UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

Commission File Number: 0-19394

GTSI CORP.

(Exact name of registrant as specified in its charter)

Delaware		54-1248422
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
2553 Dulles View Drive, Suite 100, Herndon, VA		20171-5219
(Address of principal executive offices)		(Zip Code)

703-502-2000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, $0.005 par value		NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. YES o NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive DataFile required to be submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO þ

The aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of June 30, 2009 was $42,809,049.

The number of shares outstanding of the registrant’s common stock on February 26, 2010 was 9,577,750.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K are incorporated by reference to GTSI’s proxy statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of GTSI’s Stockholders scheduled to be held on April 21, 2010.

 

 

CONTENTS

		Page
PART I
Item 1. Business			1
Item 1A. Risk Factors			11
Item 1B. Unresolved Staff Comments			17
Item 2. Properties			17
Item 3. Legal Proceedings			17
Item 4. Submission of Matters to a Vote of Security Holders			17
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			18
Item 6. Selected Financial Data			22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			36
Item 8. Financial Statements and Supplementary Data			37
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			64
Item 9A. Controls and Procedures			64
Item 9B. Other Information			64
PART III
Item 10. Directors, Executive Officers and Corporate Governance			65
Item 11. Executive Compensation			65
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			65
Item 13. Certain Relationships and Related Transactions, and Director Independence			65
Item 14. Principal Accounting Fees and Services			65
PART IV
Item 15. Exhibits, Financial Statement and Schedules			66
Signatures			67
Schedule II Valuation and Qualifying Accounts			68
Exhibit Index			69
Exhibit 23.1
Exhibit 23.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32
Exhibit 99.1

Disclosure Regarding Forward-Looking Statements

Readers are cautioned that this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (“Exchange Act”) relating to our operations that are based on our current expectations, estimates and projections. Words such as “expect,” “believe,” “anticipate,” “plan,” “intend” and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Our actual results may differ materially from what is expressed or projected in these forward-looking statements. The reasons for this include the factors discussed in Item 1A, Risk Factors, of this Annual Report on Form 10-K. We specifically disclaim any obligation to update these forward-looking statements. These forward-looking statements should not be relied on as representing our estimates or views as of any subsequent date.

PART I

ITEM 1.		BUSINESS

Overview

Founded in 1983, GTSI Corp. is a Delaware corporation with over 26 years of experience focused exclusively on selling information technology (“IT”) products and solutions to U.S. Federal, state and local governments and to prime contractors that are working directly on government contracts. We use the terms “GTSI,” “Company,” “we,” “our,” and “us” to refer to GTSI Corp. and its subsidiaries. During this period, our customers have come to rely on GTSI to translate business challenges into practical technology solutions for today’s governments. “GTSI” is a registered service mark of GTSI Corp. All other trademarks and service marks are proprietary to their respective owners.

We sell to departments and agencies of the U.S. Federal Government, as well as state and local governments, and prime contractors. Our total sales were $762 million, $821 million and $723 million for the years ended December 31, 2009, 2008 and 2007, respectively. We offer a competitive mix of logistical and procurement support to our customers. The approximate percentage of our sales by customer type for the years ended December 31 was:

		2009				2008				2007
Federal Government			72	%			70	%			63	%
Prime Contractors			23	%			23	%			27	%
State and Local Governments			5	%			7	%			10	%
Total			100	%			100	%			100	%

Additional information related to net income (loss), total assets, significant customers and long-lived assets is provided in the consolidated financial statements and the accompanying notes to the consolidated financial statements appearing in Part II, Item 8 of this Annual Report on Form 10-K (this “Form 10-K”).

The IT solutions we offer to our customers are enterprise product-based, with many including a service component. Enterprise product-based components are identified and purchased by government procurement officers under standard government contracts, ranging from single agency contracts to those which are available to the entire U.S. Federal Government or state government contracts such as U.S. Communities. We are well-positioned to fulfill the requirement of having an appropriate contract vehicle as we hold a contract portfolio that includes nearly four dozen such contracts, including many major Federal agency-specific contracts.

