**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**FORM 10–Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2005**

 

**Commission File Number:     0–19394**

 

**GTSI CORP.**

(Exact name of registrant asspecified in its charter)

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

 

**703–502–2000**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.          YES 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

 

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

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

 

 

----

 

**GTSI CORP.**

**Form 10–Q for the Quarter Ended June 30, 2005**

 

**INDEX**

 
| **PART I – FINANCIAL  INFORMATION** |                                                                                                          |
|------------------------------------------|---------------------------------------------------------------------------------------------------------------|
|                                     |                                                                                                          |   |
| ITEM 1.                                  | FINANCIAL STATEMENTS –                                                                                   |   |
|                                     |                                                                                                          |   |
|                                     | Consolidated Balance Sheets  as of  June 30, 2005 (Unaudited) and December 31, 2004                           | 2 |
|                                     |                                                                                                          |   |
|                                     | Consolidated  Statements of Operations for the Three and Six Months  Ended June 30, 2005 and 2004 (Unaudited) | 3 |
|                                     |                                                                                                          |   |
|                                     | Condensed  Consolidated Statements of Cash Flows for the  Six Months Ended June 30, 2005 and 2004 (Unaudited) | 4 |
|                                     |                                                                                                          |   |
|                                     | Notes  to Condensed Consolidated Financial Statements (Unaudited)                                             | 5 |
|                                     |                                                                                                          |   |
| ITEM  2.                                 | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                   | 11 |
|                                     |                                                                                                          |   |
| ITEM  3.                                 | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                   | 22 |
|                                     |                                                                                                          |   |
| ITEM 4.                                  | CONTROLS AND PROCEDURES                                                                                       | 22 |
|                                     |                                                                                                          |   |
|                                     |                                                                                                          |   |
| **PART II – OTHER INFORMATION**     |                                                                                                          |
|                                     |                                                                                                          |   |
| ITEM 1.                                  | LEGAL PROCEEDINGS                                                                                             | 23 |
|                                     |                                                                                                          |   |
| ITEM 2.                                  | UNREGISTERED SALES OF EQUITY  SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASE OF EQUITY SECURITIES           | 23 |
|                                     |                                                                                                          |   |
| ITEM  4.                                 | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                          | 24 |
|                                     |                                                                                                          |   |
| ITEM 6.                                  | EXHIBITS                                                                                                      | 24 |
|                                     |                                                                                                          |   |
|                                     |                                                                                                          |   |
| **SIGNATURES**                           | 25                                                                                                            |
|                                     |                                                                                                          |   |
| **EXHIBIT INDEX**                        | 26                                                                                                            |

 

1

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**PART I. FINANCIALINFORMATION**

 

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

 

**GTSI CORP.**

**CONSOLIDATED BALANCE SHEETS**

(In thousands, except share data)

 
| ** **                                                                                                                                                                                         | ** ** | **(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                                                                                                                                                                              |       | 19,521          |       | 9,616            |       |
| Total  current assets                                                                                                                                                                              |       | 254,419         |       | 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                                                                                                                                                                                      |       | $               | 271,672    |             | $          | 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                                                                                                                                                                                 |       | 36,440          |       | 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                                                                                                                                                                   |       | 79,832          |       | 92,137           |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                   |       | $               | 271,672    |             | $          | 296,386 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

2

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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,**         | ** ** |
| ** **                                      | ** ** | **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 |       | 29,393                 |       | 24,622               |       | 57,684 |   | 46,319 |   |
|                                            |       |                   |       |                 |       |   |   |   |   |
| LOSS  FROM OPERATIONS                           |       | (12,787                | )          | (3,085               | )          | (22,999 | ) | (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                       |       | (12,433                | )          | (2,566               | )          | (21,916 | ) | (4,850 | ) |
|                                            |       |                   |       |                 |       |   |   |   |   |
| INCOME  TAX BENEFIT                             |       | (4,288                 | )          | (1,013               | )          | (7,961 | ) | (1,915 | ) |
|                                            |       |                   |       |                 |       |   |   |   |   |
| NET  LOSS                                       |       | $                      | (8,145     | )                    | $          | (1,553 | ) | $ | (13,955 | ) | $ | (2,935 | ) |
|                                            |       |                   |       |                 |       |   |   |   |   |
| LOSS  PER SHARE                                 |       |                   |       |                 |       |   |   |   |   |
| Basic                                           |       | $                      | (0.88      | )                    | $          | (0.18 | ) | $ | (1.53 | ) | $ | (0.34 | ) |
| Diluted                                         |       | $                      | (0.88      | )                    | $          | (0.18 | ) | $ | (1.53 | ) | $ | (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.

 

3

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**GTSI CORP.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

(In thousands)

 
| ** **                                                                      | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                      | ** ** | **June 30,**         | ** ** |
| ** **                                                                      | ** ** | **2005**             | ** ** | **2004** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                       | ** ** | ** **           | ** ** | ** ** | ** ** |
| Net  loss                                                                       |       | $                    | (13,955    | ) | $ | (2,935 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities |       | 16,520               |       | 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.

