**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10–Q/A**

**AMENDMENT No. 2**

 

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

 

**For thequarterly period ended June 30, 2005**

 

**CommissionFile Number:  0–19394**

 

**GTSI CORP.**

(Exact name of registrant as specified in its charter)

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe 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 tosuch filing requirements for the past 90 days.     YES  ý     NO  o

 

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

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date:

 
| **Class**                       | ** ** | **Shares Outstanding at July 31, 2005** |
|---------------------------------|------------|----------------------------------------------|
| Common Stock, $0.005  par value |       | 9,243,249                                    |

 

 

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**EXPLANATORY NOTE**

 

ThisAmendment No. 2 to our Quarterly Report on Form 10-Q for the quarter endedJune 30, 2005 of GTSI Corp. (“GTSI” or the “Company”) is being filed to restatethe Company’s financial statements for the three and six months ended June 30,2005. This Form 10-Q/A for the quarterly period ended June 30, 2005includes these revisions and amends:

 

•                  Part I, Item 1, Financial Statements

•                  Part I, Item 2, Management’s Discussionand Analysis of Financial Condition and Results of Operations

 

InNovember 2005, the Company determined it had inadvertently expensed costsrelated to its employee retention programs in the second quarter of 2005. Asa result, the Company is, by means of this filing, restating its previouslyissued quarterly financial report for the period ended June 30, 2005.

 

Exceptfor the above-referenced information regarding retention payments with futureservice requirement provisions, this Amendment speaks as of the original filingdate of our Quarterly Report on Form 10-Q and has not been updated toreflect events occurring subsequent to the original filing date of August 9,2005. Accordingly, this amendment should be read in conjunction with theCompany’s filings with the SEC subsequent to the filing of our Quarterly Reporton Form 10-Q for the quarter ended June 30, 2005.

 

1

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**GTSICORP.**

**Form 10–Qfor the Quarter Ended June 30, 2005**

 

**INDEX**

 
| ** **                                   | ** **                                                                                                         | **Page**                                                                                    |
|----------------------------------------------|--------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
|                                         |                                                                                                               |                                                                                        |
| **PART I – FINANCIAL INFORMATION** |                                                                                                               |                                                                                        |
|                                         |                                                                                                               |
|                                         | ITEM 1.                                                                                                            | FINANCIAL STATEMENTS –                                                                 |   |
|                                         |                                                                                                               |
|                                         | Consolidated Balance Sheets as of  June 30, 2005 (Unaudited) and December 31, 2004                       | 3                                                                                           |
|                                         |                                                                                                               |                                                                                        |
|                                         | Consolidated Statements of  Operations for the Three and Six Months Ended June 30, 2005 and 2004  (Unaudited) | 4                                                                                           |
|                                         |                                                                                                               |                                                                                        |
|                                         | Condensed Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004  (Unaudited) | 5                                                                                           |
|                                         |                                                                                                               |                                                                                        |
|                                         | Notes to Condensed  Consolidated Financial Statements (Unaudited)                                                  | 6                                                                                           |
|                                         |                                                                                                               |
|                                         | ITEM 2.                                                                                                            | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 15 |
|                                         |                                                                                                               |                                                                                        |   |
|                                         | ITEM 4.                                                                                                            | CONTROLS AND  PROCEDURES                                                                    | 26 |
|                                         |                                                                                                               |
| **PART II – OTHER  INFORMATION**   |                                                                                                               |                                                                                        |
|                                         |                                                                                                               |
|                                         | ITEM 6.                                                                                                            | EXHIBITS                                                                                    | 27 |
|                                         |                                                                                                               |
| **SIGNATURES**                               | 27                                                                                                                 |
|                                         |                                                                                                               |
| **EXHIBIT INDEX**                       | 28                                                                                                                 |
|                                              |                                                                                                                    |                                                                                             |  |  |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.              FINANCIAL STATEMENTS**

 

**GTSI CORP.**

**CONSOLIDATED BALANCE SHEETS**

(In thousands, except share data)

 
| ** **                                                                                                                                                                                                   | ** ** | **(Restated)**    | ** ** | ** **            | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                   | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                                                   | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| **ASSETS**                                                                                                                                                                                                   | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                                              | ** ** | ** **        | ** ** | ** **            | ** ** |
| Cash                                                                                                                                                                                                         |       | $                 | 292        |                  | $          | 397 |   |
| Accounts  receivable, net                                                                                                                                                                                    |       | 161,782           |       | 202,742               |       |
| Leases  receivable, net                                                                                                                                                                                      |       | 2,752             |       | 7,864                 |       |
| Merchandise  inventories                                                                                                                                                                                     |       | 70,072            |       | 59,184                |       |
| Other current  assets                                                                                                                                                                                        |       | 20,154            |       | 9,616                 |       |
| Total current  assets                                                                                                                                                                                        |       | 255,052           |       | 279,803               |       |
| Property and  equipment, net                                                                                                                                                                                 |       | 4,325             |       | 5,083                 |       |
| Computer  software, net                                                                                                                                                                                      |       | 11,280            |       | 10,100                |       |
| Other assets                                                                                                                                                                                                 |       | 1,648             |       | 1,400                 |       |
| Total assets                                                                                                                                                                                                 |       | $                 | 272,305    |                  | $          | 296,386 |   |
|                                                                                                                                                                                                         |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                |       |              |       |                  |       |
| Current liabilities:                                                                                                                                                                                         |       |              |       |                  |       |
| Notes payable to  banks                                                                                                                                                                                      |       | $                 | —     |                  | $          | 1,179 |   |
| Accounts payable                                                                                                                                                                                             |       | 165,645           |       | 173,218               |       |
| Accrued  liabilities                                                                                                                                                                                         |       | 14,051            |       | 14,734                |       |
| Deferred revenue                                                                                                                                                                                             |       | 7,250             |       | 9,216                 |       |
| Accrued warranty  liabilities                                                                                                                                                                                |       | 1,625             |       | 2,429                 |       |
| Total current  liabilities                                                                                                                                                                                   |       | 188,571           |       | 200,776               |       |
| Other  liabilities                                                                                                                                                                                           |       | 3,269             |       | 3,473                 |       |
| Total  liabilities                                                                                                                                                                                           |       | 191,840           |       | 204,249               |       |
|                                                                                                                                                                                                         |       |              |       |                  |       |
| Commitments and contingencies                                                                                                                                                                                |       |              |       |                  |       |
|                                                                                                                                                                                                         |       |              |       |                  |       |
| Stockholders’ equity                                                                                                                                                                                    |       |              |       |                  |       |
| Common stock -  $0.005 par value, 20,000,000 shares authorized; 9,806,084 issued and  9,362,549 outstanding at June 30, 2005; and 9,806,084 issued and 8,987,643  outstanding at December 31, 2004 |       | 49                |       | 49                    |       |
| Capital in  excess of par value                                                                                                                                                                              |       | 46,396            |       | 46,817                |       |
| Retained  earnings                                                                                                                                                                                           |       | 37,073            |       | 50,395                |       |
| Treasury stock,  443,535 shares at June 30, 2005 and 818,441 shares at December 31,  2004, at cost                                                                                                 |       | (3,053            | )          | (5,124                | )          |
| Total  stockholders’ equity                                                                                                                                                                             |       | 80,465            |       | 92,137                |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                             |       | $                 | 272,305    |                  | $          | 296,386 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

3

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**GTSI CORP.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited)

(In thousands, except per share data)

 
| ** **                                           | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                           | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                           | ** ** | **(Restated)**         | ** ** | ** **           | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                 |       |                   |       |                 |       |   |   |   |   |
| SALES                                                |       | $                      | 160,683    |                 | $          | 238,990 |   | $ | 317,684 |   | $ | 417,612 |   |
|                                                 |       |                   |       |                 |       |   |   |   |   |
| COST OF SALES                                        |       | 144,077                |       | 217,453              |       | 282,999 |   | 377,994 |   |
|                                                 |       |                   |       |                 |       |   |   |   |   |
| GROSS MARGIN                                         |       | 16,606                 |       | 21,537               |       | 34,685 |   | 39,618 |   |
|                                                 |       |                   |       |                 |       |   |   |   |   |
| SELLING,  GENERAL & ADMINISTRATIVE EXPENSES |       | 28,398                 |       | 24,622               |       | 56,689 |   | 46,319 |   |
|                                                 |       |                   |       |                 |       |   |   |   |   |
| LOSS FROM OPERATIONS                                 |       | (11,792                | )          | (3,085               | )          | (22,004 | ) | (6,701 | ) |
|                                                 |       |                   |       |                 |       |   |   |   |   |
| INTEREST AND OTHER INCOME                            |       |                   |       |                 |       |   |   |   |   |
| Interest and  other income                           |       | 578                    |       | 541                  |       | 1,498 |   | 1,911 |   |
| Interest and  other expense                          |       | (224                   | )          | (22                  | )          | (415 | ) | (60 | ) |
| Interest and  other income, net                      |       | 354                    |       | 519                  |       | 1,083 |   | 1,851 |   |
|                                                 |       |                   |       |                 |       |   |   |   |   |
| LOSS BEFORE INCOME TAXES                             |       | (11,438                | )          | (2,566               | )          | (20,921 | ) | (4,850 | ) |
|                                                 |       |                   |       |                 |       |   |   |   |   |
| INCOME TAX BENEFIT                                   |       | (3,927                 | )          | (1,013               | )          | (7,600 | ) | (1,915 | ) |
|                                                 |       |                   |       |                 |       |   |   |   |   |
| NET LOSS                                             |       | $                      | (7,511     | )                    | $          | (1,553 | ) | $ | (13,321 | ) | $ | (2,935 | ) |
|                                                 |       |                   |       |                 |       |   |   |   |   |
| LOSS PER SHARE                                       |       |                   |       |                 |       |   |   |   |   |
| Basic                                                |       | $                      | (0.81      | )                    | $          | (0.18 | ) | $ | (1.46 | ) | $ | (0.34 | ) |
| Diluted                                              |       | $                      | (0.81      | )                    | $          | (0.18 | ) | $ | (1.46 | ) | $ | (0.34 | ) |
|                                                 |       |                   |       |                 |       |   |   |   |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING                  |       |                   |       |                 |       |   |   |   |   |
| Basic                                                |       | 9,249                  |       | 8,573                |       | 9,126 |   | 8,564 |   |
| Diluted                                              |       | 9,249                  |       | 8,573                |       | 9,126 |   | 8,564 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