To fulfill product demand, we maintain an ISO 9001:2000-registered Integration and Distribution Center containing approximately 142,000 square-feet in Northern Virginia, adjacent to Washington Dulles International Airport. We use the proximity to the airport and close systems relationships with our customers and vendors to provide timely delivery of our customers’ mission-critical applications. We leverage our Integration and Distribution Center and matching logistics expertise to offer a wide variety of managed fulfillment and value added services such as:

	•		Hardware integration
	•		Customer image propagation
	•		Automated system diagnostics and data capture
	•		Customer asset tagging
	•		Complex configurations of various IT solutions, such as Voice over Internet Protocol (“VoIP”)

Additionally, GTSI’s customer operations and purchasing teams are ISO 9001:2000-registered.

To help our customers acquire, manage and refresh their technology in a strategic and application-appropriate manner, GTSI has created a financial services capability to manage the entire technology lifecycle. GTSI offers lease arrangements to allow government agencies to acquire access to technology as an evenly distributed operating expense, rather than on the much more budget-sensitive and discontinuous capital expense basis. This is especially important to agencies with budget planning requirements that cover several future years and technology needs cannot be accurately planned on the same timeline. It also helps agencies keep their information management resources focused on the flow and security of agency information, rather than ownership of the technology itself.

Business Strategy

GTSI is committed to and focused on providing enterprise infrastructure technology solutions to the government customer. We believe there are significant opportunities to increase profitability through the continued development of our existing business by focusing on financial and professional services, and to expand on our relatively low market share within the growing government IT market.

GTSI continues to evolve as a provider of value-added enterprise infrastructure solutions that include both products and services to our government and system integrator customers. We have been successful in providing technical assistance to support complex, multi-vendor solutions and in priming as well as subcontracting with other service providers. While the larger infrastructure solutions sales transactions represent a small percentage of our total transactions, they represent the majority of our margin and profits. Going forward, we will continue to focus on these larger, more profitable transactions, and drive processes and changes to make the delivery of the smaller transactions more profitable. Specifically, we plan to:

Continue Focusing on the Government IT Market

Because of our exclusive focus on government, GTSI has developed the expertise and established the partner and customer relationships necessary to be a leader in this market. As a result, our marketing activities and sales force have been effective at reaching and servicing the government market consisting of government IT executives including chief information officers, procurement and contracting officers, information resource managers, as well as systems integrators, value-added resellers and prime contractors.

Leverage Technology Lifecycle Management (“TLM”)

GTSI provides TLM services for our government customers. TLM involves most aspects of the technology management process, including assessing and identifying technology needs, acquisition of those technologies, integration and implementation, ongoing services, asset disposal and financial services. We believe this model represents a distinctive advantage to our customers. Coupled with support services, technology refresh, and asset disposal, we offer our customers cost effective methods to manage technology infrastructure.

Retain and Obtain Government Contracts and Utilize Flexible Contract Vehicles

GTSI holds a wide range of government contracts, including multi-million dollar, multi-year contracts with the U.S. Department of Defense (“DoD”) and various federal civilian agencies, as well as several multiple award schedules and blanket purchasing agreements with a variety of DoD, federal civilian agencies, state, and local agencies. In addition, we also serve as a subcontractor, providing products and services to other companies holding government contracts. GTSI intends to continue identifying and pursuing contract vehicles that best leverage our broad selection of solutions, services, integration and distribution capabilities and partner relationships.

Continue to expand our Solution and Services

Over the course of 2009, GTSI was successful in developing and delivering services opportunities that expanded beyond a single technology, rather a host of technology set to fulfill our customer’s requirements. GTSI will continue to focus on this area most particularly in our Physical Security practice where this has become most prevalent, due to federal funding backed by the U.S. Department of Homeland Security (“DHS”). Integrated CCTV systems with networking, storage and communication requirements require specialize expertise that GTSI has successfully developed.

Provide a High-Quality Centralized Source for Procuring IT Products and Services

In addition to offering a vast line of computer hardware, software and peripheral products, GTSI offers pre- and post-sales technical support and assistance in the selection, configuration, installation and maintenance of the products and systems that we sell. We offer a wide range of IT solutions and products plus the convenience, flexibility and cost savings of obtaining infrastructure technology solutions from a centralized source. As we interact with our customers, we focus on providing high quality customer services associated with the order, delivery, installation and repair of the products we sell. In addition to our heritage product offerings, we also have capabilities to meet our customer’s needs with regard to data centers, networks, client devices, physical security, communications, and enterprise content and management.