 

4

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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 rulesand regulations of the Securities and Exchange Commission (“SEC”) for quarterlyreports on Form 10-Q and, therefore, omit or condense certain note disclosuresand other information required by accounting principles generally accepted inthe United States of America for complete financial statements.  These financial statements should thereforebe read in conjunction with the audited consolidated financial statements andaccompanying notes for the year ended December 31, 2004 included in GTSI’sAnnual Report on Form 10-K, as amended by Forms 10-K/A filed with the SEC onApril 28, 2005 and August 1, 2005.  Theconsolidated financial statements include the accounts of GTSI and its whollyowned subsidiaries. All intercompany transactions and balances have beeneliminated.  Investments in which theCompany does not control the investee but has the ability to exercisesignificant influence over its operating and financial policies are accountedfor using the equity method of accounting. In the opinion of management, all adjustments (which are of a normalrecurring nature) necessary for a fair presentation of interim period resultshave been included.  The results ofoperations for the three and six month periods ended June 30, 2005 are notnecessarily indicative of the results that may be expected for the full year,or future periods.  GTSI has historicallyexperienced significant seasonal fluctuations in operations as a result ofgovernment buying and funding patterns. Certain prior period amounts have beenreclassified 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”), which is a revisionof FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”).FAS 123R supersedes Accounting Principles Board Opinion No. 25 “Accounting forStock Issued to Employees” (“APB 25”) and its related Interpretations.Generally, the approach to accounting in FAS 123R requires all share-basedpayments to employees, including grants of employee stock options, to be recognizedin the financial statements based on the grant-date fair value of theaward.  As permitted by FAS 123, theCompany currently accounts for share-based payments to employees using theintrinsic value provisions of APB 25 and, as such, generally recognizes nocompensation costs for employee stock options. Accordingly, the adoption of FAS123R’s fair value method may have a significant impact on the Company’s resultsof operations, although it will have no impact on GTSI’s overall financialposition. The impact of adoption of FAS 123R cannot be predicted at this timebecause it will depend on levels of share-based payments granted in the future.However, had the Company adopted FAS 123R in prior periods, the impact of thatstandard would have approximated the impact of FAS 123 as described in thedisclosure of pro forma net loss and loss per share in Note 3 of these condensedconsolidated financial statements. FAS123R also requires the benefits of taxdeductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow as required undercurrent literature. This requirement will reduce net operating cash flows andincrease net financing cash flows in periods after adoption.

 

5

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InApril 2005, the SEC adopted a new rule that amends the compliance date for FAS123R to be effective as of the beginning of the first annual reporting periodthat begins after June 15, 2005. Thus, GTSI will adopt the standard beginning January1, 2006. FAS 123R offers several alternatives for implementation.  At this time, management plans to use themodified prospective transition method. The Company is also evaluating theimpact of FAS 123R to its employee stock purchase plan (“ESPP”).

 

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 afterDecember 15, 2005 and the Company plans to adopt FAS 154 on January 1, 2006.The Company does not expect the adoption of FAS 154 to have a significantimpact on its financial statements.

 

**3.  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 compensation costs for theCompany’s stock options had been determined based on the fair value methodconsistent with the provisions of FAS 123 (in thousands, except per sharedata):

 
| ** **                                                                                                                                    | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                                                    | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| ** **                                                                                                                                    | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net  loss – as reported                                                                                                                  |       | $                      | (8,145     | )                    | $          | (1,553 | ) | $ | (13,955 | ) | $ | (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                                                                                                                    |       | $                      | (8,310     | )                    | $          | (1,825 | ) | $ | (14,803 | ) | $ | (3,976 | ) |
|                                                                                                                                          |       |                   |       |                 |       |   |   |   |   |
| Loss  per share – as reported                                                                                                            |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                                                                                         |       | $                      | (0.88      | )                    | $          | (0.18 | ) | $ | (1.53 | ) | $ | (0.34 | ) |
| Diluted                                                                                                                                       |       | $                      | (0.88      | )                    | $          | (0.18 | ) | $ | (1.53 | ) | $ | (0.34 | ) |
|                                                                                                                                          |       |                   |       |                 |       |   |   |   |   |
| Loss  per share – pro forma                                                                                                              |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                                                                                         |       | $                      | (0.90      | )                    | $          | (0.21 | ) | $ | (1.62 | ) | $ | (0.46 | ) |
| Diluted                                                                                                                                       |       | $                      | (0.90      | )                    | $          | (0.21 | ) | $ | (1.62 | ) | $ | (0.46 | ) |

 

Forthe three and six months ended June 30, 2005 and 2004, the Company recordedcharges of approximately $34 thousand and $480 thousand for stock-basedcompensation granted to non-employees based on the fair value method.

 

6

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**4.  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, recognizescurrent and long-term leases receivable, net of unearned finance income, on theaccompanying balance sheets.  GTSIperiodically sells leases receivable to various unrelated financing companiesand accounts for these sales in accordance with SFAS No. 140 “Accounting forthe 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.