4

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**GTSI CORP.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

(In thousands)

 
| ** **                                                                      | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                      | ** ** | **June 30,**    | ** ** |
| ** **                                                                      | ** ** | **(Restated)**       | ** ** | ** ** | ** ** |
| ** **                                                                      | ** ** | **2005**             | ** ** | **2004** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                       | ** ** | ** **           | ** ** | ** ** | ** ** |
| Net loss                                                                        |       | $                    | (13,321    | ) | $ | (2,935 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities |       | 15,886               |       | 46,446 |   |
| Net cash  provided by operating activities                                      |       | 2,565                |       | 43,511 |   |
|                                                                            |       |                 |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                       |       |                 |       |   |   |
| Cost of software and equipment                                                  |       | (2,315               | )          | (3,843 | ) |
| Net cash used in  investing activities                                          |       | (2,315               | )          | (3,843 | ) |
|                                                                            |       |                 |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                       |       |                 |       |   |   |
| Payments of bank notes, net                                                     |       | (1,179               | )          | (12,813 | ) |
| Payments to acquire treasury stock                                              |       | (1,333               | )          | — |   |
| Proceeds from ESPP                                                              |       | 247                  |       | 429 |   |
| Proceeds from exercises of stock options                                        |       | 1,910                |       | 386 |   |
| Net cash used in  financing activities                                          |       | (355                 | )          | (11,998 | ) |
|                                                                            |       |                 |       |   |   |
| NET (DECREASE) INCREASE IN CASH                                                 |       | (105                 | )          | 27,670 |   |
| CASH AT BEGINNING OF PERIOD                                                     |       | 397                  |       | 177 |   |
| CASH AT END OF PERIOD                                                           |       | $                    | 292        |   | $ | 27,847 |   |
|                                                                            |       |                 |       |   |   |
| CASH PAID DURING THE PERIOD FOR:                                                |       |                 |       |   |   |
| Interest                                                                        |       | $                    | 172        |   | $ | 38 |   |
| Income taxes                                                                    |       | $                    | 14         |   | $ | 1,018 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

5

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**GTSI CORP.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited)

 

**1.  Basis of Presentation**

 

Theaccompanying unaudited interim condensed consolidated financial statements ofGTSI Corp. (“GTSI” or the “Company”) have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”) for quarterlyreports on Form 10-Q and, therefore, omit or condense certain notedisclosures and other information required by accounting principles generallyaccepted in the United States of America for complete financialstatements.  These financial statementsshould therefore be read in conjunction with the audited consolidated financialstatements and accompanying notes for the year ended December 31, 2004included in GTSI’s Annual Report on Form 10-K, as amended by Forms 10-K/Afiled with the SEC on April 28, 2005 and August 1, 2005.  The consolidated financial statements includethe accounts of GTSI and its wholly owned subsidiaries. All intercompanytransactions and balances have been eliminated. Investments in which the Company does not control the investee but hasthe ability to exercise significant influence over its operating and financialpolicies are accounted for using the equity method of accounting.  In the opinion of management, all adjustments(which are of a normal recurring nature) necessary for a fair presentation ofinterim period results have been included. The results of operations for the three and six month periods ended June 30,2005 are not necessarily indicative of the results that may be expected for thefull year, or future periods.  GTSI hashistorically experienced significant seasonal fluctuations in operations as aresult of government buying and funding patterns. Certain prior period amountshave been reclassified to conform to the current period presentation.

 

**2. NewAccounting Pronouncements**

 

InDecember 2004, the FASB issued Statement of Financial Accounting Standards(“SFAS”) No. 123 (Revised 2004) “Share-Based Payment” (“FAS 123R”), whichis a revision of FASB Statement No. 123, “Accounting for Stock-BasedCompensation” (“FAS 123”). FAS 123R supersedes Accounting Principles BoardOpinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”) andits related Interpretations. Generally, the approach to accounting in FAS 123R requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the financial statements based on the grant-datefair value of the award.  As permitted byFAS 123, the Company currently accounts for share-based payments to employeesusing the intrinsic value provisions of APB 25 and, as such, generallyrecognizes no compensation costs for employee stock options. Accordingly, theadoption of FAS 123R’s fair value method may have a significant impact on theCompany’s results of operations, although it will have no impact on GTSI’soverall financial position. The impact of adoption of FAS 123R cannot bepredicted at this time because it will depend on levels of share-based paymentsgranted in the future. However, had the Company adopted FAS 123R in priorperiods, the impact of that standard would have approximated the impact of FAS123 as described in the disclosure of pro forma net loss and loss per share inNote 3 of these condensed consolidated financial statements. FAS123R alsorequires the benefits of tax deductions in excess of recognized compensationcost to be reported as a financing cash flow, rather than as an operating cashflow as required under current literature. This requirement will reduce netoperating cash flows and increase net financing cash flows in periods afteradoption.

 

6

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InApril 2005, the SEC adopted a new rule that amends the compliancedate for FAS 123R to be effective as of the beginning of the first annualreporting period that begins after June 15, 2005. Thus, GTSI will adoptthe standard beginning January 1, 2006. FAS 123R offers severalalternatives for implementation.  At thistime, management plans to use the modified prospective transition method. TheCompany is also evaluating the impact of FAS 123R to its employee stockpurchase plan (“ESPP”).

 

InJune 2005, the FASB issued SFAS No. 154 “Accounting Changes and ErrorCorrections,” (“FAS 154”) which is a replacement of APB Opinion No. 20 “AccountingChanges” and FASB Statement No. 3 “Reporting Accounting Changes in InterimFinancial Statements”. FAS 154 changes the accounting for and reporting ofchanges in accounting principles and error corrections by requiringretrospective application to prior period financial statements unlessimpracticable. This statement is effective in fiscal years beginning after December 15,2005 and the Company plans to adopt FAS 154 on January 1, 2006. TheCompany does not expect the adoption of FAS 154 to have a significant impact onits financial statements.

 

7

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**3.  Restatement of Previously Issued FinancialStatements**

 

InNovember 2005, the Company determined it had inadvertently expensed costsrelated to its employee retention programs in the second quarter of 2005. The Company promptly notified both its Audit Committee and its independentaccountants.  The Company is, by means ofthis filing, restating its previously issued unaudited quarterly financial statementsfor the three and six months ended June 30, 2005. Set forth below is acomparison of the previously reported and restated Consolidated Statements ofOperations for the three and six months ended June 30, 2005 andConsolidated Balance Sheet at June 30, 2005.

