**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q/A**

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

**For the quarterly periodended March 31, 2006**

**Commission File Number:      0-19394**

**GTSI Corp.**

(Exact name ofregistrant 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’stelephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.      YES  o        NO  x

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o      Acceleratedfiler  x     Non-accelerated filer  o

The number of shares of common stock, $0.005 par value, outstanding asof April 30, 2006 was 9,362,846.

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). o   Yes               x    No

 

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**EXPLANATORYNOTE**

This Amendment to the Quarterly Report on Form 10-Q of GTSI Corp.(“GTSI” or the “Company”) is being filed to restate the Company’s condensedconsolidated financial statements for the three months ended March 31, 2006.

The information contained in this Amendment, including the financialstatements and notes thereto, amends only Items 1, 2 and 4 of the originallyfiled Quarterly Report on Form 10-Q for the quarter ended March 31, 2006. ThisAmendment does not reflect events occurring after the original filing date ofMay 10, 2006, or modify or update those disclosures that may have been affectedby subsequent events.

In August 2006, the Company concluded that previously reportedfinancial statement information required restatement to correct the accountingfor: a) the transfer of certain receivables to third parties in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities*, b) overstatement of accounts payableand the related cost of sales, and c) the recording of miscellaneous accountingadjustments appropriate for the fair presentation of the financial statements.Following the restatement, income on certain transferred receivables is beingrecognized over the term of the respective lease agreements, rather than at thetime of transfer, along with the related interest expense on financed leasedebt. In addition, the transferred receivables, together with relatedliabilities, are reported in the Company’s balance sheets following therestatement.

1

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**GTSI Corp.**

**Form 10–Q/Afor the Quarter Ended March 31, 2006**

**CONTENTS**
| **PART I – FINANCIAL  INFORMATION** |
|------------------------------------------|
| ** **                               |
|                                     |   |   | **Page** |
| ITEM 1.                                  | FINANCIAL STATEMENTS – |   |   |
|                                     |   |   |   |
|                                     | Condensed Consolidated Balance Sheets as of March 31,  2006 (Unaudited) and December 31, 2005 |   | 3 |
|                                     |   |   |   |
|                                     | Condensed Consolidated Statements of Operations for  the Three Months Ended March 31, 2006 and 2005 (Unaudited) |   | 4 |
|                                     |   |   |   |
|                                     | Condensed Consolidated Statements of Cash Flows for  the Three Months Ended March 31, 2006 and 2005 (Unaudited) |   | 5 |
|                                     |   |   |   |
|                                     | Notes to Condensed Consolidated Financial Statements  (Unaudited) |   | 6 |
|                                     |   |   |   |
| ITEM 2.                                  | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   | 16 |
|                                     |   |   |   |
| ITEM 3.                                  | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |   | 25 |
|                                     |   |   |   |
| ITEM 4.                                  | CONTROLS AND  PROCEDURES |   | 25 |
|                                     |   |   |   |
| **PART  II – OTHER INFORMATION**    |
| ** **                               |
| ITEM 5.                                  | DEFAULTS UPON  SENIOR SECURITIES |   | 27 |
|                                     |   |   |   |
| ITEM 6.                                  | EXHIBITS |   | 27 |
|                                     |   |   |   |
| **SIGNATURES**                           |   | 27 |
|                                     |   |   |   |
| **EXHIBIT INDEX**                        |   | 28 |

 

2

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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, 2006**             | ** ** | **December 31, 2005 **    | ** ** |
| ** **                                                                                                                                                                                          | ** ** | **(restated see Note 2)** | ** ** | **(restated see Note 2)** | ** ** |
| **ASSETS**                                                                                                                                                                                          | ** ** | ** **                               | ** ** | ** **                               | ** ** |
| Current assets:                                                                                                                                                                                     | ** ** | ** **                               | ** ** | ** **                               | ** ** |
| Cash                                                                                                                                                                                                |       | $                                        | 2,503      |                                     | $          | 27 |   |
| Accounts  receivable, net                                                                                                                                                                           |       | 157,709                                  |       | 226,356                                  |       |
| Inventory                                                                                                                                                                                           |       | 33,281                                   |       | 56,819                                   |       |
| Deferred costs                                                                                                                                                                                      |       | 13,769                                   |       | 17,069                                   |       |
| Other current  assets                                                                                                                                                                               |       | 9,265                                    |       | 8,605                                    |       |
| Total current  assets                                                                                                                                                                               |       | 216,527                                  |       | 308,876                                  |       |
| Depreciable  assets, net                                                                                                                                                                            |       | 13,146                                   |       | 13,640                                   |       |
| Long-term  financing receivables and other assets                                                                                                                                                   |       | 18,822                                   |       | 23,391                                   |       |
| Total assets                                                                                                                                                                                        |       | $                                        | 248,495    |                                     | $          | 345,907 |   |
|                                                                                                                                                                                                |       |                                     |       |                                     |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                      |       |                                     |       |                                     |       |
| Current liabilities:                                                                                                                                                                                |       |                                     |       |                                     |       |
| Borrowings under  credit facility                                                                                                                                                                   |       | $                                        | —     |                                     | $          | 48,014 |   |
| Accounts payable                                                                                                                                                                                    |       | 108,406                                  |       | 151,995                                  |       |
| Financed lease  debt                                                                                                                                                                                |       | 31,861                                   |       | 25,187                                   |       |
| Accrued  liabilities                                                                                                                                                                                |       | 17,704                                   |       | 16,603                                   |       |
| Deferred revenue                                                                                                                                                                                    |       | 5,788                                    |       | 6,020                                    |       |
| Accrued warranty  liabilities                                                                                                                                                                       |       | 941                                      |       | 849                                      |       |
| Total current  liabilities                                                                                                                                                                          |       | 164,700                                  |       | 248,668                                  |       |
| Long-term  financed lease debt                                                                                                                                                                      |       | 12,281                                   |       | 15,996                                   |       |
| Other  liabilities                                                                                                                                                                                  |       | 2,986                                    |       | 3,076                                    |       |
| Total  liabilities                                                                                                                                                                                  |       | 179,967                                  |       | 267,740                                  |       |
|                                                                                                                                                                                                |       |                                     |       |                                     |       |
| Commitments and  contingencies                                                                                                                                                                      |       |                                     |       |                                     |       |
|                                                                                                                                                                                                |       |                                     |       |                                     |       |
| Stockholders’ equity                                                                                                                                                                           |       |                                     |       |                                     |       |
| Common stock -  $0.005 par value, 20,000,000 shares authorized; 9,806,084 issued and  9,362,846 outstanding at March 31, 2006; and 9,806,084 issued and 9,307,606  outstanding at December 31, 2005 |       | 49                                       |       | 49                                       |       |
| Capital in  excess of par value                                                                                                                                                                     |       | 45,081                                   |       | 45,104                                   |       |
| Retained  earnings                                                                                                                                                                                  |       | 26,703                                   |       | 36,731                                   |       |
| Treasury stock,  443,238 shares at March 31, 2006 and 498,478 shares at December 31, 2005, at  cost                                                                                                 |       | (3,305                                   | )          | (3,717                                   | )          |
| Total  stockholders’ equity                                                                                                                                                                    |       | 68,528                                   |       | 78,167                                   |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                    |       | $                                        | 248,495    |                                     | $          | 345,907 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

3

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**GTSI CORP.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited)

(In thousands,except per share data)
| ** **                                      | ** ** | **Three months ended   March 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(restated  see Note 2)**                   | ** ** | **(restated   see Note 2)** | ** ** |
|                                            |       |                                                   |       |   |   |
| SALES                                           |       | $                                                      | 148,279    |   | $ | 156,629 |   |
|                                            |       |                                                   |       |   |   |
| COST OF SALES                                   |       | 129,978                                                |       | 139,236 |   |
|                                            |       |                                                   |       |   |   |
| GROSS MARGIN                                    |       | 18,301                                                 |       | 17,393 |   |
|                                            |       |                                                   |       |   |   |
| SELLING, GENERAL  & ADMINISTRATIVE EXPENSES |       | 29,606                                                 |       | 28,104 |   |
|                                            |       |                                                   |       |   |   |
| LOSS FROM  OPERATIONS                           |       | (11,305                                                | )          | (10,711 | ) |
|                                            |       |                                                   |       |   |   |
| INTEREST AND  OTHER INCOME                      |       |                                                   |       |   |   |
| Lease-related income                            |       | 2,378                                                  |       | 833 |   |
| Interest and other income                       |       | 279                                                    |       | 337 |   |
| Interest and other expense                      |       | (1,380                                                 | )          | (477 | ) |
| Interest and other income, net                  |       | 1,277                                                  |       | 693 |   |
|                                            |       |                                                   |       |   |   |
| LOSS BEFORE  INCOME TAXES                       |       | (10,028                                                | )          | (10,018 | ) |
|                                            |       |                                                   |       |   |   |
| INCOME TAX BENEFIT                              |       | —                                                 |       | 3,774 |   |
|                                            |       |                                                   |       |   |   |
| NET LOSS                                        |       | $                                                      | (10,028    | ) | $ | (6,244 | ) |
|                                            |       |                                                   |       |   |   |
| LOSS PER SHARE                                  |       |                                                   |       |   |   |
| Basic                                           |       | $                                                      | (1.08      | ) | $ | (0.69 | ) |
| Diluted                                         |       | $                                                      | (1.08      | ) | $ | (0.69 | ) |
|                                            |       |                                                   |       |   |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING            |       |                                                   |       |   |   |
| Basic                                           |       | 9,288                                                  |       | 9,002 |   |
| Diluted                                         |       | 9,288                                                  |       | 9,002 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