 

**5.  Capitalized Software**

 

Capitalizedsoftware is stated at cost less accumulated amortization. On April 18, 2005 GTSIreplaced 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 Company hascapitalized $11.0 million of costs related to GEMS. Approximately $1.5 millionwas capitalized in the six month period ended June 30, 2005. Amortizationexpense for GEMS during the six months ended June 30, 2005 and June 30, 2004was $0.4 million and $0.2 million, respectively.

 

Management is alsoevaluating various CRM solutions, including the future use of our existing CRMplatform.  If we select a new CRMsolution, we may incur an impairment charge for the write-off of our existingCRM software.  Utilization of a robustCRM platform is expected to allow us to more effectively cross-sell and up-selladditional products, services, and warranties based on our customers’ needs andordering patterns.  As of June 30, 2005,the Company has capitalized approximately $0.8 million related to its CRMsolution.

 

**6.  Credit Facility**

 

OnApril 27, 2005 the Company and its lenders signed an amendment to the Company’scredit facility to increase the size of the facility from $125 million to $165million (the “Credit Facility”). In addition to existing participants GECommercial Distribution Finance Corporation and SunTrust Bank, Wachovia Bankand M&T Bank were added to the lender syndicate. The Credit Facilityincludes a revolving line of credit (the “Revolver”) and a provision forinventory financing of vendor products (the “Wholesale Financing Facility”).The Credit Facility, unless terminated earlier, will continue after the maturitydate of February 28, 2006 from year to year, unless any party gives the otherparty written notice of termination not less than 90 days prior to the start ofa new renewal period.

 

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 to TTM net sales ratio to be maintained. As ofJune 30, 2005, the Company was not in compliance with this debt covenant. Subsequentto quarter-end, the Company received a waiver from its lenders curing thedefault of the covenant. See Note 10 for additional details and disclosuresrelated to the Credit Facility. The Company was in compliance with all otherdebt covenants as of June 30, 2005. GTSI had available credit of $82.5 millionat June 30, 2005 and $59.0 million at December 31, 2004.

 

**7.  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

 

7

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millionavailable under previous authorizations, results in $10.0 million available forrepurchase. During the three months ended June 30, 2005, the Company purchasedapproximately 160 thousand shares of common stock for its treasury at a cost ofapproximately $1.3 million. No purchases occurred during 2004. The Company willhold the repurchased shares in treasury.

 

*StockOptions*

During the six months ended June 30, 2005 and theyear ended December 31, 2004, 473,450 and 397,492, respectively, of stockoptions were exercised under the Company’s stock option plan. These shares wereissued from treasury stock. The tax benefit of stock options exercised duringthe six months ended June 30, 2005 and 2004 was approximately $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 shares are scheduled tovest on the first anniversary of issuance. The Company recorded approximately $218,000in stockholders’ equity for deferred compensation in 2005.  The deferred compensation is amortized on astraight-line basis over the vesting period of the grants. During the threemonths ended June 30, 2005, approximately $18,000 was recorded as stockcompensation expense for restricted stock.

 

**8.  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                                                                                                                    |       | $                      | (8,145     | )                    | $          | (1,553 | ) | $ | (13,955 | ) | $ | (2,935 | ) |
| Weighted  average shares outstanding                                                                                         |       | 9,249                  |       | 8,573                |       | 9,126 |   | 8,564 |   |
| Basic  loss per share                                                                                                        |       | $                      | (0.88      | )                    | $          | (0.18 | ) | $ | (1.53 | ) | $ | (0.34 | ) |
|                                                                                                                         |       |                   |       |                 |       |   |   |   |   |
| Diluted  earnings per share:                                                                                                 |       |                   |       |                 |       |   |   |   |   |
| Net  loss                                                                                                                    |       | $                      | (8,145     | )                    | $          | (1,553 | ) | $ | (13,955 | ) | $ | (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                                                                                                      |       | $                      | (0.88      | )                    | $          | (0.18 | ) | $ | (1.53 | ) | $ | (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.

 

8

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**9.  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.  Thefollowing table summarizes the activity related to product warranty liabilities(in thousands):

 
| ** **                                 | ** ** | **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 andsubsequently recognized over the term of the contract.  The following table summarizes the activityrelated to the deferred warranty 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 amounts have been recorded 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 atDecember 31, 2004, as a security deposit for all tenant improvements associatedwith the lease.

 

Asof June 30, 2005, GTSI had an outstanding letter of credit to a customer in theamount 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.

 

9

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Inthe $25 million lawsuit filed against GTSI previously reported in the Company’speriodic reports filed with the SEC, the case went to trial in March2005.  The Court granted GTSI's motion to strike, and in late July entereda final order in favor of GTSI and awarded GTSI $1.4 million in attorneys' feesand costs. GTSI expects that the plaintiff will appeal the Court’sruling.  Management continues to believe the claim is without meritand intends to vigorously defend any appeal, but the ultimate outcome of thismatter remains uncertain. Management is unable to estimate the amount GTSI mayhave to pay, if any, related to this matter. No amounts have been accrued as ofJune 30, 2005.