 
| ** **                                           | ** ** | **Three months ended**   | ** ** | **Six months ended**   | ** ** |
|------------------------------------------------------|------------|--------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **June 30, 2005**   | ** ** | **June 30, 2005** | ** ** |
| ** **                                           | ** ** | **Previously  Reported** | ** ** | **Restated**           | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** |
|                                                 |       |                     |       |                   |       |   |   |   |   |
| SALES                                                |       | $                        | 160,683    |                   | $          | 160,683 |   | $ | 317,684 |   | $ | 317,684 |   |
|                                                 |       |                     |       |                   |       |   |   |   |   |
| COST OF SALES                                        |       | 144,077                  |       | 144,077                |       | 282,999 |   | 282,999 |   |
|                                                 |       |                     |       |                   |       |   |   |   |   |
| GROSS MARGIN                                         |       | 16,606                   |       | 16,606                 |       | 34,685 |   | 34,685 |   |
|                                                 |       |                     |       |                   |       |   |   |   |   |
| SELLING,  GENERAL & ADMINISTRATIVE EXPENSES |       | 29,393                   |       | 28,398                 |       | 57,684 |   | 56,689 |   |
|                                                 |       |                     |       |                   |       |   |   |   |   |
| LOSS FROM OPERATIONS                                 |       | (12,787                  | )          | (11,792                | )          | (22,999 | ) | (22,004 | ) |
|                                                 |       |                     |       |                   |       |   |   |   |   |
| INTEREST AND OTHER INCOME, NET                       |       | 354                      |       | 354                    |       | 1,083 |   | 1,083 |   |
|                                                 |       |                     |       |                   |       |   |   |   |   |
| LOSS BEFORE INCOME TAXES                             |       | (12,433                  | )          | (11,438                | )          | (21,916 | ) | (20,921 | ) |
|                                                 |       |                     |       |                   |       |   |   |   |   |
| INCOME TAX BENEFIT                                   |       | (4,288                   | )          | (3,927                 | )          | (7,961 | ) | (7,600 | ) |
|                                                 |       |                     |       |                   |       |   |   |   |   |
| NET LOSS                                             |       | $                        | (8,145     | )                      | $          | (7,511 | ) | $ | (13,955 | ) | $ | (13,321 | ) |
|                                                 |       |                     |       |                   |       |   |   |   |   |
| LOSS PER SHARE                                       |       |                     |       |                   |       |   |   |   |   |
| Basic                                                |       | $                        | (0.88      | )                      | $          | (0.81 | ) | $ | (1.53 | ) | $ | (1.46 | ) |
| Diluted                                              |       | $                        | (0.88      | )                      | $          | (0.81 | ) | $ | (1.53 | ) | $ | (1.46 | ) |

 

8

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| ** **                                       | ** ** | **June 30, 2005** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **Previously**         | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Reported**           | ** ** | **Restated** | ** ** |
| **ASSETS**                                       | ** ** | ** **             | ** ** | ** ** | ** ** |
| Current assets:                                  | ** ** | ** **             | ** ** | ** ** | ** ** |
| Cash                                             |       | $                      | 292        |   | $ | 292 |   |
| Accounts  receivable, net                        |       | 161,782                |       | 161,782 |   |
| Leases  receivable, net                          |       | 2,752                  |       | 2,752 |   |
| Merchandise  inventories                         |       | 70,072                 |       | 70,072 |   |
| Other current  assets                            |       | 19,521                 |       | 20,154 |   |
| Total current  assets                            |       | 254,419                |       | 255,052 |   |
| Property and  equipment, net                     |       | 4,325                  |       | 4,325 |   |
| Computer  software, net                          |       | 11,280                 |       | 11,280 |   |
| Other assets                                     |       | 1,648                  |       | 1,648 |   |
| Total assets                                     |       | $                      | 271,672    |   | $ | 272,305 |   |
|                                             |       |                   |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**    |       |                   |       |   |   |
| Total  liabilities                               |       | 191,840                |       | 191,840 |   |
|                                             |       |                   |       |   |   |
| Stockholders’ equity                        |       |                   |       |   |   |
| Common stock                                     |       | 49                     |       | 49 |   |
| Capital in  excess of par value                  |       | 46,396                 |       | 46,396 |   |
| Retained  earnings                               |       | 36,440                 |       | 37,073 |   |
| Treasury stock,,  at cost                        |       | (3,053                 | )          | (3,053 | ) |
| Total  stockholders’ equity                 |       | 79,832                 |       | 80,465 |   |
| Total  liabilities and stockholders’ equity |       | $                      | 271,672    |   | $ | 272,305 |   |

 

Therestatement of the Company’s Consolidated Statements of Operations resulted ina reduction of selling, general and administrative expenses of $1.0 millionthat was initially expensed in the second quarter and should have beenamortized over the 12-month future service period required for the retentionprogram.  As a result, the Company’s restated second quarter net lossdecreased by approximately $0.6 million, or $0.07 per share, from its net losspreviously reported in Form 10-Q for the second quarter. The restatementof the Company’s Consolidated Balance Sheet as of June 30, 2005 resultedin an increase in other current assets of $0.6 million.

 

Allfinancial information for the three and six months ended June 30, 2005 inthis Quarterly Report on Form 10-Q is presented inclusive of the resultingrevisions of amortizing this expense over twelve months.

 

**4.  Stock-Based Compensation**

 

TheCompany accounts for stock-based compensation using the intrinsic value methodof accounting in accordance with APB 25 and related Interpretations.Accordingly, no compensation cost for stock options granted to employees wasreflected in net income, as all options granted had an exercise price equal tothe fair market value of the Company’s common stock on the date of the grant.The following table illustrates, in accordance with the provisions of SFAS No. 148“Accounting for Stock-Based Compensation – Transition and Disclosure” theeffect on net income and earnings per share if

 

9

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compensationcosts for the Company’s stock options had been determined based on the fairvalue method consistent with the provisions of FAS 123 (in thousands, exceptper share data):

 
| ** **                                                                                                                                    | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                                                    | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                                                                                                    | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss – as reported                                                                                                                   |       | $                      | (7,511     | )                    | $          | (1,553 | ) | $ | (13,321 | ) | $ | (2,935 | ) |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (165                   | )          | (272                 | )          | (848 | ) | (1,041 | ) |
| Net loss – pro forma                                                                                                                     |       | $                      | (7,676     | )                    | $          | (1,825 | ) | $ | (14,169 | ) | $ | (3,976 | ) |
|                                                                                                                                          |       |                   |       |                 |       |   |   |   |   |
| Loss per share – as reported                                                                                                             |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                                                                                         |       | $                      | (0.81      | )                    | $          | (0.18 | ) | $ | (1.46 | ) | $ | (0.34 | ) |
| Diluted                                                                                                                                       |       | $                      | (0.81      | )                    | $          | (0.18 | ) | $ | (1.46 | ) | $ | (0.34 | ) |
|                                                                                                                                          |       |                   |       |                 |       |   |   |   |   |
| Loss per share – pro forma                                                                                                               |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                                                                                         |       | $                      | (0.83      | )                    | $          | (0.21 | ) | $ | (1.55 | ) | $ | (0.46 | ) |
| Diluted                                                                                                                                       |       | $                      | (0.83      | )                    | $          | (0.21 | ) | $ | (1.55 | ) | $ | (0.46 | ) |

 

Forthe three and six months ended June 30, 2005 and 2004, the Companyrecorded charges of approximately $34 thousand and $480 thousand forstock-based compensation granted to non-employees based on the fair valuemethod.

 

**5.  Leases Receivable**

 

TheCompany sells products to certain customers under sales-type lease arrangementstypically for terms of two or three years. The Company accounts for its sales-type leases according to theprovisions of SFAS No. 13 “Accounting for Leases” and, accordingly,recognizes current and long-term leases receivable, net of unearned financeincome, on the accompanying balance sheets. GTSI periodically sells leases receivable to various unrelated financingcompanies and accounts for these sales in accordance with SFAS No. 140 “Accountingfor the Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities – a Replacement of FASB Statement 125.” During the six months endedJune 30, 2005, $13.8 million of leases receivable were sold to unrelatedthird-party financing companies.

 

**6.  Capitalized Software**

 

Capitalizedsoftware is stated at cost less accumulated amortization. On April 18, 2005GTSI replaced its legacy fulfillment system by implementing the supply chainmanagement modules of its enterprise resource planning system, the GTSIEnterprise Management System (“GEMS”). As of June 30, 2005, the Companyhas capitalized $11.0 million of costs related to GEMS. Approximately $1.5million was capitalized in the six month period ended June 30, 2005. Amortizationexpense for GEMS during the six months ended June 30, 2005 and June 30,2004 was $0.4 million and $0.2 million, respectively.

 

Managementis also evaluating various CRM solutions, including the future use of ourexisting CRM platform. If we select a new CRM Solution, we may incur animpairment charge for the write-off of our existing CRM software. Utilizationof a robust CRM platform is expected to allow us to more effectively cross-selland up-sell additional products, services and warranties based on our customers’needs and ordering patterns. As of June 30, 2005 the company hascapitalized approximately $0.8 million related to its CRM solution.

 

10

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**7.  Credit Facility**

 

OnApril 27, 2005, the Company and its lenders signed an amendment to theCompany’s Credit Facility to increase the size of the facility from $125million to $165 million (the “Credit Facility”). In addition to existingparticipants GE Commercial Distribution Finance Corporation and SunTrust Bank,Wachovia Bank and Manufacturers and Traders Trust Company were added to thelender syndicate. The Credit Facility includes a revolving line of credit (the “Revolver”)and a provision for inventory financing of vendor products. The Credit Facility,unless terminated earlier, will continue after the maturity date of February 28,2006 from year to year, unless any party gives the other party written noticeof termination not less than 90 days prior to the start of a new renewalperiod.

 

Borrowingunder the Revolver is limited to 85% of eligible accounts receivable. Borrowingunder the Credit Facility is secured by substantially all of the Company’sassets. The Revolver carries an interest rate indexed to the London InterbankOffered Rate (“LIBOR”) plus 1.75 percentage points. One of the financial covenantsof the Company’s Credit Facility required a minimum trailing twelve months (“TTM”)earnings before interest and taxes (“EBIT”) to TTM net sales ratio to bemaintained. As of June 30, 2005, the Company was not in compliance with thisfinancial covenant and, as a result, the Company was not in compliance withanother covenant which prohibited the Company from purchasing its stock when adefault existed. Subsequent to quarter-end, the Company received waivers fromits lenders curing all of these covenant defaults. See Note 10 for additionaldetails and disclosures related to the Credit Facility. GTSI had availablecredit of $82.5 million at June 30, 2005 and $59.0 million at December 31,2004.