4

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**GTSI CORP.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

(In thousands)
| ** **                                                                      | ** ** | **Three months ended   March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| ** **                                                                      | ** ** | **(restated  see Note 2)**                   | ** ** | **(restated  see Note 2)** | ** ** |
| ** **                                                                      | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                      |       |                                                   |       |   |   |
| Net loss                                                                        |       | $                                                      | (10,028    | ) | $ | (6,244 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities |       | 52,916                                                 |       | 37,498 |   |
| Net cash provided by operating activities                                       |       | 42,888                                                 |       | 31,254 |   |
|                                                                            |       |                                                   |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                      | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Purchase of  depreciable assets                                                 |       | (639                                                   | )          | (1,126 | ) |
| Net cash used in investing activities                                           |       | (639                                                   | )          | (1,126 | ) |
|                                                                            |       |                                                   |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                      | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Payments on  credit facility                                                    |       | (48,014                                                | )          | (1,168 | ) |
| Proceeds from  financed lease debt                                              |       | 8,110                                                  |       | 8,877 |   |
| Proceeds from  exercises of stock options                                       |       | 131                                                    |       | 349 |   |
| Net cash (used in) provided by financing activities                             |       | (39,773                                                | )          | 8,058 |   |
|                                                                            |       |                                                   |       |   |   |
| NET INCREASE IN  CASH                                                           |       | 2,476                                                  |       | 38,186 |   |
|                                                                            |       |                                                   |       |   |   |
| CASH AT  BEGINNING OF PERIOD                                                    |       | 27                                                     |       | 387 |   |
|                                                                            |       |                                                   |       |   |   |
| CASH AT END OF PERIOD                                                           |       | $                                                      | 2,503      |   | $ | 38,573 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

5

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**GTSI CORP.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited)

**1.****                                     ****Basis of Presentation**

Theaccompanying unaudited interim condensed consolidated financial statements ofGTSI Corp. and its subsidiaries (“GTSI” or the “Company”) have been preparedpursuant to the rules and regulations of the Securities and Exchange Commissionfor quarterly reports on Form 10-Q and, therefore, omit or condense certainnote disclosures and other information required by U.S. generally acceptedaccounting principles for complete financial statements.  These financial statements should thereforebe read in conjunction with the audited consolidated financial statements andaccompanying notes for the year ended December 31, 2005 included in GTSI’sAnnual Report on Form 10-K/A. 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.

Inthe opinion of management, the accompanying unaudited condensed consolidatedfinancial statements reflect all adjustments of a normal recurring nature(except as disclosed herein) considered necessary to present fairly GTSI’sfinancial position as of March 31, 2006 and its results of operations and cashflows for the three months ended March 31, 2006 and 2005.

Theresults of operations for the three month period ended March 31, 2006 are notnecessarily indicative of the results that may be expected for the full year,or future periods.  GTSI has historicallyexperienced significant seasonal fluctuations in operations as a result ofgovernment buying and funding patterns. These patterns historically have had a negative effect on GTSI’s salesand net loss during the quarter ended March 31.

TheCompany has not complied with certain covenants of the Company’s $75 millionrevolving credit facility with a group of banks (the “Credit Agreement”) whichwill terminate on May 31, 2006. A breach of any of the covenants orrestrictions contained in the Credit Agreement would result in an event ofdefault. Such a default could allow the lenders to discontinue lending ordeclare all borrowings outstanding to be due and payable. If any of theseevents occur, there is no assurance that GTSI will have sufficient fundsavailable to pay in full the total amount of obligations that become due as aresult of any such acceleration, or that GTSI will be able to find additionalor alternative financing to refinance any such accelerated obligations. If theCompany is unable to obtain alternative financing prior to the expiration ofthe Credit Agreement, it would likely have a material adverse affect on GTSI’sfinancial condition and ability to continue as a going concern.

**2.****                                     ****Restatement of FinancialStatements**

InAugust 2006, the Company concluded its consolidated financial statements forthe three months ended March 31, 2006 should be restated to correct itsaccounting treatment for: a) the transfer of certain receivables to thirdparties in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities,*(“FAS 140”*)*; b) overstatement of accounts payable and the related costof sales, and c) the recording of miscellaneous accounting adjustmentsappropriate for the fair presentation of the financial statements. Thefollowing tables summarize the effects of these adjustments on GTSI’s financialstatements:

 

6

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ConsolidatedCondensed Balance Sheet

March31, 2006

(inthousands)

 
| ** **                                        | ** ** | **As Previously  Reported** | ** ** | **Adjustment** | ** ** | **Reference** | ** ** | **As Restated** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|----------------|------------|---------------|------------|----------------------|------------|
| Accounts  receivable, net                         |       | $                                | 134,244    |           | $          | 23,465        |       | a,c                  |       | $ | 157,709 |   |
| Inventory                                         |       | $                                | 26,923     |           | $          | 6,358         |       | b,c                  |       | $ | 33,281 |   |
| Deferred costs                                    |       | $                                | 12,066     |           | $          | 1,703         |       | a,c                  |       | $ | 13,769 |   |
| Other current  assets                             |       | $                                | 8,905      |           | $          | 360           |       | c                    |       | $ | 9,265 |   |
| Total current  assets                             |       | $                                | 184,640    |           | $          | 31,887        |       | a,c                  |       | $ | 216,527 |   |
| Depreciable  assets, net                          |       | $                                | 13,153     |           | $          | (7            | )          | c                    |       | $ | 13,146 |   |
| Long-term  financing receivables and other assets |       | $                                | 3,302      |           | $          | 15,520        |       | a                    |       | $ | 18,822 |   |
| Total assets                                      |       | $                                | 201,095    |           | $          | 47,400        |       | a,b,c                |       | $ | 248,495 |   |
| Accounts payable                                  |       | $                                | 111,878    |           | $          | (3,472        | )          | b,c                  |       | $ | 108,406 |   |
| Financed lease  debt                              |       | $                                | —     |           | $          | 29,005        |       | a                    |       | $ | 29,005 |   |
| Accrued  liabilities                              |       | $                                | 17,665     |           | $          | 39            |       | c                    |       | $ | 17,704 |   |
| Deferred revenue                                  |       | $                                | 4,720      |           | $          | 1,068         |       | a,c                  |       | $ | 5,788 |   |
| Accrued warranty  liabilities                     |       | $                                | 921        |           | $          | 20            |       | c                    |       | $ | 941 |   |
| Total current  liabilities                        |       | $                                | 135,184    |           | $          | 26,660        |       | a,b,c                |       | $ | 161,844 |   |
| Long-term  financed lease debt                    |       | $                                | —     |           | $          | 15,137        |       | a                    |       | $ | 15,137 |   |
| Other  liabilities                                |       | $                                | 3,747      |           | $          | (761          | )          | c                    |       | $ | 2,986 |   |
| Total  liabilities                                |       | $                                | 138,931    |           | $          | 41,036        |       | a,b,c                |       | $ | 179,967 |   |
| Capital in  excess of par value                   |       | $                                | 43,056     |           | $          | 2,025         |       | c                    |       | $ | 45,081 |   |
| Retained  earnings                                |       | $                                | 21,353     |           | $          | 5,350         |       | a,b,c                |       | $ | 26,703 |   |
| Treasury stock                                    |       | $                                | (2,294     | )              | $          | (1,011        | )          | c                    |       | $ | (3,305 | ) |
| Total  stockholders’ equity                  |       | $                                | 62,164     |           | $          | 6,364         |       | a,b,c                |       | $ | 68,528 |   |
| Total liabilities and  stockholders’ equity  |       | $                                | 201,095    |           | $          | 47,400        |       | a,b,c                |       | $ | 248,495 |   |

 

Consolidated CondensedStatement of Operations

For the Three MonthsEnded March 31, 2006

(in thousands, except per share data)
| ** **                               | ** ** | **As Previously  Reported** | ** ** | **Adjustment** | ** ** | **Reference** | ** ** | **As Restated** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|----------------|------------|---------------|------------|----------------------|------------|
| Sales                                    |       | $                                | 149,844    |           | $          | (1,565        | )          | a,c                  |       | $ | 148,279 |   |
| Cost of sales                            |       | $                                | 133,791    |           | $          | (3,813        | )          | a,b,c                |       | $ | 129,978 |   |
| Gross margin                             |       | $                                | 16,053     |           | $          | 2,248         |       | a,b,c                |       | $ | 18,301 |   |
| Selling, general  and admin. expenses    |       | $                                | 29,719     |           | $          | (113          | )          | c                    |       | $ | 29,606 |   |
| Loss from operations                     |       | $                                | (13,666    | )              | $          | 2,361         |       | a,b,c                |       | $ | (11,305 | ) |
| Interest and  other income, net          |       | $                                | 623        |           | $          | 654           |       | a                    |       | $ | 1,277 |   |
| Net loss                                 |       | $                                | (13,043    | )              | $          | 3,015         |       | a,b,c                |       | $ | (10,028 | ) |
|                                     |       |                             |       |           |       |          |       |                 |       |
| Loss per share – basic  and diluted |       | $                                | (1.41      | )              | $          | 0.33          |       | a,b,c                |       | $ | (1.08 | ) |

 

7

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Condensed ConsolidatedStatement of Cash Flows

For the Three MonthsEnded March 31, 2006

(in thousands, except per share data)
| ** **            | ** ** | **As Previously  Reported** | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
|-----------------------|------------|----------------------------------|------------|----------------|------------|----------------------|------------|
| Operating cash  flows |       | 50,880                           |       | (7,992         | )          | 42,888               |       |
| Investing cash  flows |       | (642                             | )          | 3              |       | (639                 | )          |
| Financing cash flows  |       | (47,758                          | )          | 7,985          |       | (39,773              | )          |

 

**a) Transfer of receivables in accordance with FAS 140**

FAS140 provides for the treatment of transfers of assets at the time of transferas sales, provided the seller meets certain criteria and surrenders controlover the asset. Management concluded in August 2006 certain transfers did notqualify as sales under FAS 140 because the transfer agreements allowed GTSI tomaintain effective control over the transferred assets. As the transfers didnot qualify as sales under FAS 140, the Company should not have derecognizedthe assets at the time of the transfer. Therefore, the transferred receivables,together with related liabilities, are reported in the Company’s balance sheetas accounts receivable and long-term financing receivables and financed leasedebt.  In addition, corrections for thetiming of gains recognized on the transfer of financing receivables, recordedas lease-related income on the Statement of Operations, were deemed necessaryto recognize the interest income on the retained receivables and interestexpense on the financed lease debt over the term of the related arrangements.