 

**10.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 the financial covenants for the remainderof 2005.  The amendment includes the following modifications:

 

Decreased the overallsize of the facility from $165 million to $135 million;

Waived the default of theEBIT to Net Sales covenant for April, May and June of 2005; 

During the periodcommencing July 1, 2005 and expiring at 12:00pm on December 31, 2005, suspendedthe application of the EBIT to Net Sales and the Funded Debt to EBITDA ratiocovenants;

For the months ofSeptember, October, and November, 2005, increased the maximum Total Liabilitiesto Tangible Net Worth covenant to a ratio of 7:1;

For the fiscal yearending December 31, 2005, added a Maximum Pretax Loss covenant of $20 million;

For the quarter endingSeptember 30, 2005, added a Minimum Pretax Profit covenant of $2 million; and

Increased the ExcessCollateral Requirement from $7.5 million to $20 million.

 

The lenders charged aone-time fee of $82,500 in conjunction with the above-referenced fifthamendment to the Credit Facility.

 

10

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

 

Thefollowing discussion and analysis is provided to increase the understanding of,and should be read in conjunction with, our unaudited condensed consolidatedfinancial statements and notes included in this Quarterly Report on Form 10-Qand our consolidated financial statements and notes in our Annual Report onForm 10-K for the year ended December 31, 2004, as amended by Forms 10-K/Afiled with the 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 contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended,relating to our operations that are based on our current expectations,estimates, forecasts and projections. Words such as “expect,” “plan,” “believe,”“anticipate,”  “intend” and similarexpressions are intended to identify these forward-looking statements.  These statements are not guarantees of futureperformance and are subject to risks, uncertainties and assumptions that aredifficult to predict.  Therefore, actualresults in future periods may differ materially from those expressed orprojected in any forward-looking statements because of a number of risks anduncertainties, including:

**•**                  Theseasonality of our business makes our future financial results less predictable,which may adversely affect our stock price;

**•**                  Fluctuationsin our gross margins;

**•**                  Anyissue that compromises our relationship with agencies of the federal governmentwould cause serious harm to our business;

**•**                  Ourability to recruit, retain and motivate talented employees;

**•**                  Ourexposure to inventory risks;

**•**                  Infrastructurefailures could have a material adverse effect on our business;

**•**                  Ourqualifications as a small business for new contract awards;

**•**                  Ourreliance on our vendor relationships and the availability of products;

**•**                  Changesin federal government fiscal spending; and

**•**                  Productivitychallenges arising from the implementation 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 undertake noobligation to revise or update any forward-looking statements for any reason.

 

**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 andexpanding sales of our managed services offerings. Today we seek to delivermaximum value through 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:

 

**•**                  ProjectManagement of Complex Integration Programs;

**•**                  ComplexSystem “Builds”;

**•**                  GlobalWarehousing;

**•**                  StagedDeployments;

**•**                  Program-SpecificCatalogs;

**•**                  Logisticsand Transportation Management;

**•**                  SystemInstallation and De-installation;

**•**                  Pre-buildand Stage any size order; and

**•**                  FullCompliance 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 to doublerevenue, 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 were disappointing,falling below our growth forecast and resulting in a net loss of $14.0 million.Management contributes this result to three main factors: 1) problemsassociated 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.

 

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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:

 

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

**•**                  Netloss for the six months ended June 30, 2005 was $14.0 million, predominantlyrelated to a 24.5% increase in SG&A expenses from our additional headcount;

**•**                  Whileour cash balance is $27.5 million less as of June 30, 2005 than at June 30,2004, we continue to have no long term debt on our balance sheet ;

**•**                  Ourcash flow from operations during the six months ended June 30, 2005 remainedpositive; and

**•**                  Theimplementation of GEMS in April 2005 negatively affected our near-term salesand bookings and required cash outflows of $3.2 million during the six monthsended 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. Managementbelieves that this new information platform is essential to our long-termsuccess. 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 were adverselyaffected 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 earnings results.We are not currently able to generate reports to separate our total sales intosales by vendor, product or contract; however, we expect to disclose thesetraditional measures of our revenues in our quarterly report for the threemonths ending September 30, 2005.

 

AlthoughERP implementations are frequently difficult for an organization, we are makingprogress; our organization is quoting, taking orders, and shipping product. Weare aggressively tackling software bugs and we are working to regain our previouslevel of productivity as employees become acclimated to GEMS. In July 2005, weinstalled 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.

 

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**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 make significantassumptions.  We believe that some of themore critical estimates and related assumptions that affect our financialcondition and results of operations are in the areas of merchandise inventories,long-lived assets, warranties, contingencies, and revenue recognition. For moreinformation on critical accounting estimates, see the MD&A included in PartII, Item 7 of our 2004 Form 10-K.  Wehave discussed the application of these critical accounting estimates with theAudit Committee of our Board of Directors.