 

**8.  Stockholders’ Equity**

 

*Treasurystock*

 

During2005, GTSI’s Board of Directors approved an increase to the Company’s sharerepurchase program. The increased authorization was for $7.3 million which,combined with the remaining $2.7 million available under previousauthorizations, results in $10.0 million available for repurchase. During thethree months ended June 30, 2005, the Company purchased approximately 160thousand shares of common stock for its treasury at a cost of approximately$1.3 million. As of June 30, 2005, GTSI had authorization for remainingfuture purchases of $8.7 million for GTSI common stock. However, under theterms of our Credit Facility, as amended (see Note 11), purchases of GTSIcommon stock during the remainder of 2005 are restricted to $2.5 million. Nopurchases occurred during 2004. The Company will hold the repurchased shares intreasury.

 

*StockOptions*

 

During the six months ended June 30, 2005 andthe year ended December 31, 2004, 473,450 and 397,492, respectively, ofstock options were exercised under the Company’s stock option plan. Theseshares were issued from treasury stock. The tax benefit of stock optionsexercised during the six months ended June 30, 2005 and 2004 wasapproximately $0.8 million and $0.2 million, respectively.

 

*Restricted Stock*

 

Duringthe three months ended June 30, 2005, the Company, as authorized by its Boardof Directors, issued restricted stock grants of 26,664 shares of the Company’scommon stock to the non-employee members of the Board under the Amended andRestated 1996 Stock Incentive Plan. These restricted

 

11

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sharesare scheduled to vest on the first anniversary of issuance. The Companyrecorded approximately $218,000 in stockholders’ equity for deferredcompensation in 2005.  The deferredcompensation is amortized on a straight-line basis over the vesting period ofthe grants. During the three months ended June 30, 2005, approximately$18,000 was recorded as stock compensation expense for restricted stock.

 

**9.  Earnings Per Share**

 

Basicearnings per share are calculated by dividing net income or loss by theweighted average shares outstanding during the period.  Diluted earnings per share are computedsimilarly to basic earnings per share, except that the weighted average sharesoutstanding are increased to include equivalents, when their effect isdilutive.  The following table sets forththe computation of basic and diluted earnings per share (in thousands, exceptper share amounts):

 
| ** **                                                                                                                   | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                                   | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                                                                                   | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Basic earnings per share:                                                                                                    |       |                   |       |                 |       |   |   |   |   |
| Net loss                                                                                                                     |       | $                      | (7,511     | )                    | $          | (1,553 | ) | $ | (13,321 | ) | $ | (2,935 | ) |
| Weighted average  shares outstanding                                                                                         |       | 9,249                  |       | 8,573                |       | 9,126 |   | 8,564 |   |
| Basic loss per  share                                                                                                        |       | $                      | (0.81      | )                    | $          | (0.18 | ) | $ | (1.46 | ) | $ | (0.34 | ) |
|                                                                                                                         |       |                   |       |                 |       |   |   |   |   |
| Diluted earnings per share:                                                                                                  |       |                   |       |                 |       |   |   |   |   |
| Net loss                                                                                                                     |       | $                      | (7,511     | )                    | $          | (1,553 | ) | $ | (13,321 | ) | $ | (2,935 | ) |
| Weighted average  shares outstanding                                                                                         |       | 9,249                  |       | 8,573                |       | 9,126 |   | 8,564 |   |
| Incremental  shares attributable to the assumed conversion of dilutive stock options and non-vested  restricted stock awards |       | N/A                    | *     | N/A                  | *     | N/A | **  | N/A | **  |
| Weighted average  shares and equivalents                                                                                     |       | 9,249                  |       | 8,573                |       | 9,126 |   | 8,564 |   |
| Diluted loss per  share                                                                                                      |       | $                      | (0.81      | )                    | $          | (0.18 | ) | $ | (1.46 | ) | $ | (0.34 | ) |

 

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* For the three monthsended June 30, 2005 and 2004 there were approximately 634 and 774 shares,respectively, of potentially dilutive options that are not included because thenet losses for the quarters make their impact antidilutive.

** For the six monthsended June 30, 2005 and 2004 there were approximately 642 and 855 shares,respectively, of potentially dilutive options that are not included because thenet losses for the periods make their impact antidilutive.

 

**10.  Commitments and Contingencies**

 

*ProductWarranties*

 

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.  The

 

12

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followingtable summarizes the activity related to product warranty liabilities (inthousands):

 
| ** **                                | ** ** | **Six months ended** | ** ** |
|-------------------------------------------|------------|----------------------|------------|
| ** **                                | ** ** | **June 30,**    | ** ** |
| ** **                                | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Accrued warranties at beginning of period |       | $                    | 2,429      |   | $ | 4,555 |   |
| Charges made against warranty liabilities |       | (767                 | )          | (1,211 | ) |
| Adjustments to warranty reserves          |       | (196                 | )          | — |   |
| Accruals for additional warranties sold   |       | 159                  |       | 842 |   |
| Accrued warranties at end of period       |       | $                    | 1,625      |   | $ | 4,186 |   |

 

Revenuefrom extended warranty contracts is recorded as deferred revenue and subsequentlyrecognized over the term of the contract. The following table summarizes the activity related to the deferredwarranty revenue (in thousands):

 
| ** **                                       | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **June 30,**    | ** ** |
| ** **                                       | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Deferred warranty revenue at beginning of period |       | $                    | 2,599      |   | $ | 2,819 |   |
| Deferred warranty revenue recognized             |       | (729                 | )          | (682 | ) |
| Revenue deferred for additional warranties sold  |       | 72                   |       | 462 |   |
| Deferred warranty revenue at end of period       |       | $                    | 1,942      |   | $ | 2,599 |   |

 

*ContingentInsurance Settlement*

 

During2004, the Company became aware that certain integrated hardware components weremissing from hardware delivered on a customer order. Although the investigationof this matter has been essentially completed, the Company’s management wasunable to determine where or when the loss occurred in the supply chain. WhileGTSI filed a comprehensive claim of $0.6 million with its insurance carrier,management currently believes that it is remote that the Company will receivepayment for its claim; therefore, no gain contingency amounts have beenrecorded as of June 30, 2005.

 

*Lettersof Credit*

 

GTSIwas obligated under an operating lease to provide its landlord with a letter ofcredit in the amount of $0.2 million at June 30, 2005 and $0.8 million at December 31,2004, as a security deposit for all tenant improvements associated with thelease.

 

Asof June 30, 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 a specific contract.

 

*LegalProceedings*

 

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

 

In the $25 million lawsuitfiled against GTSI previously reported in the Company’s periodic reports filedwith the SEC, the case went to trial in March 2005.  The Courtgranted GTSI’s motion to strike, and in late July entered a final order infavor of GTSI and awarded GTSI $1.4 million in attorneys’ fees andcosts. GTSI expects that the plaintiff will appeal the Court’sruling.  Management continues to believe the claim is without meritand intends to vigorously defend any appeal, but the ultimate outcome of thismatter remains uncertain. No amounts have been accrued as of June 30,2005.

 

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**11.Subsequent Events**

 

On August 8, 2005, theCompany and its lenders executed a fifth amendment to the Company’s CreditFacility principally to waive certain financial covenant defaults during thesecond quarter of 2005, and to revise certain financial and other covenants forthe remainder of 2005.  The amendment included the followingmodifications:

 

•                  Decreasedthe overall size of the Credit Facility from $165 million to $135 million;

•                  Waivedthe default of the EBIT to Net Sales covenant for April, May and June of2005;

•                  Duringthe period commencing July 1, 2005 and expiring on December 31, 2005,suspended the application of the EBIT to Net Sales and the Funded Debt to EarningsBefore Interest, Taxes, Depreciation and Amortization (“EBITDA”) ratio covenants;

•                  Forthe months of September, October, and November, 2005, increased the MaximumTotal Liabilities to Tangible Net Worth covenant to a ratio of 7:1;

•                  Forthe fiscal year ending December 31, 2005, added a Maximum Pretax Losscovenant of $20 million;

•                  Forthe quarter ending September 30, 2005, added a Minimum Pretax Profitcovenant of $2 million;

•                  Addedan Excess Collateral requirement of $20 million;

•                  Duringthe period from August 8, 2005 through December 31, 2005, prohibitsthe Company from purchasing any of its stock; and

•                  Prohibitsthe Company from paying cash dividends on its stock during the period from August 8,2005 through December 31, 2005.

 

The lenders charged aone-time fee of $82,500 in connection with the above-referenced fifth amendmentto the Credit Facility.