**b)Overstatement of certain account payable and the related cost of sales**

As a result ofcertain systems and process related errors, several instances of overstatementof accounts payable and the related cost of sales were identified during areview of aged payable balances.

**c)Other – recording of miscellaneous accounting adjustments**

TheCompany has made other less significant corrections to various other accountsthat are appropriate for the fair presentation of the Company’s March 31, 2006financial statements.

GTSIrestated its previously issued consolidated financial statements for the yearended December 31, 2005 which are discussed in detail in GTSI’s Annual Reporton Form 10-K/A for the year ended December 31, 2005. The restatements as of andfor the three months ended March 31, 2005 included prior period adjustmentsfor: i) the transfer of certain receivables to third parties in accordance withFAS 140, ii) overstatement of accounts payable and the related cost of sales,and iii) other miscellaneous adjustments. A summary of the aggregate effects on GTSI’s consolidated financialstatements is shown below:

8

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Consolidated BalanceSheet

December 31, 2005

(in thousands)
| ** **                                        | ** ** | **As Previously  Reported** | ** ** | **As Restated** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|----------------------|------------|
| Cash                                              |       | $                                | 22         |                 | $          | 27 |   |
| Accounts  receivable, net                         |       | $                                | 207,886    |                 | $          | 226,356 |   |
| Inventory                                         |       | $                                | 56,666     |                 | $          | 56,819 |   |
| Deferred costs                                    |       | $                                | 14,909     |                 | $          | 17,069 |   |
| Other current  assets                             |       | $                                | 9,118      |                 | $          | 8,605 |   |
| Total current  assets                             |       | $                                | 288,601    |                 | $          | 308,876 |   |
| Long-term  financing receivables and other assets |       | $                                | 4,416      |                 | $          | 23,391 |   |
| Total assets                                      |       | $                                | 306,657    |                 | $          | 345,907 |   |
| Accounts payable                                  |       | $                                | 159,038    |                 | $          | 151,995 |   |
| Financed lease  debt                              |       | $                                | —     |                 | $          | 25,187 |   |
| Accrued  liabilities                              |       | $                                | 16,634     |                 | $          | 16,603 |   |
| Deferred revenue                                  |       | $                                | 3,611      |                 | $          | 6,020 |   |
| Accrued warranty  liabilities                     |       | $                                | 744        |                 | $          | 849 |   |
| Total current  liabilities                        |       | $                                | 228,041    |                 | $          | 248,668 |   |
| Long-term  financed lease debt                    |       | $                                | —     |                 | $          | 15,996 |   |
| Other  liabilities                                |       | $                                | 3,922      |                 | $          | 3,076 |   |
| Total  liabilities                                |       | $                                | 231,963    |                 | $          | 267,740 |   |
| Capital in  excess of par value                   |       | $                                | 42,943     |                 | $          | 45,104 |   |
| Retained  earnings                                |       | $                                | 34,396     |                 | $          | 36,731 |   |
| Treasury stock                                    |       | $                                | (2,694     | )                    | $          | (3,717 | ) |
| Total  stockholders’ equity                  |       | $                                | 74,694     |                 | $          | 78,167 |   |
| Total liabilities and  stockholders’ equity  |       | $                                | 306,657    |                 | $          | 345,907 |   |

 

Consolidated CondensedStatement of Operations (unaudited)

For the three monthsended March 31, 2005

(in thousands, except per share data)
| ** **                                     | ** ** | **As Reported** | ** ** | **As Restated** | ** ** |
|------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| Sales                                          |       | $                    | 160,677    |                 | $          | 156,629 |   |
| Cost of sales                                  |       | $                    | 142,204    |                 | $          | 139,236 |   |
| Gross margin                                   |       | $                    | 18,473     |                 | $          | 17,393 |   |
| Selling,  general, and administrative expenses |       | $                    | 28,291     |                 | $          | 28,104 |   |
| Loss from  operations                          |       | $                    | (9,818     | )                    | $          | (10,711 | ) |
| Interest and  other income, net                |       | $                    | 729        |                 | $          | 693 |   |
| Net loss                                       |       | $                    | (5,526     | )                    | $          | (6,244 | ) |
|                                           |       |                 |       |                 |       |
| Loss per share-basic  and diluted              |       | $                    | (0.61      | )                    | $          | (0.69 | ) |

 

Condensed ConsolidatedStatement of Cash Flows

For the Three MonthsEnded March 31, 2005

(in thousands, except per share data)

|                       | ** ** | **As Previously   Reported** | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
|-----------------------|------------|----------------------------------------|------------|----------------|------------|----------------------|------------|
| Operating cash  flows |       | 25,585                                 |       | 5,669          |       | 31,254               |       |
| Investing cash  flows |       | (1,181                                 | )          | 55             |       | (1,126               | )          |
| Financing cash flows  |       | (829                                   | )          | 8,887          |       | 8,058                |       |

 

**3.****                                     ****Stock-Based Compensation**

Asof March 31, 2006, the Company has four stock-based employee compensationplans, which are described below.  Priorto January 1, 2006, the Company accounted for those plans under the recognitionand measurement provisions of APB Opinion No. 25, *Accountingfor Stock Issued to Employees,*(“APB 25”) and relatedInterpretations, as permitted by FASB Statement No. 123, *Accountingfor Stock-Based Compensation* (“FAS 123”).  No stock-based employee compensation cost wasrecognized in the condensed consolidated Statement of Operations for the threemonths ended March 31, 2005 as all options granted under those plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.  Effective January 1,2006, the Company adopted the fair value recognition provisions of FASBStatement No. 123(R), *Share-Based Payment*,(“FAS 123R”), using the 

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modified-prospective-transitionmethod.  Under that transition method,compensation cost recognized in the three months ended March 31, 2006 includes:(a) compensation cost for all share-based payments granted prior to, but notyet vested as of January 1, 2006 based on the grant date fair value estimatedin accordance with the original provisions of FAS 123, and (b) compensationcost for all share-based payments granted subsequent to January 1, 2006, basedon the grant-date fair value estimated in accordance with the provisions of FAS123R.  Results for the prior periods havenot been restated.

Asa result of adopting FAS 123R on January 1, 2006, the Company’s reported lossfrom operations, loss before income taxes and net loss for the three monthsended March 31, 2006 are $189 thousand lower than if it had continued toaccount for share-based compensation under APB 25.

Priorto the adoption of FAS 123R, the Company presented all tax benefits of deductionsresulting from the exercise of stock options as operating cash flows in thecondensed consolidated Statement of Cash Flows. FAS 123R requires the cash flows resulting from the tax benefitsresulting from tax deductions in excess of the compensation cost recognized forthose options (excess tax benefits) be classified as financing cash flows.  Since there was no tax benefit for stockoptions during the three months ended March 31, 2006, there was no impact onthe Company’s Statement of Cash Flows for the adoption of FAS 123R.

Thefollowing table illustrates the effect on net loss and loss per share if theCompany had applied the fair value recognition provisions of FAS 123 to optionsgranted under the Company’s stock option plans for the three months ended March31, 2005.  For purposes of this pro formadisclosure, the value of the options is estimated using a Black-Scholes-Mertonoption-pricing formula and amortized to expense over the options’ vestingperiods, as a single award.
| **(in thousands, except per share data)**                                                                                | ** ** | **Three months ended   March 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                                                                                                        | ** ** | **(restated see Note 2)**                         | ** ** |
| ** **                                                                                                                                        | ** ** | ** **                                                       | ** ** |
| Net loss – as  reported                                                                                                                      |       | $                                                                | (6,244     | ) |
| Deduct: Total  stock-based employee compensation expense determined under the fair value  based method for all awards, net of related tax effects |       | (589                                                             | )          |
| Net loss – pro  forma                                                                                                                        |       | $                                                                | (6,833     | ) |
|                                                                                                                                              |       |                                                             |       |
| Loss per share,  basic and diluted – as reported                                                                                             |       | $                                                                | (0.69      | ) |
|                                                                                                                                              |       |                                                             |       |
| Loss per share, basic  and diluted – pro forma                                                                                               |       | $                                                                | (0.76      | ) |

 

*StockIncentive Plans*

TheCompany has two stockholder approved combination incentive and non-statutorystock incentive plans: the 1994 Stock Option Plan, as amended (“1994 Plan”),and the Amended and Restated 1996 Stock Incentive Plan (“1996 Plan”). Theseplans provide for the granting of options to employees (both plans) and non-employeedirectors (only under the 1996 Plan) to purchase up to 300,000 and 3,500,000shares, respectively, of the Company’s common stock. The 1996 Plan also permitsthe grant of restricted stock units to its employees and non-employeedirectors. The Company has another stockholder approved plan, the 1997Non-Officer Stock Option Plan (“1997 Plan”), which provides for the granting ofnon-statutory stock options to employees (other than officers and directors) topurchase up to 300,000 shares of the Company’s common stock. In addition, GTSIhas utilized a vehicle permitted under NASDAQ marketplace rules that allows acompany without stockholder approval to offer stock options to 

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prospectiveemployees as an inducement to join GTSI (the “Capitalization Vehicle”).