 

During the three months ended June 30, 2005, we did not change or adoptany new accounting estimates or policies that had a material effect on ourconsolidated 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 |       | 18.3                   |       | 10.3                 |       | 18.1 |   | 11.1 |   |
| Loss  from operations                           |       | (8.0                   | )          | (1.3                 | )          | (7.2 | ) | (1.6 | ) |
| Interest  and other income, net                 |       | 0.2                    |       | 0.2                  |       | 0.3 |   | 0.4 |   |
| Loss  before income taxes                       |       | (7.8                   | )          | (1.1                 | )          | (6.9 | ) | (1.2 | ) |
| Income  tax benefit                             |       | 2.7                    |       | 0.4                  |       | 2.5 |   | (0.5 | ) |
| Net  loss                                       |       | (5.1                   | )%         | (0.7                 | )%         | (4.4 | )% | (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 endedJune 30, 2005 our revenue was weaker than projected, due to the related factorsof problems associated with the implementation of GEMS, changing sales mix, anddecreased productivity from increased turnover in our sales organization. Dueto problems with our GEMS implementation, we experienced difficulties indelivering products to many customers on a timely basis during the secondquarter. This caused disruptions with our customers and negatively impactedsales.

 

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

 

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tocustomers during the three months ended June 30, 2005. Productivity was alsoaffected 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.

 

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, that theproportion of sales of products from our top five vendors did not materiallychange 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. Themajority of this increase was due to the increase in unshipped backlog to $115.2million at June 30, 2005, compared to $81.5 million at December 31, 2004. Backlogfluctuates significantly from period to period due to the seasonality ofgovernment ordering patterns and fluctuations in inventory availability ofvarious products. Unshipped backlog was $30.1 million lower at June 30, 2005than 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 prior year.However, we experienced a favorable improvement in gross margin as a percentageof sales to 10.3% in the second quarter of 2005 from 9.0% in the second quarterof 2004. This improvement was due to one large transaction during the secondquarter of 2005 as well as improved product mix, increased services revenue,and centralized pricing initiatives by management. Gross margin percentagesvary over time and may change significantly depending on our customers’ use ofavailable contract vehicles and the mix of products sold. We expect to continueto increase our gross margin as a percentage of sales by revamping ourpurchasing processes, improving our pricing processes and improving our mix. Ourgross margin is impacted by the attainment of vendor incentive funds which arerecorded as a reduction of Cost of sales. Vendor incentives for the secondquarter 2005 were substantially flat in absolute dollars despite the decreasein 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 months ended June30, 2005 increased $4.8 million, or 19.4%, from the same period in 2004.  This increase is primarily due to increased compensationand benefit costs for the additional employees hired to support our strategicgrowth plan. An important factor in our business is that it takes some time fornew sales professionals to become fully productive. SG&A expenses for thequarter ending June 30, 2005 included $0.8 million of GEMS related expenses forconsulting, training and depreciation. Expressed as a

 

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percentageof total sales, SG&A expenses increased from 10.3% in the three monthsended June 30, 2004 to 18.3% 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 same periodin 2004. This decline was primarily due to our percentage loss on our equityinvestment. Interest and other income remained relatively flat, period overperiod. Management anticipates our lease sales to increase over the next fewyears.

 

*IncomeTaxes*

OurIncome tax benefit increased $3.3 million, from $1.0 million for the threemonths ended June 30, 2004 to $4.3 million for the three months ended June 30,2005. The increase in this benefit is related to GTSI’s increased Loss beforeincome taxes of $9.9 million quarter over quarter. This was slightly offset bythe decrease in our estimated annual effective tax rate from 39.5% for the threemonths ended June 30, 2004 to 34.5% for the 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 sales teammanagement has been a key driver resulting in less than half of our teamsattaining their booking quotas.

 

*Gross Margin*

Grossmargin as a percentage of sales increased from 9.5% for the six months endedJune 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 in grossmargin percentage. Vendor incentives for the six months ended June 30, 2005were substantially flat in absolute dollars from 2004 to 2005 despite thedecrease in overall sales for the period.

 

*SG&A Expenses*

SG&Aexpenses for the six months ended June 30, 2005 increased $11.4 million, or 24.5%,from the same period in 2004.  Thisincrease was primarily related to increased salary expenses of $6.5 million andemployee benefit costs of $1.7 million from increased headcount. SG&Aexpenses during the six month period ended June 30, 2005 included $1.7 millionof GEMS related expenses for consulting, training and depreciation. SG&Aexpenses as a percentage of sales increased seven percentage points to 18.1%for the six months ended June 30, 2005.

 

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*Interestand Other Income, Net*

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

 

*IncomeTaxes*

Werecorded a tax benefit of $8.0 million for the six months ended June 30, 2005compared to a tax benefit of $1.9 million in the same period last year.  This increase was due to the increased Lossbefore income taxes of $17.1 million to $21.9 million for the six months endedJune 30, 2005. Our income tax benefit for 2005 was calculated at an estimatedannual effective tax rate of 36.3%, compared to 39.5% estimated income tax rateat June 30, 2004.  The decrease inthe effective tax rate is due primarily to the impact of the Company’s projectedpermanent differences between book and tax income on the projected net loss forthe year ending December 31, 2005.