 

OnAugust 15, 2005, the Company and its lenders executed a sixth amendment tothe Company’s Credit Facility which included the following modifications:

 

•                  Waivedthe default regarding the Company’s prohibition from purchasing its stock whena financial covenant default existed for the months of May, June, and July 2005;

•                  Terminatedthe above-referenced provision in the fifth amendment that prohibited theCompany from purchasing any of its stock during the balance of 2005; and

•                  Permitsthe Company during the period from August 8, 2005 through December 31,2005 to purchase its stock only if the following conditions are satisfied:  (a) the purchase prices for the stock donot exceed in the aggregate $2.5 million, (b)  no default exists under theCredit Facility and no default or event of default will occur or is reasonablylikely to occur as a result of any such purchase, (c) there is at least$7.5 million of Excess Eligible Accounts under the Credit Facility after givingeffect to the contemplated purchase, and (d) an additional reserve istaken against GTSI’s borrowing base under the Credit Facility equal to theaggregate purchase price paid for the stock.

 

The Credit Facility, asamended, provides that if, after December 31, 2005, there is no existingdefault and no default or event of default is reasonably likely to occur as aresult of such payment, the Company may annually make payments aggregating upto $2.5 million for stock purchases, cash dividends and certain prepayments ofdebt. Additionally, if there is at least $7.5 million of Excess EligibleAccounts under the Credit Facility, after giving effect to the contemplatedpurchase, the Company may make payments of any amount for stock purchases.

 

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**ITEM 2.****                                          ****MANAGEMENT’S DISCUSSION ANDANALYSIS 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 consolidatedfinancial statements and notes included in this Quarterly Report on Form 10-Qand our consolidated financial statements and notes in our Annual Report on Form 10-Kfor the year ended December 31, 2004, as amended by Forms 10-K/A filed withthe SEC on April 29, 2005 and August 1, 2005 (“2004 Form 10-K”).  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 containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, relating to our operations that are based onour current expectations, estimates, forecasts and projections. Words such as “expect,”“plan,” “believe,” “anticipate,”  “intend”and similar expressions are intended to identify these forward-lookingstatements.  These statements are notguarantees of future performance and are subject to risks, uncertainties andassumptions that are difficult to predict. Therefore, actual results in future periods may differ materially fromthose expressed or projected in any forward-looking statements because of anumber of risks and uncertainties, including:

 

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

•                  Fluctuations in our gross margins;

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

•                  Our ability to recruit, retain and motivatetalented employees;

•                  Our exposure to inventory risks;

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

•                  Our qualifications as a small business fornew contract awards;

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

•                  Changes in federal government fiscalspending; and

•                  Productivity challenges arising from theimplementation GEMS.

 

Fora detailed discussion of risk factors affecting GTSI’s business and operations,see Item 1, Business, “Risk Factors” in our 2004 Form 10-K. We undertakeno obligation to revise or update any forward-looking statements for anyreason.

 

**Overview**

 

GTSIis a recognized IT solutions leader, providing products and services primarilyto federal government customers worldwide. One of our key differentiators is the extensive number of contractvehicles we have in our portfolio.  Formore than two decades GTSI has served the public sector by partnering withglobal IT leaders such as Panasonic, HP, Sun Microsystems, Cisco and Microsoftto provide cutting edge technology to the government. Several years ago wecreated a sales division focused on growing our integrator business and expandingsales of our managed services offerings. Today we seek to deliver maximum valuethrough our broad range of products and services.

 

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Ourcorporate headquarters and distribution center are located in Chantilly,Virginia. Another of our differentiators is our ISO 9001:2000 certifieddistribution center which offers many benefits and services, includingintegration services, custom asset tagging, image configuration and loading,custom packaging and staging, recovery disk and degaussing hard drive cleansing.We also offer a number of services at our integration and distribution centerincluding:

 

•                  Project Management of Complex IntegrationPrograms;

•                  Complex System “Builds”;

•                  Global Warehousing;

•                  Staged Deployments;

•                  Program-Specific Catalogs;

•                  Logistics and Transportation Management;

•                  System Installation and De-installation;

•                  Pre-build and Stage any size order; and

•                  Full Compliance with DOD RFID mandate.

 

In the beginning of 2004, we reviewed ourhistorical financial performance in conjunction with a competitive marketanalysis, and concluded that GTSI held only a small market share percentage ina highly fragmented, growing government IT market. GTSI’s management teambelieved we could substantially increase our sales growth by hiring additionalsales people to penetrate areas of the government IT market that had previouslybeen underserved. Management believed there was a direct linkage between thenumber of salespeople within our organization and our potential revenuegrowth.  This concept was incorporated intoan ambitious strategic growth plan with a goal to increase market share and todouble GTSI’s sales to $2 billion, principally through organic initiatives, by2007.

 

InJuly 2004, we announced and embarked upon a strategic plan seeking todouble revenue, improve margin, and increase productivity by 2007. A financial plan was developed detailingincremental milestones for annual revenue growth, gross margin improvement, andnet income targets for 2005 through 2007. This plan was presented to GTSI’s Board of Directors in July 2004.  Upon consideration by the Board, thefinancial plan was deployed company wide. An executive long-term incentive plan for 2006 and 2007 was instituted tiedto the achievement of our financial targets. This document was filed as exhibit10.19 to our 2004 Form 10-K. During the second half of 2004 we increased thenumber of employees by 20% to approximately 850 employees. During 2005,our number of employees has leveled at approximately 875 employees.

 

Firstquarter sales were significantly weaker than projected under our 2005 operatingbudget, declining approximately 12% from the same period in 2004. While weadded approximately 150 additional people during the second half of 2004, theseresources were not as productive from a revenue generation perspective aspreviously contemplated. Second quarter sales continued to fall belowprojections and were $78.3 million lower than in the same period of the prioryear. Our results for the six months ending June 30, 2005 weredisappointing, falling below our growth forecast and resulting in a net loss of$13.3 million. Management contributes this result to three main factors: 1)problems associated with the implementation of GEMS, 2) a change in the mix oftransactions from numerous small transactions to increasing reliance on larger,more complex transactions with longer sales cycles, and 3) lower employeeproductivity due in part to increased turnover especially in our salesorganization. Management still intends to drive the business to increase sales;however, it has determined that it is unlikely we will double sales by 2007.

 

16

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Wehave revised our financial projections for the remainder of 2005, incorporatingour year to date results, comparisons of actual bookings to quotas, andshipping delays due to difficulties with the implementation of GEMS. Althoughwe anticipate, based on the seasonality of our business, improved results for thethird and fourth quarters of 2005, we expect our annual results to be a netloss for 2005.

 

Asdiscussed in more detail throughout our MD&A for the three and six monthsended June 30, 2005 compared to June 30, 2004:

 

•                  Year to date sales decreased $99.9 million,or 23.9%, from the same period last year;

•                  Net loss for the six months ended June 30,2005 was $13.3 million, predominantly related to a 22.4% increase in SG&Aexpenses from our additional headcount;

•                  While our cash balance is $27.5 million lessas of June 30, 2005 than at June 30, 2004, we continue to have nolong-term debt on our balance sheet;

•                  Our cash flow from operations during the sixmonths ended June 30, 2005 remained positive; and

•                  The implementation of GEMS in April 2005negatively affected our near-term sales and bookings and required cash outflowsof $3.2 million during the six months ended June 30, 2005.

 

**GEMS**

 

Thesupply chain management phase of our enterprise resource planning system, GEMS,became operational in mid-April 2005, replacing our legacy system.Management believes that this new information platform is essential to ourlong-term success. This implementation had a significant impact on our businessoperations, and financial results for the quarter ended June 30, 2005 werenegatively affected due to lower bookings and shipments. We continue toexperience order fulfillment challenges and difficulty in delivering productsto customers in a timely manner due to software problems with the GEMSimplementation. This has caused some disruption to customer relationships.Adapting to GEMS has resulted in decreased productivity, especially in theareas of quoting and purchasing. Shipments during April and May wereadversely affected by GEMS; however, we experienced improvement during June.

 

Weexperienced considerable operational difficulties associated with thetransition to GEMS. As a result, we temporarily suspended the external reportingof monthly revenue, backlog and bookings. We intend to disclose this data forthe months of April, May, and June 2005 with the second quarter earningsresults. We are not currently able to generate reports to separate our totalsales into sales by vendor, product or contract; however, we expect to disclosethese traditional measures of our revenues in our quarterly report for thethree months ending September 30, 2005.

 

AlthoughERP implementations are frequently difficult for an organization, we are makingprogress; our organization is quoting, taking orders, and shipping product. We areaggressively tackling software bugs and we are working to regain our previouslevel of productivity as employees become acclimated to GEMS. In July 2005,we installed three key productivity enhancements as part of the planned 1.1release of GEMS. More releases are planned for the near future designed toimprove productivity throughout GTSI.

 

**CriticalAccounting Estimates**

 

Ourunaudited condensed consolidated financial statements are based on theselection of accounting policies and the application of significant accountingestimates, some of which require management to

 

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makesignificant assumptions.  We believe thatsome of the more critical estimates and related assumptions that affect ourfinancial condition and results of operations are in the areas of merchandiseinventories, long-lived assets, warranties, contingencies, and revenuerecognition. For more information on critical accounting estimates, see theMD&A included in Part II, Item 7 of our 2004 Form 10-K .  We have discussed the application of thesecritical accounting estimates with the Audit Committee of our Board ofDirectors.