Underthe 1997, 1996, and 1994 Plans, options have a term of up to ten years,generally vest over four years and option prices are required to be at not lessthan 100% of the fair market value of the Company’s common stock at the date ofgrant and, except in the case of non-employee directors, must be approved bythe Board of Directors or its Compensation Committee.  Options issued under the CapitalizationVehicle have a term of seven years, vest over four years and option pricesequal the fair market value of the Company’s common stock at the date of grant.The vesting period for restricted stock and restricted stock units isdetermined by the Compensation Committee on an individual award basis. GTSIrecognizes stock-based compensation expense for these graded vesting awards ona straight-line basis over the requisite service period for the entire award,which is equal to the vesting period specified in the option agreement.

*ValuationAssumptions*

Thefair value of each option award is estimated on the date of grant using aBlack-Scholes-Merton option valuation model that uses the assumptions noted inthe following table.  Expectedvolatilities are based on the historical volatility of GTSI’s stock.  The Company uses historical data to estimateoption exercises and employee terminations within the valuation model.  The expected term of options granted has beendetermined based on historical exercise behavior and represents the period oftime that options granted are expected to be outstanding.  The risk-free interest rate is based on thefive year U.S. Treasury rates at the time of grant which approximates GTSI’s4.8 year expected term of the option.
|                           | ** ** | **Three months ended   March 31, 2006** | ** ** |
|---------------------------|------------|------------------------------------------------------------------|------------|
| Expected  volatility      |       | 50.1                                                             | %          |
| Expected dividends        |       | —                                                           |       |
| Expected term  (in years) |       | 4.8                                                              |       |
| Risk-free rate            |       | 4.6                                                              | %          |

 

*Stock Options*

Asummary of option activity under the Company’s stock incentive plans as ofMarch 31, 2006 and changes during the period then ended is presented below:
| **Options**                     | ** ** | **Shares** | ** ** | **Weighted-  Average   Exercise   Price** | ** ** | **Weighted-  Average   Remaining   Contractual   Term** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
|---------------------------------|------------|------------|------------|-----------------------------------------------------|------------|------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                      | ** ** | **(000)**  | ** ** | ** **                                          | ** ** | ** **                                                             | ** ** | **($000)**                                  | ** ** |
| Outstanding at  January 1, 2006 |       | 2,088      |       | $                                                   | 8.57       |                                                                   |       |                                        |       |   |
| Granted                         |       | 10         |       | $                                                   | 6.61       |                                                                   |       |                                        |       |   |
| Exercised                       |       | (123       | )          | $                                                   | 4.34       |                                                                   |       |                                        |       |   |
| Forfeited                       |       | (92        | )          | $                                                   | 7.87       |                                                                   |       |                                        |       |   |
| Expired                         |       | (69        | )          | $                                                   | 10.34      |                                                                   |       |                                        |       |   |
| Outstanding at  March 31, 2006  |       | 1,814      |       | $                                                   | 8.81       |                                                                   | 4.1        |                                        | $          | 768 |   |
| Exercisable at March  31, 2006  |       | 1,610      |       | $                                                   | 8.90       |                                                                   | 3.8        |                                        | $          | 768 |   |

 

Theweighted-average grant-date fair value of options granted during the threemonths ended March 31, 2006 and 2005 was $3.16 and $4.70, respectively.  The total intrinsic value of optionsexercised during the three months ended March 31, 2006 and 2005 was $369thousand and $240 thousand respectively. Cash received from option exercisesunder all share-based payment arrangements for the three months 

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endedMarch 31, 2006 and 2005 was $131 thousand and $349 thousand, respectively.  The tax benefit for the tax deductions fromoption exercises of the share-based payment arrangements totaled zero and $94thousand for the three months ended March 31, 2006 and 2005, respectively. TheCompany has historically issued shares from treasury stock to satisfy optionexercises. During the three monthsended March 31, 2006, a Company executive exercised 100,000 stock options andreceived 31,073 shares of GTSI common stock in a net share settlement, in whichthe executive effectively tendered mature shares. In addition, 22,500 otherstock options were exercised during the three months ended March 31, 2006 andissued from treasury stock.

 *Restricted Shares*

Thefair value of nonvested shares of restricted stock is determined based on theclosing trading price of the Company’s shares on the grant date. There were norestricted stock units granted during the three months ended March 31, 2005. Asummary of the status of Company’s nonvested shares as of March 31, 2006, andchanges during the period ended March 31, 2006, is presented below:
| Nonvested Shares         | ** ** | **Shares  (000)** | ** ** | **Weighted-Average   Grant-Date Fair Value** | ** ** |
|-------------------------------|------------|-------------------|------------|-------------------------------------------------------------|------------|
| Nonvested at  January 1, 2006 |       | 50                |       | $                                                           | 8.16       |   |
| Granted                       |       | 2                 |       | $                                                           | 7.20       |   |
| Nonvested at March 31,  2006  |       | 52                |       | $                                                           | 8.13       |   |

 

*UnrecognizedCompensation*

Asof March 31, 2006, there was $1.7 million of total unrecognized compensationcost related to nonvested stock-based awards. That cost is expected to be recognized over a period of 4.1 years.  During the three months ended March 31, 2006,approximately 6 thousand awards vested.

**4.****                                     ****Lease Receivables**

TheCompany offers lease arrangements to its customers. These arrangementstypically are for periods from two to four years and are generally accountedfor as sales-type leases. The Company’s net investment in leases is included inthe Consolidated Balance Sheets in accounts receivable, net and long-termfinancing receivables and were as follows (in thousands):

 

|                                           | ** ** | **March 31, 2006  (restated see Note 2)** | ** ** | **December 31, 2005  (restated see Note 2)** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| Future minimum  lease payments receivable |       | $                                                                  | 49,039     |                                                                  | $          | 30,736 |   |
| Unguaranteed  residual values             |       | 9,482                                                              |       | 8,723                                                                 |       |
| Unearned income                           |       | (8,898                                                             | )          | (6,328                                                                | )          |
| Net investment in lease                   |       | $                                                                  | 49,623     |                                                                  | $          | 33,131 |   |

** **

**5.****                                     ****Inventory**

Inventoryis valued at the lower of cost or market. The Company writes down its inventoryfor obsolete or excess inventory based on assumptions about future demand andmarket conditions by recording a reserve to inventory on the balance sheet. Asof March 31, 2006 and December 31, 2005, the balance of the reserve was $4.1million and $6.8 million, respectively.

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**6.****                             ****Debt**

a. Credit Agreements

As of December 31, 2005, the Company had a$135 million revolving credit facility with a group of lenders (the “CreditFacility”). As of January 31, 2006, the Company defaulted on three financialcovenants under the Credit Facility and its lenders requested the execution ofan agreement to temporarily forbear them from enforcing their rights andremedies as a result of the events of default. During the three months endedMarch 31, 2006, a forbearance agreement (the “Credit Agreement”) was executedbetween GTSI and its lenders. Under the terms of the Credit Agreement, thelenders agreed to forbear from exercising their rights and remedies againstGTSI in respect of certain existing defaults under the Credit Facility and tocontinue to advance funds to the Company until May 31, 2006, unless GTSI is inbreach of the Credit Agreement at an earlier date.  As required by the Credit Agreement, theCompany paid a $225 thousand fee to the lenders. Under the Credit Agreement thesize of the Credit Facility was decreased to $75 million and the interest ratewas increased to LIBOR plus 3.0% per annum. As of March 31, 2006, GTSI hadavailable credit of $34.9 million under the Credit Agreement.

As of March 31, 2006, GTSI was not incompliance with the minimum financial net worth financial covenant in theCredit Agreement.  In addition, on April3, 2006, GTSI defaulted on another covenant under the Credit Agreement when theCompany received a staff determination letter from the NASDAQ National Marketstating that, because GTSI had not filed its Annual Report on Form 10-K for2005 with the SEC, its common stock was subject to delisting from the NASDAQNational Market. Upon the filing of GTSI’s Form 10-K for 2005 on April 12,2006, NASDAQ issued a letter stating the Company was in compliance with thelisting rules.

On April 10, 2006, the Company signed acommitment letter to negotiate a new revolving credit facility with two majorU.S. banks by May 31, 2006. The Company and the lenders are working to completetheir due diligence efforts and management plans to execute a new revolvingcredit facility agreement prior to June 1, 2006.

b. Financed Lease Debt

As the transfers of the financing receivablesdid not meet the sale criteria under FAS 140, the receipt of cash from thethird party financing companies are accounted for as secured borrowings, whichare included in the accompanying consolidated balance sheets as financed leasedebt.   The Company has received cash of$8.1 million and $8.9 million for the three months ended March 31, 2006 and2005, respectively, related to the transfer of the financing receivables tothird parties.