 

**Seasonal Fluctuations**

 

Historically, approximatelyof 95% of our annual sales have been earned from departments and agencies of theU.S. Federal Government, either directly or indirectly through systemintegrators to which GTSI is a sub-contractor. Management has noted a trend inour sales to prime contractors increasing as a percentage of our total sales.We believe this trend is caused by the buying patterns of our customers and GTSI’s shift tolarger, more complex orders. We have historically experienced, and expect tocontinue to experience, significant seasonal fluctuations in our operations asa result of government buying and funding patterns, which also affect thebuying patterns of GTSI’s prime contractor customers.  These buying and funding patternshistorically have had a significant positive effect on our bookings in thethird quarter ended September 30 each year (the federal government’s fiscalyear end), and consequently on sales and net income in the third and fourthquarters of each year.

 

Historically, sales for the first and second quartersof our fiscal year have comprised approximately 18% and 21%, respectively of totalannual 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 cash flowfrom operations, although $40.9 million less than the same period last year.  This decrease was due to an $11.0 million increasein net loss and a net change in assets and liabilities of approximately $30million.  Changes in assets andliabilities included an increase in the use of cash for Accounts Payable of $40.7Mduring the six months ended June 30, 2005 compared to cash provided fromAccounts Payable the same period of

 

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2004.Cash used for Other Current Assets increased $14.8M for the six-months endedJune 30, 2005 due primarily to increases in the tax receivable due to anincreased loss for the six months and an increase in deferred costs. The increasein cash used is partially offset by a decrease in cash used in MerchandiseInventories of $20.0. In the absence of substantial cost reductions necessary toreturn us to profitability, there is no assurance that we will be able tomaintain positive cash flow from operations in future periods.

 

Cashused in financing activities was $0.4 million for the six months ended June 30,2005 compared 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 shares repurchasedon the open market under our share repurchase plan. We did not repurchase anyshares on the open market during 2004. During the first quarter of 2005, we expended$1.2 million to fully pay our Notes payable to banks, whereas net payments ofbank notes during 2004 totaled $12.8 million. During 2005, these outlays wereoffset by exercises of common stock options of $1.9 million and proceeds fromthe employee stock purchase plan of $0.2 million. Proceeds from exercises ofcommon stock options increased $1.5 million from the six-months ended June 30,2004 to the six-months ended June 30, 2005 predominately due to the exercise of400,000 stock options by our Chief Executive Officer. Cash received during thesix months ended June 30, 2005 from ESPP declined $0.2 million compared to thesix months ended June 30, 2004.

 

*Liquidity*

AtJune 30, 2005 our long-term debt remained zero although our cash balances aredepleted. At June 30, 2004 our cash balance was $27.8 million. Our workingcapital decreased $13.2 million from $79.0 million at December 31, 2004. As of June30, 2005, our working capital was $65.8 million, as compared to $62.5 million and$55.2 million for the same periods in 2004 and 2003, respectively. GTSI’scurrent assets are $25.4 million less as of June 30, 2005 when compared to ourprior fiscal balance. This decline is mainly due to decreased accountsreceivable of $41.0 million related to lower 2005 sales, offset by increases of$10.1 million in inventory and $8.6 million in income taxes receivable. At June30, 2005 our current ratio was equal to the industry average of 1.3. GTSI’squick ratio at June 30, 2005 was 0.9, falling below 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.

 

*BankCredit Facility*

OnApril 27, 2005 GTSI and its lenders signed an amendment to our credit facilityto increase the size of the facility from $125 million to $165 million (the “CreditFacility”). In addition to existing participants GE Commercial DistributionFinance Corporation and SunTrust Bank, Wachovia Bank and M&T Bank wereadded to the lender syndicate. The Credit Facility includes a revolving line ofcredit (the “Revolver”) and a provision for inventory financing of vendorproducts (the “Wholesale Financing Facility”). The Credit Facility, unlessterminated earlier, will continue after the maturity date of February 28, 2006from year to year, unless any party gives the other party written notice oftermination not less than 90 days prior to the start of a new renewal period.

 

Borrowingunder the Revolver is limited to 85% of eligible accounts receivable. Borrowingunder the Credit Facility is secured by substantially all of our assets.

 

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TheRevolver carries an interest rate indexed 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 to TTM net sales ratio to be maintained. As of June 30, 2005 we werenot in compliance with this debt covenant. Subsequent to quarter end, we received a waiver from our lenders curing thedefault of the covenant. We were in compliance with all other debt covenants asof June 30, 2005. GTSI had available credit of $82.5 million at June 30, 2005and $59.0 million at December 31, 2004.

 

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 the financial covenants for the remainderof 2005.  The amendment includes the following modifications:

 

Decreased the overallsize of the facility from $165 million to $135 million;

Waived the default of theEBIT to Net Sales covenant for April, May and June of 2005;

During the periodcommencing July 1, 2005 and expiring at 12:00pm on December 31, 2005, suspendedthe application of the EBIT to Net Sales and the Funded Debt to EBITDA ratiocovenants;

For the months ofSeptember, October, and November, 2005, increased the maximum Total Liabilitiesto Tangible Net Worth covenant to a ratio of 7:1;

For the fiscal yearending December 31, 2005, added a Maximum Pretax Loss covenant of $20 million;

For the quarter endingSeptember 30, 2005, added a Minimum Pretax Profit covenant of $2 million; and

Increased the ExcessCollateral Requirement from $7.5 million to $20 million.