 

During the three months ended June 30, 2005, we did not change oradopt any new accounting estimates or policies that had a material effect onour consolidated financial condition or results of operations.

 

**Historical Results of Operations**

 

Thefollowing table illustrates the unaudited percentage of sales represented byitems in our consolidated statements of operations for the periods presented.

 
| ** **                                          | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                          | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                          | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Sales                                               |       | 100.0                  | %          | 100.0                | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                       |       | 89.7                   |       | 91.0                 |       | 89.1 |   | 90.5 |   |
| Gross margin                                        |       | 10.3                   |       | 9.0                  |       | 10.9 |   | 9.5 |   |
| Selling, general & administrative expenses |       | 17.6                   |       | 10.3                 |       | 17.8 |   | 11.1 |   |
| Loss from operations                                |       | (7.3                   | )          | (1.3                 | )          | (6.9 | ) | (1.6 | ) |
| Interest and other income, net                      |       | 0.2                    |       | 0.2                  |       | 0.3 |   | 0.4 |   |
| Loss before income taxes                            |       | (7.1                   | )          | (1.1                 | )          | (6.6 | ) | (1.2 | ) |
| Income tax benefit                                  |       | 2.4                    |       | 0.4                  |       | 2.4 |   | (0.5 | ) |
| Net loss                                            |       | (4.7                   | )%         | (0.7                 | )%         | (4.2 | )% | (0.7 | )% |

 

**ThreeMonths Ended June 30, 2005 Compared With the Three Months Ended June 30,2004**

 

*Sales*

 

Salesconsist of revenue from products delivered and services sold or rendered, netof allowances for customer returns and credits. During the three months ended June 30,2005 our revenue was weaker than projected, due to the related factors ofproblems associated with the implementation of GEMS, changing sales mix, and decreasedproductivity from increased turnover in our sales organization. Due to problemswith our GEMS implementation, we experienced difficulties in deliveringproducts to many customers on a timely basis during the second quarter. Thiscaused disruptions with our customers and negatively impacted sales.

 

Salesfor the three months ended June 30, 2005 declined $78.3 million, or 32.8%,compared to the same period in 2004. Decreased productivity related to thedistraction of the GEMS implementation and the challenge of learning a newsoftware system caused a decline in bookings and delays in shipping products tocustomers during the three months ended June 30, 2005. Productivity wasalso affected during the second quarter by higher than normal turnover on somecustomer sales teams and in our purchasing department. Turnover of sales team managementhas been a key driver resulting in less than half of our teams attaining theirbooking quotas. In addition, we have noted declining trends in sales to ourAirforce and Navy customers, as well as decreased extended warranty sales.

 

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Duringthe last three years we have focused on building stronger partnerships with ourkey vendors. Management plans to continue focusing our partner strategy in thefuture to improve our gross margins while increasing customer service. Sales ofproducts from our top five vendors have accounted for approximately 60% of oursales historically. We are not currently able to generate reports to separateour total sales into sales by vendor, product or contract; however, we expectto disclose these traditional measures of our revenues in our quarterly reportfor the three months ending September 30, 2005. We believe, however, thatthe proportion of sales of products from our top five vendors did notmaterially change from historical percentages.

 

*Backlog*

 

Werecognize an order as backlog when we receive and accept a written customerpurchase order.  Our total backlogincludes orders that have not shipped (“unshipped backlog”) as well as ordersthat have shipped but cannot be recognized as sales at the period end.  Total backlog increased $42.3 million, or 48.7%,from $86.8 million at December 31, 2004 to $129.1 million at June 30,2005. The majority of this increase was due to the increase in unshippedbacklog to $115.2 million at June 30, 2005, compared to $81.5 million at December 31,2004. Backlog fluctuates significantly from period to period due to theseasonality of government ordering patterns and fluctuations in inventoryavailability of various products. Unshipped backlog was $30.1 million lower at June 30,2005 than the same period of the prior year due to lower bookings and delays inshipping due to systems challenges.

 

*GrossMargin*

 

Grossmargin is Sales less Cost of sales, which includes product cost, freight,warranty maintenance costs and certain other expenses related to the cost ofacquiring products. Gross margin dollars declined $4.9 million for the threemonths ended June 30, 2005 as compared to the same period of the prioryear. However, we experienced a favorable improvement in gross margin as apercentage of sales to 10.3% in the second quarter of 2005 from 9.0% in the secondquarter of 2004. This improvement was due to one large transaction during thesecond quarter of 2005 as well as improved product mix, increased servicesrevenue, and centralized pricing initiatives implemented by management. 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 continue to increase our gross margin as a percentage of sales byrevamping our purchasing processes, improving our pricing processes and improvingour mix. Our gross margin is impacted by the attainment of vendor incentivefunds which are recorded as a reduction of Cost of sales. Vendor incentives forthe second quarter 2005 were substantially flat in absolute dollars despite thedecrease in overall sales for the period.

 

*Selling,General & Administrative Expenses*

 

Wehave invested heavily in the business in terms of headcount and technology tobuild a larger, more robust organization to capitalize on the marketopportunity we anticipate from the expanding federal government IT budget. Selling,general & administrative (“SG&A”) expenses for the three monthsended June 30, 2005 increased $3.8 million, or 15.3%, from the same periodin 2004.  This increase is primarily due toincreased compensation and benefit costs for the additional employees hired to supportour strategic growth plan. An important factor in our business is that it takessome time for new sales professionals to become fully productive. SG&Aexpenses for the quarter ending June 30, 2005 included $0.8 million ofGEMS related expenses for consulting, training and depreciation. Expressed as apercentage of total sales, SG&A expenses increased from 10.3% in the threemonths ended June 30, 2004 to 17.6% during the three months ended June 30,2005.

 

*Interestand Other Income, Net*

 

Interestand other income, net of interest and other expense, decreased $0.2 million, or31.7%, during the three months ended June 30, 2005 compared to the sameperiod in 2004. This decline was primarily due

 

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toour percentage loss on our equity investment. Interest and other income remainedrelatively flat, period over period. Management anticipates our lease sales toincrease over the next few years.

 

*IncomeTaxes*

 

OurIncome tax benefit increased $2.9 million, from $1.0 million for the threemonths ended June 30, 2004 to $3.9 million for the three months ended June 30,2005. The increase in this benefit is related to the $6.0 million increase inGTSI’s Loss before income taxes to $7.5 million for the three months ended September 30,2005. This was slightly offset by the decrease in our estimated annual effectivetax rate from 39.5% for the three months ended June 30, 2004 to 34.3% forthe same period in our current year.

 

# **SixMonths Ended June 30, 2005 Compared With the Six Months Ended June 30,2004**

 

*Sales*

 

Salesfor the first six months of 2005 were $317.7 million, compared to $417.6million in the first six months of 2004, or a decrease of $99.9 million, or 23.9%.  The $21.6 million decrease in first quarter saleswas related to lower backlog at the beginning of the year and lower thanexpected bookings. However, our year to date sales decline is predominantly dueto sales declines during the second quarter caused by problems associated withthe implementation of GEMS, changing sales mix, and decreased productivity duein part to increased turnover in our sales organization. We have hired many newsales associates over the past few quarters for both new positions as well asbackfilling due to the turnover in the organization. We are not yet seeing theproductivity levels that we expected from these new sales associates. Decreasedproductivity caused a decline in bookings and delays in shipping products tocustomers during the three months ended June 30, 2005. Turnover of salesteam management has been a key driver resulting in less than half of our teamsattaining their booking quotas.

 

*GrossMargin*

 

Grossmargin as a percentage of sales increased from 9.5% for the six months ended June 30,2004 to 10.9% for the six months ended June 30, 2005.  This improvement was due to one large transactionduring the second quarter of 2005 as well as improved product mix, increasedservices revenue, and centralized pricing initiatives implemented bymanagement. Gross margin dollars decreased $4.9 million from the six monthsended June 30, 2004 to $34.7 million for the six months ended June 30,2005. This decrease was related to lower total sales, offset by the increase ingross margin percentage. Vendor incentives for the six months ended June 30,2005 were substantially flat in absolute dollars from 2004 to 2005 despite thedecrease in overall sales for the period.

 

*SG&AExpenses*

 

SG&Aexpenses for the six months ended June 30, 2005 increased $10.4 million,or 22.4%, from the same period in 2004. This increase was primarily related to increased salary expenses of $6.5million and employee benefit costs of $1.7 million from increased headcount. SG&Aexpenses during the six month period ended June 30, 2005 included $1.7million of GEMS related expenses for consulting, training and depreciation. SG&Aexpenses as a percentage of sales increased 6.7% to 17.8% for the six monthsended June 30, 2005.

 

*Interestand Other Income, Net*

 

Interestand other income, net during the six months ended June 30, 2005 decreased$0.8 million to $1.1 million compared to the same period in 2004. This declinewas caused by reduced lease interest income of $0.4 million due to the timingof when leases were funded by external sources and a $0.3 million loss on an equityinvestment.