The terms of the financed lease debtgenerally correspond to the terms of the underlying lease agreements, generallytwo to four years.  The secured financeddebt is secured by the related lease and other receivables.   The Company recognized interest expenseassociated with the secured financing debt of $0.6 million and $0.2 million forthe three months ended March 31, 2006 and 2005, respectively.

**7.             Loss Per Share**

Basicloss per share is calculated by dividing net loss by the weighted averageshares outstanding during the period, which includes shares of restricted stockthat are fully vested.  Diluted loss pershare is computed similarly to basic loss per share, except that the weightedaverage shares outstanding are increased to include equivalents, when theireffect is dilutive.

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Antidilutiveemployee stock options totaling 229 thousand and 572 thousand have been excludedfor the three months ended March 31, 2006 and 2005, respectively.  Unvested restricted stock units totaling 51thousand shares have been excluded for the three months ended March 31, 2006.

**8.             Income Taxes**

TheCompany has provided a valuation allowance against the full amount of the netdeferred tax assets at March  31, 2006because, in the opinion of management, it is more likely than not that thesedeferred tax assets will not be realized. Therefore, no income tax benefit wasreported in the Statement of Operations on the loss before income taxes of$10.0 million for the three months ended March 31, 2006.

**9.             Commitments andContingencies**

*Product Warranties*

GTSIoffers extended warranties on certain products which are generally covered forthree or 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,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(restated  see Note 2)**             | ** ** | **(restated  see Note 2)** | ** ** |
| Accrued  warranties at beginning of period          |       | $                                                | 849        |   | $ | 2,429 |   |
| Charges made  against warranty liabilities          |       | (115                                             | )          | (1,401 | ) |
| Change in  estimate of accrued warranty liabilities |       | 170                                              |       | (613 | ) |
| Accruals for  additional warranties sold            |       | 37                                               |       | 434 |   |
| Accrued warranties at  end of period                |       | $                                                | 941        |   | $ | 849 |   |

 

Revenueand cost of sales from extended warranty contracts is recorded as deferredrevenue and deferred costs, respectively, and subsequently recognized over theterm of the contract.  The followingtable summarizes the activity related to the deferred warranty revenue (inthousands):
| ** **                                        | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | **(restated  see Note 2)**             | ** ** | ** ** | ** ** |
| Deferred  warranty revenue at beginning of period |       | $                                                | 1,361      |   | $ | 2,599 |   |
| Deferred  warranty revenue recognized             |       | (283                                             | )          | (367 | ) |
| Revenue deferred  for additional warranties sold  |       | 67                                               |       | 53 |   |
| Deferred warranty  revenue at end of period       |       | $                                                | 1,145      |   | $ | 2,285 |   |

 

*Lettersof Credit*

GTSIwas obligated under an operating lease to provide its landlord with a letter ofcredit in the amount 

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of$150 thousand at March 31, 2006 and December 31, 2005, as a security depositfor all tenant improvements associated with the lease.

Asof December 31, 2005, GTSI had an outstanding letter of credit to a customer inthe amount of $1.75 million to guarantee the performance by the Company of allobligations under the contract.  Thisobligation expired on February 28, 2006.

*EmploymentAgreements*

Asof December 31, 2005, the Company had an employment agreement with its formerChief Executive Officer which provided for payment of $0.7 million upontermination of employment. This agreement was terminated on February 15, 2006when the Company entered into a transition agreement with its former CEO (the “TransitionAgreement”). The Transition Agreement provides for a payment of $1.1 million tobe paid out over the next 18 months, as well as reimbursement for certainbenefits and legal fees totaling $0.1 million. As a result, the Companyrecorded a severance liability, which is included in accrued liabilities, of $1.2million during the three months ended March 31, 2006.  The related charge increased selling, general& administrative expenses by $1.2 million for the three months ended March31, 2006.

OnFebruary 16, 2006, GTSI entered into an employment agreement with the Company’scurrent President and Chief Executive Officer. This agreement provides forpayments of 12 months of base salary plus bonus equal to the previous year’sbonus payments upon termination of employment or a change in control. Inaddition, GTSI has change in control agreements with 15 additional 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, 2006 no accruals have beenrecorded for these agreements.

*Contingencies*

Currently,and from time to time, GTSI is involved in litigation incidental to the conductof its business.  As of March 31, 2006,GTSI is not a party to any lawsuit or proceeding that, in the opinion ofmanagement, is likely to have a material adverse effect on its financialposition or results of operations.

**10.          Subsequent Events**

GTSI’sBoard of Directors (the “Board”) approved on April 28, 2006 the following bonuspayments, short-term incentive program, and severance agreements for theCompany’s executive officers in an effort to promote retention and performancein 2006 and beyond:

1)              First quarter cash bonus payments for GTSI’sCEO, CFO, Executive VP of Sales, Chief Marketing Officer, and Group VP of IT& Operations for approximately $0.2 million in recognition of efforts toenhance the Company’s financial position, provide leadership and regardingother significant corporate matters. Pursuant to similar arrangements theCompany is providing bonuses to promote retention and performance to all othereligible employees for the first quarter of 2006. Incentive expense forexecutive officers and other employees totaling $0.6 million was accrued duringthe three months ended March 31, 2006 and reported in GTSI’s Statement ofOperations as selling, general & administrative expenses;

2)              A short term incentive program forapproximately 25 key employees, including the Company’s Executive Officers, toencourage efforts in enhancing GTSI’s financial performance and stockholdervalue. The program will be funded with an amount equal to 10% of GTSI’searnings before taxes, if any, for the year ending December 31, 2006; and

3)              Severance payments consisting of six monthsof base salary, if terminated without cause, for GTSI’s CFO, Executive VP ofSales, Chief Marketing Officer and Group VP of IT & Operations.

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

Thefollowing discussion and analysis is provided to increase the understanding of,and should be read in conjunction with, our unaudited condensed consolidated financialstatements and notes included in Part I, Item 1 of this Quarterly Report onForm 10-Q/A and our consolidated financial statements and notes in our AnnualReport on Form 10-K/A for the year ended December 31, 2005.  We use the terms “GTSI,” “we,” “our,” and “us”to refer to GTSI Corp. and its subsidiaries.

**DisclosureRegarding Forward-Looking Statements**

Readersare cautioned that this Quarterly Report on Form 10-Q/A containsforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended, relating to our operations that are based on our currentexpectations, estimates, forecasts and projections.  Words such as “expect,” “plan,” “believe,” “anticipate,”  “intend” and similar expressions are intendedto identify these forward-looking statements. These statements are not guarantees of future performance and aresubject to risks, uncertainties and assumptions that are difficult topredict.  Therefore, actual results infuture periods may differ materially from those expressed or projected in anyforward-looking statements because of a number of risks and uncertainties,including:

·                  Theuncertainty surrounding our ability to meet the covenants under our CreditAgreement in future periods and to obtain alternative financing for our futurecapital needs;

·                  Infrastructurefailures;

·                  Ourexposure to inventory risks;

·                  Changesin our management team, including our former Chief Executive Officer who resignedFebruary 15, 2006;

·                  Materialweaknesses in our internal control over financial reporting;

·                  Continuingnet losses, if we fail to align costs with our sales levels;

·                  Ourreliance on a small number of large transactions for significant portions ofour sales and gross margins;

·                  Ourability to shift our business model from a reseller of products to a high-endsolutions provider;

·                  Potentialadditional expenses to comply with the changing regulations of corporategovernance and public disclosure;

·                  Ourability to attract and retain talented employees;

·                  Ourquarterly sales and cash flows are volatile, which makes our future financialresults difficult to forecast;

·                  Unsatisfactoryperformance by third parties with which we work could hurt our reputation, operatingresults and competitiveness;

·                  Anyissue that compromises our relationship with agencies of the Federal governmentwould cause serious harm to our business;

·                  Competitionand loss of market share;

·                  Ourqualifications as a small business for new contract awards; and

·                  Changesin Federal government fiscal spending.

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Fora detailed discussion of risk factors affecting GTSI’s business and operations,see Item 1A, Risk Factors in our Annual Report on Form 10-K/A for the yearended December 31, 2005. We undertake no obligation to revise or update anyforward-looking statements.

**Restatement**

InAugust 2006, management concluded that GTSI’s financial statements for the yearended December 31, 2005 and the quarter ended March 31, 2006 should be restatedto correct the accounting for the transfer of certain receivables to thirdparties, the overstatement of accounts payable and the related cost of sales,and the recording of miscellaneous accounting adjustments appropriate for thefair presentation of the financial statements. As a result of the correctionsof these errors, we restated our financial statements as described more fullyin Note 2 of our unaudited condensed consolidated financial statements in thisForm 10-Q/A. Following the restatement, income on certain transferredreceivables is being recognized over the term of the respective leaseagreements, along with interest expense on financed lease debt. Theserestatements resulted in a decrease to net loss of $3.0 million, or $0.33 pershare, for the three months ended March, 31, 2006 and an increase to net lossof $0.7 million for the three months ended March 31, 2005. In addition, thetransferred receivables together with related liabilities are reported in GTSI’sbalance sheets following the restatement. These restatement entries resulted inan increase of $47.4 million and $39.3 million in total assets as of March 31,2006 and December 31, 2005, respectively, and an increase in total liabilitiesof $41.0 million as of March 31, 2006 and $35.8 million as of December 31,2005. Additionally, the restatement entries affected the Statement of CashFlows by moving cash flows from operations to cash flows from financingactivities, resulting in a reclassification of $10.6 million between operatingand financing cash flows for the three months ended March 31, 2006, and adecrease to cash provided by operating activities of $5.6 million and anincrease to cash provided by financing activities of $9.0 million for the threemonths ended March 31, 2006. This Management’s Discussion and Analysis ofFinancial Condition and Results of Operations has been modified and updated toreflect the effect of these restatements.