Customers

Federal Government & Prime Contractors

GTSI has been exclusively dedicated to the Federal, state and local government marketplaces since our inception in 1983. Historically, over 20% of our revenue comes from prime contractors. Our most significant subcontracts are with companies such as Raytheon Company, General Dynamics, SAIC, Northrop Grumman and Lockheed Martin. Our top customer relationships include the U.S. Department of Army, U.S. Department of Veterans Affairs, DHS, Internal Revenue Service and the Federal Bureau of Investigation. While GTSI derives the majority of its sales from Federal Civilian and DOD sectors; we are also focused on continuing to grow our positions in the state and local and U.S. Intelligence marketplaces. The breakout of our U.S. Federal Government sales is approximated below:

		2009				2008				2007
Department of Defense			38	%			43	%			34	%
Civilian Agencies and Departments			37	%			32	%			36	%
Prime Contractors			25	%			25	%			30	%
Total			100	%			100	%			100	%

State and Local

GTSI’s sales in the state and local government market are generated mostly from county and city agencies. Cities and counties are faced with maintaining government services, including urban security and safety that improve the quality of life for constituents. With reduced budgets and workforce, agencies are forced to re-examine core competencies and outsource labor to maximize the efficiencies that advanced technology offers to cut costs, negotiating technology and service options, and address budget constraints are essential to automating processes and achieving operational efficiency. With the U.S. Communities Program, GTSI can address customer requirements, offer a needs assessment, procure best-of-breed technologies and be responsible for the delivery.

With over $1 billion in federal funds available to state and local governments for protection against terrorist and criminal threats, our focus will continue to expand and penetrate the state and local market segment with a strategic focus by our Physical Security practice on education, city infrastructure, maritime ports and airports. In addition, our Mobile Evidence Capture (“MEC”) practice continues to focus on law enforcement and public safety. MEC enables digital in-car video evidence to be captured, transmitted, stored and retrieved without human touch or manipulation to quickly and effectively comply with prosecution processes for civil and criminal cases. Much like Physical Security solutions, MEC is moving from analog to digital leveraging GTSI technical resources, competencies in security, wireless, networking and storage using existing processes for project management and services implementation.

Contracts

GTSI achieves its sales through Federal, state and local government contracts and open market procurements. Our contracts with the U.S. Federal Government include a General Services Administration (“GSA”) Schedule contract, Indefinite Delivery/Indefinite Quantity (“IDIQ”) contracts, Blanket Purchase Agreements (“BPAs”), Task Order contracts and Mission Oriented Business Integrated Services Schedule contract for consulting services.

We typically pursue formal government bids for IDIQ contracts and BPAs. Substantially, all of these bids are awarded on a “best value” to the government basis (which, depending on the bid, can be a combination of price, management and or technical expertise, past performance on other government contracts and other factors). We seek to use our professional services and other delivery capabilities, vendor partnerships, purchasing power, supply chain management and procurement expertise to compete successfully on federal government bid opportunities. These major procurements may involve millions of dollars in total sales, span multiple years and provide a purchasing vehicle for many government agencies. Items offered under our contracts include IT infrastructure (e.g. personal computing and communication devices, server/storage systems, networking equipment, security systems, enterprise software), program/project management, technical/engineering services, life-cycle maintenance, training and services.

The majority of our contracts allow GTSI to deliver comprehensive, enterprise-wide solutions that include both products and professional services. GTSI has established a team of experienced Program Managers to increase the size and scope of our program/contract portfolio, manage programs of increasing complexity, and strengthen profitability for the company.

General Services Administration

GTSI holds a GSA designated Schedule 70 contract for the sale of IT products and services. Schedule 70 contracts are multi-award schedule contracts managed by the GSA Center for IT Schedule Programs. In 2002, the U.S. Federal Government formally exercised its first of three five-year options to extend the GTSI contract through March 31, 2007. This schedule has since been extended six times through July 31, 2010 while GTSI is in negotiations on a new contract. As a result of GTSI’s past performance in our Services sector, we received an award with increased labor rates on the existing Schedule 70 contract, as well as expansion of new labor categories that appropriately define our business. Similarly, GTSI’s solution and service approach was recognized by GSA in our 2007 MOBIS contract award for consulting services.

GSA contracts provide all government agencies, certain international organizations, authorized prime contractors, and state and local governments with an efficient and cost-effective means for buying commercial information technology products and services. GSA purchasers may place unlimited orders for products under GSA contracts.