 

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*IncomeTaxes*

 

Werecorded a tax benefit of $7.6 million for the six months ended June 30,2005 compared to a tax benefit of $1.9 million in the same period lastyear.  This increase was due to theincreased Loss before income taxes of $16.1 million to $20.9 million for thesix months ended June 30, 2005. Our income tax benefit for 2005 wascalculated at an estimated annual effective tax rate of 36.3%, compared to39.5% estimated income tax rate at June 30, 2004. The decrease in theeffective tax rate is due primarily to the impact of our projected permanentdifferences between book and tax income on the projected net loss for the yearending December 31, 2005.

 

**SeasonalFluctuations**

 

Historically, approximately 95%of our annual sales have been earned from departments and agencies of the U.S.Federal Government, either directly or indirectly through system integrators towhich GTSI is a sub-contractor. Management has noted a trend in our sales toprime contractors increasing as a percentage of our total sales. We believethis trend is caused by the buying patterns of our customers and GTSI’s shift to larger, morecomplex orders. 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 30each year (the federal government’s fiscal year end), and consequently on salesand net income in the third and fourth quarters of each year.

 

Historically, sales for the first and second quartersof our fiscal year have comprised approximately 18% and 21%, respectively oftotal annual sales. Due to the increased trend towards larger purchases by ourcustomers, (which results in longer preparation and delivery times) and theorder fulfillment challenges and shipping delays caused by GEMS during thesecond quarter of 2005, management believes our second half sales willrepresent a larger proportion of our annual sales than our historical averageof 60%. The seasonality of our business, and the unpredictability of thefactors affecting such seasonality, makes GTSI’s quarterly and annual financialresults difficult to predict and subject to significant fluctuation. Our quarterlyfinancial results are also affected by the timing of contract awards, thereceipt of products by the customer, and the incremental turnover costs to replaceemployees.

 

**Liquidity and Capital Resources**

 

 
| **Cash flows for the six months  ended June 30,  (in millions)** | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Cash provided by  operating activities                                |       | $        | 2.6        |     | $          | 43.5       |       | $ | (40.9 | ) |
| Cash used in  investing activities                                    |       | $        | (2.3       | )        | $          | (3.8       | )          | $ | 1.5 |   |
| Cash used in  financing activities                                    |       | $        | (0.4       | )        | $          | (12.0      | )          | $ | 11.6 |   |

 

Duringthe six months ended June 30, 2005, we continued to generate positive cashflow from operations, although $40.9 million less than the same period lastyear.  This decrease was primarily due toa $10.4 million increase in net loss and a net change in assets and liabilitiesof approximately $31 million.  In theabsence of substantial cost reductions necessary to return us to profitability,there is no assurance that we will be able to maintain positive cash flow fromoperations in future periods.

 

The$1.5 million decline in cash used in investing activities was principally dueto decreased investments in the development of GEMS during the first half of2005 than the same period of 2004.  Cashused in

 

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financingactivities was $0.4 million for the six months ended June 30, 2005compared to $12.0 million for the six months ended June 30, 2004. Duringthe six months ended June 30, 2005 we paid $1.3 million for sharesrepurchased on the open market under our share repurchase plan. We did notrepurchase any shares on the open market during 2004. During the first quarterof 2005, we expended $1.2 million to fully pay our Notes payable to banks,whereas net payments of bank notes during 2004 totaled $12.8 million. During2005, these outlays were offset by exercises of common stock options of $1.9million and proceeds from the employee stock purchase plan of $0.2 million. Proceedsfrom exercises of common stock options increased $1.5 million from the six-monthsended June 30, 2004 to the six-months ended June 30, 2005 predominatelydue to the exercise of 400,000 stock options by our Chief Executive Officer.Cash received during the six months ended June 30, 2005 from ESPP declined$0.2 million compared to the six months ended June 30, 2004.

 

*Liquidity*

 

AtJune 30, 2005 our long-term debt remained zero although our cash balancesare depleted. At June 30, 2004 our cash balance was $27.8 million. Ourworking capital decreased $12.5 million from $79.0 million at December 31,2004. As of June 30, 2005, our working capital was $66.5 million, as comparedto $62.5 million and $55.2 million for the same periods in 2004 and 2003,respectively. GTSI’s current assets are $24.8 million less as of June 30,2005 when compared to our prior fiscal balance. This decline is mainly due todecreased accounts receivable of $41.0 million related to lower 2005 sales,offset by increases of $10.9 million in inventory and $8.4 million in incometaxes receivable. At June 30, 2005 our current ratio was equal to theindustry average of 1.3. GTSI’s quick ratio at June 30, 2005 was 0.9, fallingbelow the industry average of 1.3.

 

InApril 2005, at its regularly scheduled quarterly meeting, GTSI’s Board ofDirectors approved an increase to GTSI’s share repurchase program. Theincreased authorization was for $7.3 million which, combined with the remaining$2.7 million available under previous authorizations, resulted in $10.0 millionavailable for purchases of treasury stock. Our treasury stock is generallyreissued upon exercise of employee stock options and for the employee stockpurchase plan. We purchased approximately 160,000 shares of common stock duringthe three months ended June 30, 2005 at a cost of $1.3 million. As of June 30,2005, we had remaining authorization to purchase $8.7 million of GTSI’s commonstock.

 

*Bank CreditFacility*

 

OnApril 27, 2005, GTSI and its lenders signed an amendment to our CreditFacility to increase the size of the facility from $125 million to $165 million(the “Credit Facility”). In addition to existing participants GE CommercialDistribution Finance Corporation and SunTrust Bank, Wachovia Bank and Manufacturersand Traders Trust Company were added to the lender syndicate. The CreditFacility includes a revolving line of credit (the “Revolver”) and a provisionfor inventory financing of vendor products. The Credit Facility, unlessterminated earlier, will continue after the maturity date of February 28,2006 from year to year, unless any party gives the other party written noticeof termination not less than 90 days prior to the start of a new renewalperiod.

 

Borrowingunder the Revolver is limited to 85% of eligible accounts receivable. Borrowingunder the Credit Facility is secured by substantially all of our assets. The Revolvercarries an interest rate indexed to the London Interbank Offered Rate (“LIBOR”)plus 1.75 percentage points. One of the financial covenants of our CreditFacility required a minimum trailing twelve months (“TTM”) earnings before interestand taxes (“EBIT”) to TTM net sales ratio to be maintained. As of June 30,2005 we were not in compliance with this financial covenant and, as a result,nor were we in compliance with another covenant which prohibited GTSI frompurchasing its stock when a covenant default existed.  Subsequent to quarter end, we received waiversfrom our lenders curing the covenant defaults. GTSI had available credit of $82.5million at June 30, 2005 and $59.0 million at December 31, 2004.

 

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On August 8, 2005, GTSIand its lenders executed a fifth amendment to the our Credit Facilityprincipally to waive certain financial covenant defaults during the secondquarter of 2005, and to revise certain financial and other covenants for theremainder of 2005.  The amendment included the following modifications:

 

•                  Decreasedthe overall size of the Credit Facility from $165 million to $135 million;

•                  Waivedthe default of the EBIT to Net Sales covenant for April, May and June of2005;

•                  Duringthe period commencing July 1, 2005 and expiring on December 31, 2005,suspended the application of the EBIT to Net Sales and the Funded Debt to EarningsBefore Interest, Taxes, Depreciation and Amortization (“EBITDA”) ratiocovenants;

•                  Forthe months of September, October, and November, 2005, increased the MaximumTotal Liabilities to Tangible Net Worth covenant to a ratio of 7:1;

•                  Forthe fiscal year ending December 31, 2005, added a Maximum Pretax Losscovenant of $20 million;

•                  Forthe quarter ending September 30, 2005, added a Minimum Pretax Profitcovenant of $2 million;

•                  Addedan Excess Collateral requirement of $20 million;

•                  Duringthe period from August 8, 2005 through December 31, 2005, prohibits usfrom purchasing any of our stock; and

•                  Prohibitsus from paying cash dividends on our stock during the period from August 8,2005 through December 31, 2005.

 

Thelenders charged a one-time fee of $82,500 in connection with theabove-referenced fifth amendment to the Credit Facility.

 

OnAugust 15, 2005, GTSI and its lenders executed a sixth amendment to our CreditFacility which included the following modifications:

 

•                  Waivedthe default regarding our prohibition from purchasing our stock when afinancial covenant default existed for the months of May, June and July 2005;

•                  Terminatedthe above-referenced provision in the fifth amendment that prohibited us from purchasingany of our stock during the balance of 2005; and

•                  Permitsus during the period from August 8, 2005 through December 31, 2005 topurchase our stock only if the following conditions are satisfied:  (a) the purchase prices for the stock donot exceed in the aggregate $2.5 million, (b)  no default exists under theCredit Facility and no default or event of default will occur or is reasonablylikely to occur as a result of any such purchase, (c) there is at least$7.5 million of Excess Eligible Accounts under the Credit Facility after givingeffect to the contemplated purchase, and (d) an additional reserve istaken against our borrowing base under the Credit Facility equal to theaggregate purchase price paid for the stock.