**Overview**

GTSIhas more than 20 years of experience in selling IT products and solutionsprimarily to U.S. Federal Government customers. We believe our key differentiators to be our strong brand amonggovernment customers, extensive contract portfolio and wide variety of vendors.

Thevast majority of the IT solutions we offer to our customers have a strongproduct component, and many are entirely product-based.  We connect IT’s leading vendors, products andservices inside the core technology areas most critical to government successby partnering with global IT leaders such as Panasonic, HP, Cisco and SunMicrosystems.  In our traditionalreseller capacity, we provide government with products for workgroup computing,such as workstations and desktops; mobility computing and communications, suchas wireless-equipped notebooks and PDAs; core computing, such as servers,high-end computing, and storage systems; networking products; and a wide rangeof peripherals.

During2005, we focused on application areas in which our government customers haveconsistently demonstrated the greatest immediate strategic interest, and whichprovide us with the greatest opportunity for sustained return oninvestment.  Our primary solutionattention is being directed toward IT consolidation, disaster recovery andbackup, e-mail management, and visual communication support for remote workersand distributed offices, including collaboration, presentation, and broadcastsystems.

Tohelp our customers acquire, manage and refresh this technology in a strategicand application-appropriate manner, GTSI has created a mix of financialservices capable of managing the entire 

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technologylifecycle.  We offer leasing arrangementsto allow government agencies to acquire access to technology as an evenlydistributed operating expense, rather than the much more budget-sensitive anddiscontinuous capital expenditures.  Thismodel is in high demand from our customers, and we believe it represents adistinctive advantage.  We expect tocontinue to expand our sales from leasing arrangements for IT products andsolutions in 2006.

Asdiscussed in more detail throughout our MD&A for the three months endedMarch 31, 2006 compared to March 31, 2005:

·                  Totalsales declined $8.4 million;

·                  Grossmargin as a percentage of sales increased 1.2 percent; and

·                  Netloss for the three months ended March 31, 2006 was $10.0 million, predominantlyrelated to increased selling, general & administrative expenses of $1.5million and no income tax benefit since we have a full valuation on ourdeferred tax assets.

Weare looking forward to significant improvements in operational and financialperformance through a combination of additional sales and improved marginpercentages.  We have put in place amulti-element plan to move the business from lower margin product sales tohigher margin solutions sales.  In thefirst element of our plan, we identified and exited failing or non-strategicactivities, including two reductions in workforce totaling over 100 full timepositions and realigning functions throughout GTSI to increase marginimprovement through cost reductions.  Inthe second and third elements of our plan, which will progress throughout 2006,we will work to improve execution of the current business and deliver highvalue solutions.  We believe there aresignificant opportunities to increase our relatively low market share withinthe government IT market as we pursue a distinctive business model combiningthe concepts of a value added provider of complex IT solutions with atraditional reseller.

**CriticalAccounting Estimates and Policies**

Ourunaudited condensed consolidated financial statements are based on theselection of accounting policies and the application of significant accountingestimates, some of which require management to make significantassumptions.  We believe that some of themore critical estimates and related assumptions that affect our financialcondition and results of operations pertain to revenue recognition, financingreceivables, valuation of inventory, capitalized internal use software,accounts payable and income taxes. For more information on critical accountingestimates and policies see the MD&A included in our Annual Report on Form10-K/A for the year ended December 31, 2005. We have discussed the application of these critical accounting estimatesand policies with the Audit Committee of our Board of Directors.

Weadopted SFAS No. 123 (Revised 2004), *Share-Based Payment*(“FAS 123R”) as of January 1, 2006 and as a result, we changed theaccounting for our stock option plans from the intrinsic value method, usedprior to 2006, to the fair value method as required by FAS 123R. We adopted FAS123R using the modified-prospective-transition method. As a result of the adoption,our stock-based compensation expense increased $0.2 million during the threemonths ended March 31, 2006, which was recorded as selling, general &administrative expenses on our condensed consolidated Statement of Operations.In accordance with the modified-prospective-transition method, our consolidatedfinancial statements for prior periods have not been restated to reflect, anddo not include, the impact of FAS 123R. There was no stock-based compensationexpense related to employee stock options recognized during the three monthsended March 31, 2005 because the exercise price of the stock options granted toemployees and directors equaled the fair market value of the underlying stockon the date of grant.

Weexpect that the adoption of FAS 123R will result in additional expenses, ascompared to 2005, of 

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approximately$0.7 million for the unvested stock options outstanding at December 31,2005.  We are unable to predict theultimate impact to our operations, as it will depend on the level of share-basedawards in 2006 and thereafter, and the actual rate of forfeitures, as comparedto our estimate of forfeitures.

FAS123R requires companies to estimate the fair value of share-based paymentawards on the date of grant using an option-pricing model. The value of theportion of the award that is ultimately expected to vest is recognized asexpense over the requisite service periods in our condensed consolidatedStatement of Operations. Our determination of fair value of share-based paymentawards on the date of grant using an option-pricing model is affected byassumptions regarding a number of highly complex and subjective variables.These variables include our expected stock price volatility, expected term,risk free interest rates, and actual and projected employee stock optionexercise behaviors.

Weanalyzed our historical volatility to estimate the expected volatility,consistent with FAS 123R. The risk-free interest rate assumption is thefive-year U.S. Treasury rates at the date of grant. The estimated expected liferepresents the weighted-average period the stock options are expected to remainoutstanding and has been determined based on an analysis of historical exercisebehavior.

Asstock-based compensation expense recognized in the condensed consolidatedStatement of Operations for the first quarter of 2006 is based on awardsultimately expected to vest, it has been reduced for estimated forfeitures.Forfeitures were estimated based on historical experience. As of March 31,2006, the total compensation cost related to nonvested awards not yetrecognized was $1.7 million, which will be recognized over a period of 4.1years.

Duringthe year ended December 31, 2005, the Company’s Board of Directors approved theacceleration of the vesting of unvested stock options with an exercise pricehigher than $8.09, the market value on the date of the acceleration, previouslyawarded to employees, officers and directors under GTSI’s stock optionplans.  This action affected unvestedoptions to purchase an aggregate of 515 thousand shares of common stock atexercise prices per share between $8.23 and $13.67.  The vesting of these options was acceleratedto avoid recognizing compensation expense in future financial statements uponthe adoption of FAS 123R.

**Historical Results of Operations**

Thefollowing table illustrates the unaudited percentage of sales represented byitems in our condensed consolidated statements of operations for the periodspresented:
| ** **                                      | ** ** | **Three months ended  March 31.** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(restated)**                                   | ** ** | **(restated)** | ** ** |
| ** **                                      | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Sales                                           |       | 100.0                                            | %          | 100.0 | % |
| Cost of sales                                   |       | 87.7                                             |       | 88.9 |   |
| Gross margin                                    |       | 12.3                                             |       | 11.1 |   |
| Selling, general  & administrative expenses |       | 19.9                                             |       | 17.9 |   |
| Loss from  operations                           |       | (7.6                                             | )          | (6.8 | ) |
| Interest and  other income, net                 |       | 0.8                                              |       | 0.4 |   |
| Loss before  income taxes                       |       | (6.8                                             | )          | (6.4 | ) |
| Income tax  benefit                             |       | —                                           |       | 2.4 |   |
| Net loss                                        |       | (6.8                                             | )%         | (4.0 | )% |

 

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The following tables indicate, for the periodsindicated (dollars in millions), the approximate sales by type and vendor alongwith related percentages of total sales.
| ** **                           | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| **Sales by Type**          | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(restated)**                                       | ** ** | **(restated)** | ** ** |
| Hardware, net of  reserves           |       | $                                                    | 114.8      |   | 77.4 | % | $ | 127.7 |   | 81.6 | % |
| Software                             |       | 12.9                                                 |       | 8.7 |   | 16.2 |   | 10.3 |   |
| Resold  third-party service products |       | 8.5                                                  |       | 5.7 |   | 10.0 |   | 6.4 |   |
| Services                             |       | 12.1                                                 |       | 8.2 |   | 2.7 |   | 1.7 |   |
| Total                                |       | $                                                    | 148.3      |   | 100.0 | % | $ | 156.6 |   | 100.0 | % |

 
| ** **                    | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|
| **Sales by Vendor** | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **(restated)**                                       | ** ** | **(restated)** | ** ** |
| Panasonic                     |       | $                                                    | 33.6       |   | 22.7 | % | $ | 39.5 |   | 25.2 | % |
| Cisco                         |       | 24.7                                                 |       | 16.7 |   | 17.0 |   | 10.9 |   |
| HP                            |       | 16.2                                                 |       | 10.9 |   | 19.1 |   | 12.2 |   |
| Sun Microsystems              |       | 10.1                                                 |       | 6.8 |   | 14.7 |   | 9.4 |   |
| Network  Appliances           |       | 3.6                                                  |       | 2.4 |   | 3.5 |   | 2.2 |   |
| Other, net of  reserves       |       | 60.1                                                 |       | 40.5 |   | 62.8 |   | 40.1 |   |
| Total                         |       | $                                                    | 148.3      |   | 100.0 | % | $ | 156.6 |   | 100.0 | % |

 

**Three Months Ended March 31, 2006 Compared With the Three Months EndedMarch 31, 2005**

*Sales*

Salesconsist of revenue from products delivered and services sold or rendered, netof allowances for customer returns. Sales for the first quarter of 2006declined $8.4 million, or 5.3 %, compared to the same period in 2005. Reasonsfor the sales declines are consistent with the trends we experienced during thelatter part of 2005 and include weak performance associated with certain salesteams and vendor lines resulting in decreased bookings during the fourthquarter of 2005. Sales to certain government agencies and of vendor productlines were below previous periods, and we have taken steps to align theresources in the organization with the margin potential.

