004.  There havebeen no material changes in our market risk from that disclosed in our Form10-K.

 

**ITEM 4.****    ****CONTROLS AND PROCEDURES**

 

As of the end of the period covered by thisreport, management performed an evaluation, with the participation of GTSI’sChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe disclosure controls and procedures (as defined in Rules13a-15(e) or 15d –15(e) under the Securities Exchange Act of 1934, as amended). Based on thisevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures are effective in ensuringthat information required to be disclosed by us in reports filed or submittedunder the Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms.

 

There was no change in our internal controlover financial reporting during our first quarter of fiscal 2005 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

18

----

 

**PART II – OTHERINFORMATION**

 

# **ITEM1.  LEGAL PROCEEDINGS**

# ** **

In November 2003, GTSI Corp. was served witha $25 million lawsuit, with treble damages, related to an alleged breach ofcontract due to the termination of Ichiban, Inc., a former subcontractor. Thissuit was filed in Virginia Circuit Court in Fairfax County, Virginia andfollows the Company’s earlier lawsuit against the former subcontractor. InMarch 2005, the Virginia Circuit Court dismissed the plaintiff’s suit againstGTSI. A final order entering judgment in favor of GTSI is scheduled to beentered on May 6, 2005. Management continues to believe the claims are withoutmerit and intends to vigorously defend any appeal, but the ultimate outcome ofthis matter is uncertain.

 

**ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K:**

 

(a)                                  Exhibits:

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

 

(b)                                 Reports on Form 8-K:

On February 23, 2005, GTSIfurnished a Current Report on Form 8-K under Item 2 relating to its pressrelease of financial information for the three and twelve month periods endedDecember 31, 2004, and monthly sales information.

 

19

----

 

**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on May 6, 2005 on its behalf by the undersigned thereunto dulyauthorized.

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

 

20

----

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                    |
|---------------------|------------|----------------------------------------------------------------------------------------------------|
| 10.1                |       | Fourth Amendment to Credit  Facilities Agreement (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) |

 

21

----