 

The Credit Facility, asamended, provides that if, after December 31, 2005, there is no existingdefault and no default or event of default is reasonably likely to occur as aresult of such payment, we may annually make payments aggregating up to $2.5million for stock purchases, cash dividends and certain prepayments of debt.Additionally, if there is at least $7.5 million of Excess Eligible Accountsunder the Credit Facility, after giving effect to the contemplated purchase, wemay make payments of any amount for stock purchases.

 

*CapitalResources and Requirements*

 

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. As of June 30, 2005 GTSI was obligated

 

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undertwo letters of credit totaling $1.9 million. Our contractual obligations underour operating leases as of June 30, 2005 are consistent with our year enddisclosure in Item 7, MD&A “Contractual Obligations” of our 2004 Form 10-K.We have no commitments to purchase inventory, property or equipment. During thethree months ended June 30, 2005 we made capital expenditures of $0.8 million,primarily for consulting costs associated with the implementation of GEMS. Weanticipate capital expenditures for GEMS to occur at a similar rate during theremainder of 2005 as we continue to install enhancements and future softwarereleases.

 

GTSIrecorded a net loss of $13.3 million for the six months ended June 30,2005. Despite this fact, we were able to maintain positive cash flows fromoperations. Management expects our cash flows from operations to increase forthe nine months ending September 30, 2005 due to the seasonal nature of ourbusiness. However, there is no assurance we will be able to maintain positivecash flow from operations in the future if sales continue to decline without acorresponding decrease in costs to return GTSI to profitability. We anticipatethat we will continue to rely primarily on operating cash flow, vendor creditand our Credit Facility to finance our operating cash needs. Even though GTSIhas experienced a significant loss in the first half of the year, we believethat such funds should be sufficient to satisfy our near term anticipated cashrequirements for operations. However, if we are not able to generate positivecash flow in the second half of the year and we are unable to meet the debtcovenants in future periods or obtain a waiver of any such default from our lenders;our Credit Facility may be reduced or restricted. We may seek additionalsources of capital, including obtaining permanent financing over a longer termat fixed rate, to finance our working capital requirements. GTSI believes thatsuch capital sources will be available to us on acceptable terms, if needed.

 

**NewAccounting Pronouncements**

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 123 (Revised2004) “Share-Based Payment” (“FAS 123R”), which is a revision of FASB StatementNo. 123 “Accounting for Stock-Based Compensation” (“FAS 123”).  FAS 123R supersedes Accounting PrincipalBoard Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”)and its related Interpretations. Generally, the approach to accounting in FAS123R requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the financial statements based onthe grant-date fair value of the award. As permitted by FAS 123, GTSI currently accounts for share-basedpayments to employees using the intrinsic value provisions of APB 25 and, assuch, generally recognizes no compensation costs for employee stock options.Accordingly, the adoption of FAS 123R’s fair value method may have asignificant impact on our results of operations, although it will have noimpact on our overall financial position. The impact of FAS 123R cannot be predicted at this time because it willdepend on levels of share-based payments granted in the future. However, had weadopted FAS 123R in prior periods, the impact of that standard would haveapproximated the impact of FAS 123 as described in the disclosure of pro formanet loss and loss per share in Note 3 to our consolidated financial statementsin Part I, Item 1 of this Form 10-Q. FAS 123R also requires thebenefits of tax deductions in excess of recognized compensation cost to bereported as a financing cash flow, rather than as an operating cash flow asrequired under current literature. This requirement will reduce net operatingcash flows and increase net financing cash flows in periods after adoption.

 

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InApril 2005, the SEC adopted a new rule that amends the compliancedate for FAS 123R to be effective as of the beginning of the first annualreporting period that begins after June 15, 2005 and we plan to adopt thestandard beginning January 1, 2006. FAS 123R offers several alternatives for implementation.  Currently, management plans to use themodified prospective transition method. We are also evaluating the impact ofFAS 123R on our employee stock purchase plan.

 

InJune 2005, the FASB issued SFAS No. 154 “Accounting Changes and ErrorCorrections,” (“FAS 154”) which is a replacement of APB Opinion No. 20 “AccountingChanges” and FASB Statement No. 3 “Reporting Accounting Changes in InterimFinancial Statements”. FAS 154 changes the accounting for and reporting of changesin accounting principles and error corrections by requiring retrospectiveapplication to prior period financial statements unless impracticable. Thisstatement is effective in fiscal years beginning after December 15, 2005and we plan to adopt FAS 154 on January 1, 2006. We do not expect theadoption of FAS 154 to have a significant impact on our financial statements.

 

**Outlook**

 

During2004 we increased our number of employees by approximately 20%, predominantlybased on our belief that additional sales professionals would produce greatersales dollars. Unfortunately, while our fixed costs have increased due tohiring costs and additional incremental compensation expense, our salesdeclined nearly $100 million for the six months ended June 30, 2005compared to the same period of the prior year. During the past three fiscalyears, first and second quarter sales have approximated 18% and 21%,respectively of GTSI’s annual sales.  Management expects a change in this trendduring the current year because our first half results have been adversely affectedby the difficulties associated with our GEMS implementation. We plan to recordsales of a proportionally higher percentage of annual sales during the rest of2005.

 

Wehave experienced disruptions to our business and short-term productivity issuesas we resolve system issues in GEMS and implement new processes. We areaggressively tracking productivity issues, with the goal to realize significantprogress in the months ahead. Our GEMS implementation has negatively impactednear-term sales and bookings. However, we expect our infrastructure investmentin GEMS to provide the foundation and resources necessary to support increaseddeliveries from our vendors and shipment of products to our customers in thefuture. In addition, we anticipate the functionality of GEMS, once mastered,will reduce the lag time between order placement and shipment. In the meantime,we have increased the shipment of products to our customers directly from ourvendors to minimize delivery times and meet our customers’ needs.

 

Severalother initiatives are underway to position GTSI to reach our strategic plangoal of increased productivity, including proactive supply-chain management;customer and vendor profitability assessments; and order managementimprovements. Management initiated a pilot program for a new customerrelationship platform (“CRM”) during June 2005. Management plans to expandthe number of users piloting the program during the second half of 2005.Depending upon the results of the pilot program and management’s evaluation ofour existing CRM platform, we may incur an impairment charge for the write-offof our existing CRM software. As of June 30, 2005 we have capitalized $0.8million in costs related to the CRM solution. Utilization of a robust CRM platform is expected to allow us to moreeffectively cross-sell and up-sell additional products, services and warrantiesbased on our customers’ needs and ordering patterns. We plan to continue toincrease the percentage of our sales from providing services.

 

GTSIis experiencing difficulties in our efforts to increase sales. We continue tobelieve we have the ability to improve our margin percentage, as has been doneover the past few quarters, through revamping

 

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ourpurchasing organization and continuing to improve our pricing processes throughuse of market based pricing and deal profitability assessments. Our year todate net loss as of June 30, 2005 is $13.3 million. Although we anticipate,based on the seasonality of our business, improved results in the third andfourth quarters of 2005, we anticipate our annual results to be a net loss for2005.

 

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

 

Asof the end of the period covered by this report, management performed anevaluation, with the participation of GTSI’s Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the disclosure controls andprocedures (as defined in Rules13a-15(e) or 15d – 15(e) under theSecurities Exchange Act of 1934, as amended). Based on this evaluation, ourChief Executive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures are effective in ensuring that informationrequired to be disclosed by us in reports filed or submitted under the SecuritiesExchange Act of 1934, as amended, is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

Duringthe quarter ended June 30, 2005, we implemented GEMS, as discussed aboveunder Item 2. “Management’s Discussion and Analysis of Financial Condition andResults of Operations—GEMS.”  Thisimplementation replaced a legacy system in which a significant portion of ourbusiness transactions originated and were processed.

 

Webelieve that this change has materially affected our internal control overfinancial reporting, as defined in Rule 13a-15(f) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”). As of the endof the period covered by this report,management’s evaluation of this change, with the participation of our ChiefExecutive Officer and Chief Financial Officer, is that it did not have amaterial adverse impact on our internal control over financial reporting underthe Exchange Act and the rules and regulations promulgated thereunder.

 

Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. Further, the design of a control system must reflect the fact thatthere are resource constraints, and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within the Company have beendetected. Because of the inherent limitations in a cost-effective controlsystem, misstatements due to error or fraud may occur and not be detected.

 

Weare currently in the process of evaluating our internal controls over financialreporting in more detail as required by Section 404 of the Sarbanes-OxleyAct of 2002 and associated SEC final rules. The results of this evaluation willbe will be appropriately disclosed in our Annual Report on Form 10-K forour 2005 fiscal year.

 

Inclosing the third quarter of 2005, the Company became aware of issues with itsdocumentation and procedures regarding retention bonuses. Accordingly, we areimplementing improvements that we expect will be effective prior to December 31,2005. The Company believes that its quarterly financial statements presentedherein are fairly stated.

 

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**PART II.  OTHER INFORMATION**

 

**ITEM 6.  EXHIBITS**

 

The exhibits set forth in the Exhibit Index arefiled 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 November 17, 2005 on its behalf bythe undersigned thereunto duly authorized.

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

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                               |
|-------------|------------|----------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                          |
| 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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