Ananalysis of sales by type shows that services sales more than quadrupled fromthe three months ended March 31, 2005 to $12.1 million for the three monthsended March 31, 2006 and exceeded budget for the quarter with improvements inrevenue and gross margin. This increase was driven by increased servicesdepartment employees and consistent with our plans to increasingly become ahigh-end solution provider. All other categories decreased quarter overquarter, most predominantly the $12.9 million decline in hardware sales.

Managementintends to significantly increase sales under lease agreements during the yearending December 31, 2006. We achieved record sales with our U.S. Communitiescontract, which was renewed in April 2006 for an additional two years. As aresult, management expects our sales to state and local governments to continueto increase as a percentage of our total sales.

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Otherthan sales of Cisco and Network Appliances, our sales from our other top threevendors declined quarter over quarter. Our $8.4 million decrease in sales mainly comprised a $5.9 million, or14.9 %, decrease in sales of our top vendor, Panasonic and a $4.6 million, or31.3 %, decrease in Sun Microsystems sales. In addition, sales from Other vendors, net of reserves, decreased $2.7million quarter over quarter.  Thesedeclines were partially offset by the $7.7 million increase in Cisco and the$0.1 million increase in Network Appliances during the three months ended March31, 2006.  We expect total sales for thethree months ending June 30, 2006 will be comparable to the $177 millionrecognized in the same period in 2005.

*GrossMargin*

Grossmargin is sales less cost of sales, which includes product cost, freight,warranty maintenance cost and certain other expenses related to the cost ofacquiring products. Gross margin dollars increased $0.9 million, or 5.2%, from$17.4 million for the three-month period ended March 31, 2005 to $18.3 millionfor the three months ended March 31, 2006. The cost of sales decrease wasrelated to higher overall sales margins and higher vendor incentive funds as apercentage of sales which are recorded as a reduction of cost of sales. Grossmargin percentages vary over time and may change significantly depending on ourcustomers’ use of available contract vehicles and the mix of products sold. Weexpect to increase our gross margin as a percentage of sales as we increase theservices content of our orders and selectively bid on contracts with higherengineering and services content.

*Selling,General & Administrative Expenses*

Duringthe three months ended March 31, 2006, selling, general & administrative (“SG&A”)expenses increased $1.5 million, or 5.3%, from the same period in 2005.  This increase was primarily due to a $1.2million severance expense under the terms of the transition agreement with ourformer CEO.  In addition, commissionexpense increased $0.6 million, despite the $8.4 million decrease in sales, dueto increased compensation to our sales professionals under the 2006 CommissionPlan and commissions paid on higher margins in 2006.  SG&A expenses increased $0.3 million forstock-based compensation for our restricted stock awards and for stock optionsupon the adoption of FAS 123R.  Duringthe three months ended March 31, 2005, we did not record any stock-basedcompensation, as we previously accounted for stock options based on theintrinsic value method and we did not grant restricted stock until the secondquarter of 2005.  Incentive compensationexpense increased $0.8 million and bad debt expense increased $0.4 millionduring the first quarter of 2006 over the same period of last year. Theincrease in incentive compensation expense was primarily related to the accrualfor bonuses to our executive officers and other eligible employees in an effortto promote retention and performance in 2006 and beyond. SG&A expenseincreased $0.3 million due to additional depreciation.

Theseincreases were offset by decreases of $0.9 million for training expenses and$0.6 million, or approximately 5%, of salary expenses as a result of thereduction in workforce in October 2005. Training expense was higher during the three months ended March 31, 2005due to preparation for the implementation of GEMS in April 2005.  Expressed as a percentage of total sales,SG&A expenses increased from 17.9% during the three months ended March 31,2005 to 19.9% for the same period of the current year.  Management is committed to reducing ourexpenses to match our sales and gross margin forecasts.  We plan to reduce SG&A expense as a percentageof sales by approximately 8% by the end of 2006.

*Interestand Other Income, Net*

Interestand other income net of interest and other expense, increased $0.6 million,during the three months ended March 31, 2006 compared to the same period in2005.  This increase was due to the $1.5million increase in lease related income from higher financing receivables. Theincrease was partially offset by the $0.9 million increase in interest expensefor our secured borrowings and increased fees, 

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higherborrowings, and a higher interest rate under our Credit Facility.  Management anticipates our lease sales andthe related income will increase over the next few years as our governmentcustomers use lease arrangements to acquire access to technology as an evenly distributedoperating expense, instead of discontinuous capital expenditures.

*IncomeTaxes*

Ourincome tax benefit was $3.8 million for the three months ended March 31, 2005,at an effective tax rate of 37.7%.  As aresult of our full valuation allowance on our deferred tax assets, we did notreport any income tax benefit during the three months ended March 31, 2006,despite our $10.0 million loss before income taxes.

**SeasonalFluctuations**

Historically in excess of 95% of our annual sales havebeen earned from departments and agencies of the U.S. Federal Government,either directly or indirectly through system integrators to which GTSI is asub-contractor. We have historically experienced, and expect to continue toexperience, significant seasonal fluctuations in our operations as a result ofgovernment buying and funding patterns, which also affect the buying patternsof GTSI’s prime contractor customers. These buying and funding patterns historically have had a significantpositive effect on our bookings in the third quarter ended September 30 eachyear (the Federal govern­ment’s fiscal year end), and consequently on sales andnet income in the third and fourth quarters of each year. Conversely, salesduring the first quarter of our fiscal year have traditionally been the weakestfor GTSI, consisting of less than 20% of our annual sales. Our SG&Aexpenses are more level throughout the year. As a result, GTSI has historically shown a net loss for the period endedMarch 31.

Quarterly financial results are also affected by thetiming of contract awards and the receipt of products by 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.

**Liquidityand Capital Resources**

*Cash flows for the three months ended March 31,*
| (in millions)                               | ** ** | **2006**       | ** ** | **2005**       | ** ** | **Increase**   | ** ** |
|--------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|
| ** **                                       | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(Decrease)** | ** ** |
| Cash provided by  operating activities           |       | $              | 42.9       |           | $          | 31.3           |       | $ | 11.6 |   |
| Cash used in  investing activities               |       | $              | (0.6       | )              | $          | (1.1           | )          | $ | (0.5 | ) |
| Cash (used in) provided  by financing activities |       | $              | (39.8      | )              | $          | 8.1            |       | $ | (47.9 | ) |

 

Duringthe three months ended March 31, 2006, our cash balance increased $2.5 millionfrom December 31, 2005, while we reduced our borrowings under our CreditFacility. GTSI’s current assets are $92.3 million less as of March 31, 2006when compared to December 31, 2005. This decline is mainly due to lowersales and decreased accounts receivable of $68.6 million as a result of ourincreased collections efforts during the first quarter of 2006. In addition, wereduced our inventory on hand by $23.5 million to mitigate our inventory riskby maintaining less inventory on hand and more effectively manage our cashflows.

Duringthe three months ended March 31, 2006 and 2005 we made capital expenditures of$0.6 million 

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and$1.1 million, respectively, primarily for consulting costs associated with thepreparation for a future release of GEMS and the implementation of GEMS inApril 2005, respectively. This resulted in a decrease in cash used in investingactivities of approximately 43% during the three months ended March 31, 2006from the same period of the prior year.

Duringthe first quarter of 2006, we were able to fully pay our borrowings under ourCredit Facility. Cash used in financing activities increased $47.9 millionquarter over quarter, predominantly due to the higher outstanding balance underthe Credit Facility as of December 31, 2005 as compared to December 31, 2004.

*CreditFacility*

Asof December 31, 2005, GTSI had a $135 million revolving credit facility with agroup of lenders, (the “Credit Facility”). As of January 31, 2006, we defaultedon three financial covenants under the Credit Facility and our lendersrequested the execution of an agreement to temporarily forbear them fromenforcing their rights and remedies as a result of the events of default.During the three months ended March 31, 2006, a forbearance agreement (the “CreditAgreement”) was executed between GTSI and our lenders. Under the terms of theCredit Agreement, the lenders agreed to forbear from exercising their rightsand remedies against GTSI in respect of certain existing defaults under theCredit Facility and to continue to advance funds to us until May 31, 2006,unless we are in breach of the Credit Agreement at an earlier date.  As required by the Credit Agreement, we paida $225 thousand fee to our lenders. Under the Credit Agreement the size of the Credit Facility was decreasedto $75 million and the interest rate was increased to LIBOR plus 3.0% perannum.  As of March 31, 2006, we hadavailable credit of $34.9 million under the Credit Agreement.

Asof March 31, 2006, GTSI was not in compliance with the minimum financial networth financial covenant in the Credit Agreement.  In addition, on April 3, 2006, GTSI defaultedon another covenant under the Credit Agreement when we received a staffdetermination letter from the NASDAQ National Market stating that because wehad not filed our Annual Report on Form 10-K for 2005 with the SEC, our commonstock was subject to delisting from the NASDAQ National Market.  Upon the filing of GTSI’s Form 10-K for 2005on April 12, 2006, NASDAQ issued a letter stating we were in compliance withthe listing rules.