 

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

 

*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 under two letters of credittotaling $2.0 million. Our contractual obligations under our operating leasesas of June 30, 2005 are consistent with our year end disclosure in Item 7,MD&A “Contractual Obligations” of our 2004 Form 10-K. We have nocommitments to purchase inventory, property or equipment. During the threemonths 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 $14.0 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.

 

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**NewAccounting Pronouncements**

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004) “Share-BasedPayment” (“FAS 123R”), which is a revision of FASB Statement No. 123 “Accountingfor Stock-Based Compensation” (“FAS 123”). FAS 123R supersedes Accounting Principal Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”) and its related Interpretations.Generally, the approach to accounting in FAS 123R requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the financial statements based on the grant-date fair value ofthe award.  As permitted by FAS 123, GTSIcurrently accounts for share-based payments to employees using the intrinsicvalue provisions of APB 25 and, as such, generally recognizes no compensationcosts for employee stock options. Accordingly, the adoption of FAS 123R’s fairvalue method may have a significant impact on our results of operations,although it will have no impact on our overall financial position.  The impact of FAS 123R cannot be predicted atthis time because it will depend on levels of share-based payments granted inthe future. However, had we adopted FAS 123R in prior periods, the impact ofthat standard would have approximated the impact of FAS 123 as described in thedisclosure of pro forma net loss and loss per share in Note 3 to ourconsolidated financial statements in Part I, Item 1 of this Form 10-Q. FAS 123Ralso requires the benefits of tax deductions in excess of recognizedcompensation cost to be reported as a financing cash flow, rather than as anoperating cash flow as required under current literature. This requirement willreduce net operating cash flows and increase net financing cash flows inperiods after adoption.

 

InApril 2005, the SEC adopted a new rule that amends the compliance date for FAS123R to be effective as of the beginning of the first annual reporting periodthat begins after June 15, 2005 and we plan to adopt the standard beginning January1, 2006.  FAS 123R offers severalalternatives for implementation.  Currently,management plans to use the modified prospective transition method. We are alsoevaluating the impact of FAS 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, 2005 and weplan to adopt FAS 154 on January 1, 2006. We do not expect the adoption of FAS154 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, 2005 compared tothe same period of the prior year. During the past three fiscal years, first andsecond quarter sales have approximated 18% and 21%, respectively of GTSI’sannual sales.  Management expects achange in this trend during the current year because our first half resultshave been adversely affected by the difficulties associated with our GEMSimplementation. We plan to record sales of a proportionally higher percentageof annual sales during the rest of 2005.

 

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

 

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goalto realize significant progress in the months ahead. Our GEMS implementationhas negatively impacted near-term sales and bookings. However, we expect ourinfrastructure investment in GEMS to provide the foundation and resourcesnecessary to support increased deliveries from our vendors and shipment ofproducts to our customers in the future. In addition, we anticipate thefunctionality of GEMS, once mastered, will reduce the lag time between orderplacement and shipment. In the meantime, we have increased the shipment ofproducts to our customers directly from our vendors to minimize delivery timesand 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 expand thenumber of users piloting the program during the second half of 2005. Dependingupon the results of the pilot program and management’s evaluation of ourexisting CRM platform, we may incur an impairment charge for the write-off ofour 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 our purchasing organization andcontinuing to improve our pricing processes through use of market based pricingand deal profitability assessments. Our year to date net loss as of June 30,2005 is $14.0 million. Although we anticipate, based on the seasonality of ourbusiness, improved results in the third and fourth quarters of 2005, weanticipate our annual results to be a net loss for 2005.

 

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**ITEM 3.****                                                     QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Forinformation required by this item see Item 7A “Quantitative and QualitativeDisclosures about Market Risk” of GTSI’s 2004 Form 10-K. Our exposures to marketrisk have not changed materially since December 31, 2004.

 

**ITEM 4.****                                                     CONTROLSAND 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 the SecuritiesExchange Act of 1934, as amended). Based on this evaluation, our ChiefExecutive 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 theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarizedand reported 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 above underItem 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 the Securities ExchangeAct of 1934, as amended (the “Exchange Act”). As of the end of the periodcovered by this report, management’sevaluation of this change, with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, is that it did not have a material adverseimpact on our internal control over financial reporting under the Exchange Actand 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-Oxley Actof 2002 and associated SEC final rules. The results of this evaluation will bewill be appropriately disclosed in our Annual Report on Form 10-K for our 2005fiscal year.