*CapitalRequirements*

Ourongoing capital requirements depend on a variety of factors, including theextent to which we are able to fund the cash needs of our business fromoperations. GTSI recorded a net loss of $10.0 million for the three monthsended March 31, 2006. Despite this fact, we were able to maintain positive cashflow from operations due to our intense collection efforts during thequarter.  We anticipate that we willcontinue to rely primarily on operating cash flow and a replacement revolvingcredit facility to finance our operating cash needs. Even though GTSI hasexperienced a significant loss in the first quarter of 2006, we believe thatsuch funds should be sufficient to satisfy our near term anticipated cashrequirements for operations, assuming we are successful at structuring a newrevolving credit facility prior to the expiration of our existing CreditFacility on May 31, 2006.

Wecontinue to have discussions with lenders related to structuring a newrevolving credit facility and on April 10, 2006 we signed a commitment letterto negotiate a new revolving credit facility with two major U.S. banks by May31, 2006, the expiration date of the current Credit Facility. However, if weare not able to generate positive cash flow during the remainder of the yearand we continue to default on the debt covenants, our revolving Credit Facilitymay be further restricted or terminated. We may seek additional sources ofcapital, including obtaining permanent financing over a longer term at fixedrates, to finance our working capital requirements or other strategicinitiatives.  If we are unable to obtainalternative financing, it would likely have a material adverse affect on ourfinancial condition and ability 

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tocontinue as a going concern.

Duringthe three months ended March 31, 2006 our obligation under letters of creditdecreased $1.8 million to $150 thousand as a result of the expiration of aletter of credit to a customer upon successful completion of a physicalsecurity project.  Our contractualobligations under our operating leases as of March 31, 2006 are consistent withour year end disclosure in Item 7, MD&A “Contractual Obligations” of our2005 Annual Report on Form 10-K/A.  Wehave no commitments to purchase inventory or equipment, nor do we have anyoff-balance sheet arrangements.

**Outlook**

Weare committed to resolving the difficulties we experienced in 2005. In February2006, we separated the positions of Chairman of the Board and CEO and hired aveteran member of our Board of Directors to fill the newly created Presidentand CEO position. Our current CEO has begun implementing a turnaround strategyfor us and plans to move GTSI away from our profile as a reseller toward thatof a solution provider. As part of our shift from reseller to solutionsprovider, GTSI is integrating commercial products with off-the-shelf softwareto provide tailored engineering solutions for customers.

Theturnaround strategy is focused on stabilizing and improving our supply chain,developing and selling value-added solutions and integration services, andincreasing sales under leasing arrangements. Management feels we have madesteady progress in improving our supply chain process. Our supply chain wasreorganized to report to a single organization under common leadership, to helpsolve some of the supply chain issues which have hindered GTSI since the GEMSimplementation. We anticipate growing our systems engineering and servicesofferings as part of the effort to focus GTSI as a solutions provider, and weplan to focus more on providing solutions to our customers, instead ofcommodity products. Growth in annual sales under leasing arrangements isanticipated as our customers take increasing advantage of the ability tofinance IT investments as recurring operating expenses. In addition to thepriorities in the turnaround strategy, we are also focusing on drivingproductivity throughout the organization.

Whilewe are forecasting sales for the second quarter of 2006 to be consistent withsales during the same period of the prior year, we expect decreases in totalsales for 2006 as a result of our focus on improving margins instead of topline sales. We experienced strong booking margin during March 2006, exceedingquota by 22%. This booking margin is expected to translate into additionalgross margin dollars and increases in gross margin as a percentage of salesduring the three months ended June 30, 2006. We are working to bring ourexpenses more in line with our margin production. Furthermore, we anticipatehigh industry growth in the areas of storage, networking and physical securitytranslating into additional sales for GTSI.

Webelieve we can make improvements to our operating results during the next threeyears. We are aggressively tackling productivity issues, with the goal torealize significant progress in the months ahead.  These productivity improvements are expectedto lower SG&A expense as a percentage of sales.

Inanticipation of working capital requirements in the coming months, GTSIobtained a commitment letter from a consortium of banks to negotiate a $125million secured revolving credit facility. We are targeting to close the facilityby May 31, 2006, the expiration date of our Credit Facility.

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**ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

Theinformation required by this item is hereby incorporated by reference to item7A of GTSI’s Annual Report on Form 10-K/A for the year ended December 31,2005.  There have been no materialchanges in our market risk from that disclosed in our Form 10-K/A.

Included in ourclassification of long-term debt are amounts related to leasetransactions.  We have reported theseamounts in Note 2 as long-term financed lease debt.  These amounts will amortize over the periodof the lease instruments with no cash affect to the Company.  The balances of these liabilities were $12.3million and $16.0 million at March 31, 2006 and December 31, 2005,respectively.  As of March 31, 2006, achange in interest rates would result in no additional interest expense relatedto financed lease debt.

**ITEM 4.   CONTROLS AND PROCEDURES**

**Evaluation of Disclosure Controls and Procedures**

Anevaluation was carried out under the supervision and with the participation ofour management including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rules13a-15(e) or 15d-15(e) under theSecurities Exchange Act of 1934, as amended) as of March 31, 2006.  Our disclosure controls and procedures aredesigned to (i) ensure that information required to be disclosed by us inreports we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’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 thisevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were not effective as of March 31,2006.

**Changesin Internal Control Over Financial Reporting and Management’s RemediationInitiatives**

Duringmanagement’s assessment of the effectiveness of our internal control overfinancial reporting as of December 31, 2005, we identified five materialweaknesses, which are described in Item 9A of our Annual Report on Form 10-K/Afor the year ended December 31, 2005. We are currently addressing theseweaknesses through a number of initiatives as described below.

Withrespect to the material weakness relating to our finance and accountingstaffing, during the three months ended March 31, 2006 funding was approved toincrease the number of employees in the Accounting Department nearly 50% and we are conducting active searchesfor the newly created positions as well as existing openings. We hiredemployees for two of the three key open accounting management positions andused external resources to supplement our revenue recognition, accounting forlease transactions and general ledger accounting functions. We plan to continueto use external consultants until the hiring and training of permanent staff iscompleted. Furthermore, the Financial Planning and Analysis Group was separatedfrom the Accounting Department, with each group now reporting directly to theCFO.  A new Corporate Controller washired in April 2006 to oversee the Accounting Department.

Weimplemented new procedures for the recording of discrepancy inventory andcustomer sales returns in 

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responseto the material weakness relating to our financial close and reporting process.In addition, for all areas in which we recorded post-closing adjustments as ofDecember 31, 2005, we have examined the accounting as of March 31, 2006 andrecorded similar closing adjustments when appropriate.  Subsequent to March 31, 2006, requests forproposal were submitted to several firms for the outsourcing of designingrevised and improved accounting policies and procedures.

Withrespect to the material weakness relating to our customer order fulfillmentprocess, we prepared an analysis similar to the analyses performed for theinterim periods during the year ended December 31, 2005, in order to recordsales and the related cost of sales in the proper period.  In addition, our new CEO brought the IT,Customer Service, Distribution, Order Management and Purchasing Departmentsunder common leadership to help solve some of the supply chain issues whichhave hindered GTSI since the GEMS implementation.

Duringthe second half of 2006, management decided it was necessary to restate GTSI’sprior financial statements for the years ended December 31, 2003, 2004 and2005. As a result management concluded that GTSI had additional materialweaknesses in its accounts receivable and accounts payable processes. Toaddress these material weaknesses additional resources have been brought intothe various groups, processes are being enhanced for accounting for thetransfers of receivables to third parties, training initiatives are underwayand performance metrics are being developed and reported.

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**PART II – OTHER INFORMATION**

# **Item 5.  Defaults UponSenior Securities**

Asof January 31, 2006, the Company was not in compliance with three of itsfinancial covenants under its Credit Facility: (i) maximum funded indebtednessto EBITDA, (ii) minimum EBIT to net sales, and (iii) minimum tangible networth. As a result, a forbearance agreement (the “Credit Agreement”) wasexecuted to temporarily forbear the lenders from enforcing their rights underthe Credit Facility and to continue to advance funds to the Company until May31, 2006, unless the Company is in breach of the Credit Agreement at an earlierdate.

Asof February 28, 2006 and March 31, 2006, GTSI was not in compliance withcertain financial covenants in the Credit Agreement. In addition, on April 3,2006, GTSI defaulted on another covenant under the Credit Agreement when theCompany received a staff determination letter from the NASDAQ National marketstating that, because GTSI had not filed its Annual Report on Form 10-K for2005 with the SEC, GTSI’s common stock was subject to delisting from NASDAQ.Upon the filing of GTSI’s Form 10-K for 2005 on April 12, 2006, NASDAQ issued aletter stating we were in compliance with the listing rules.

**Item 6.  Exhibits**

The exhibits listed in theExhibit Index are filed as part of this Quarterly Report on Form 10-Q/A.

**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on December 22, 2006 on its behalf by theundersigned thereunto duly authorized.
|            | **GTSI Corp.**                                     |
|------------|----------------------------------------------------|
| ** ** | ** **                                         |
|       | /s/ JAMES J. LETO                                  |
|       | James J. Leto                                      |
|       | President and Chief Executive Officer              |
|       |                                               |
|       | /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) |
| 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. |

 

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