 

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**PART II – OTHERINFORMATION**

 

# **ITEM 1.  LEGAL PROCEEDINGS**

 

Inthe Ichiban lawsuit filed against GTSI in November 2003, the Virginia CircuitCourt in March 2005 dismissed the plaintiff's suit against GTSI.  In late July the Circuit Court entered afinal order in favor of GTSI and awarded GTSI $1.4 million in attorneys' feesand costs. Management continues to believe the claims are without merit and intendsto vigorously defend any appeal, but the ultimate outcome of this matter isuncertain.

 

**ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS****, AND ISSUER PURCHASES OF EQUITY SECURITIES**

 
| **Period**                              | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Program** | ** ** | **Approximate Dollar  Value of Shares that  May Yet Be Purchased  Under the Program (in  thousands)** | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| April  1 to April 30, 2005              |       | —                                  |       | $                                  | —     |                                                                          | —     |                                                                                                  |       |   |   |
| May  1 to May 31, 2005                  |       | 69,300                                  |       | $                                  | 8.42       |                                                                          | 69,300     |                                                                                                  |       |   |   |
| June  1 to June 30, 2005                |       | 91,520                                  |       | $                                  | 8.19       |                                                                          | 91,520     |                                                                                                  |       |   |   |
| Total-Three  Months Ended June 30, 2005 |       | 160,820                                 |       | $                                  | 8.39       |                                                                          | 160,820    |                                                                                                  | $          | 8,667 |   |

 

GTSI's commonstock repurchase program was announced in February, 2000.  GTSI's Board of Directors authorized GTSI torepurchase its common stock for an aggregate purchase price up to $5.25million.  In January 2002, the Board ofDirectors authorized the use of up to an additional $5.0 million for thepurchase of outstanding shares of the Company's common stock, provided the pershare price did not exceed the market price. In April, 2005, GTSI's Board of Directors increased the stock repurchaseprogram by $7.3 million, which combined with the remaining $2.7 millionavailable under the previous authorization, resulted in a total of $10 millionbeing available for repurchase of GTSI's stock. The $7.3 million increase in authorized stock repurchases was announcedon April 28, 2005.  This repurchaseprogram, as increased, is the only stock repurchase program currently in effectand there have been no repurchase programs that have expired during the periodcovered by this report.

 

**Item 3. Defaults Upon Senior Securities**

 

Oneof the financial covenants of the Company’s Credit Facility required a minimumtrailing twelve months (“TTM”) earnings before interest and taxes to TTM netsales ratio to be maintained. As of June 30, 2005, the Company was not incompliance with this financial covenant. On August 8, 2005 the Company and itslenders signed a fifth amendment to the Company’s Credit Facility to waivefinancial covenant defaults during the second quarter of 2005 and revise thefinancial covenants for the remainder of 2005.  The Company was in compliance with all other CreditFacility obligations and financial covenants as of June 30, 2005.  See Part I, Item 2. “Management’s Discussionand Analysis of Financial Condition and Results of Operations – Liquidity andCapital Resources – Bank Credit Facility”.

 

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**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

(a)                                  TheCompany held its annual meeting of stockholders on April 21, 2005.

 

(b)                                 Set forth below are the two matters that werepresented to and voted upon by the Company’s stockholders, and the results ofsuch stockholders’ votes.

 

1.                                       Electionof Directors

 
| ** **        | ** ** | ** **    | ** ** | **Votes**    | ** ** |
|-------------------|------------|---------------|------------|--------------|------------|
| **Nominees**      | ** ** | **Votes For** | ** ** | **Withheld** | ** ** |
|              |       |          |       |         |       |
| Lee  Johnson      |       | 6,822,523     |       | 1,712,495    |       |
|              |       |          |       |         |       |
| James  J. Leto    |       | 5,471,773     |       | 3,063,245    |       |
|              |       |          |       |         |       |
| Thomas  L. Hewitt |       | 7,025,551     |       | 1,509,467    |       |

 

2.                                       The approval of amendments to the Company’s 1996 Stock Option Plan (a) extending the term thereof until April 21, 2015; (b) providing for grants of restricted stock, restricted stock units and performance awards; (c) eliminating the maximum limitation of 100,000 shares of common stock subject to stock options granted to any optionee per calendar year; and (d) renaming the Plan as the Amended and Restated Stock Incentive Plan.

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Abstention** | ** ** | **Broker Non-Votes** | ** ** |
|---------------|------------|-------------------|------------|----------------|------------|----------------------|------------|
|          |       |              |       |           |       |                 |       |
| 3,850,754     |       | 2,143,435         |       | 7,832          |       | 2,532,997            |       |

 

**ITEM 6. EXHIBITS:**

 

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

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on August 8, 2005 on its behalf by theundersigned 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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**EXHIBITINDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                         |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                                    |
| 10.1        |       | Severance Agreement dated as of July 15, 2005 between GTSI and Terri  Allen (filed herewith)                                                                                                                                                       |
| 10.2        |       | Fifth Amendment  to Credit Facilities Agreement (filed herewith) dated as of August 8, 2005  among GTSI, Technology Logistics, Inc., GE Commercial Distribution Finance  Corporation, as Administrative Agent and a Lender, and the other Lenders. |
| 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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