Our GSA contract contains price reduction clauses requiring that we pass on to government customers certain reduced prices we may receive from our vendors, but prohibits us from passing on price increases that exceed 10% for a period of one year. To mitigate the potentially adverse impact of any such price increase, we work with most of our GSA contract vendors to provide us with supply and price protection.

Indefinite Delivery/Indefinite Quantity

GTSI holds a number of IDIQ vehicles, through which the government establishes a purchasing vehicle and/or allocates funds for future purchases, without specifying purchase dates or quantity. IDIQ contracts offer greater flexibility than GSA contracts because they typically permit products and services to be added quickly and provide contractors more pricing flexibility. There are three types of IDIQ contracts: government-wide acquisition contracts (“GWAC”), multi-agency contracts (“MAC”) and single agency contracts. A GWAC is a task-order or delivery-order contract for information technology established by a single Federal agency for government-wide use upon approval by the Office of Management and Budget, while MACs accept orders from the same agency, and from other agencies under the authority of the Economy Act.

Blanket Purchase Agreements

Individual GSA ordering agencies may enter into GSA-authorized BPAs with GSA contract holders. BPAs are similar to second-tier contracts under a contractor’s GSA contract. BPAs enable agencies to obtain better pricing based on volume ordering, and specialized services to address specific agency needs or preferences. BPAs also serve to decrease an agency’s acquisition costs by streamlining the ordering process.

GTSI maintains several Federal Supply Schedule BPAs that are authorized under our GSA Schedule 70 contract. GSA authorized BPAs incorporate many terms, conditions and products offered on GSA Schedule contracts, often at prices lower than those available on the GSA schedules. We normally enter into separate agreements with vendors to offer reduced BPA prices to the government. Our BPAs are agency specific and allow us to increase our focus on specific products and services that are designed to satisfy the requirements of individual customers.

Task Order Contracts

GTSI has also entered into a number of Task Order contracts with Federal Government agencies. Task Order contracts specify the period of performance, including the number of option periods, and specify the quantity and scope of products and services the federal agency will acquire under the contract. Task Order contracts allow agencies to enter into contracts before their specific service/product requirements are known. After award of the master contract, the federal agency will issue individual task orders, as needed, to address specific defined requirements. Task orders typically include a statement of work (“SOW”), and/or a bill of materials (“BOM”) that define the services or products the contractor will be obligated to deliver.

State and Local

State and local contracting vehicles generally fall into two categories: individual competitive procurements for specific IT solutions or state and locally-based IDIQ contracts. State and local procurements typically require formal responses from a prospective bidder. Each state maintains a separate code of procurement regulations that must be understood. Compliance is required to successfully market and sell to individual states. GTSI currently maintains several state and local IT contracts, regularly submits written bids to state and local governments and is on a number of state and local government bid lists.

In May 2009, GTSI was re-awarded the U.S. Communities (“USC”) contract for a four-year term with a two to three-year extension option. U.S. Communities is a pre-competed cooperative purchasing agreement available to cities, counties, special districts (airport, water, etc.), state agencies, K-12 schools, higher education, and large non-profits such as hospitals and clinics in all 50 U.S. states. Our USC contract is our primary vehicle for the state and local sales organization. Entering our seventh year with the U.S. Communities Contract, we have established Programatic relationships with customers to offer the operational efficiencies that the U.S. Communities contract can allow, with GTSI providing professional services to ensure project delivery, enabling our customer to focus on their constituent business objectives.

In addition, GSA provides access to state and local government agencies to utilize GSA Schedules. Multi-state contracts enable individual states to utilize the buying power of multiple states to reduce costs based on volume purchasing.

The solutions sold under the USC contract utilize competitive labor rates for professional services at a firm-fixed price or time and material basis. Volume discounts are available to public agencies and are offered on a case by case basis depending on agency commitment and buying power. With solutions such as Physical Security, Data Center Virtualization and Modernization, and MEC as a focus, USC allows us to maintain compliance with funding milestones, act as the project manager, and provide the delivery engineering and project management to achieve customer acceptance and mission compliance.

Open Market

While open market is not a contract vehicle, GTSI has processes and procedures in-place to utilize open-market pricing, separate and apart from GSA Schedules, IDIQs and BPAs. We also sell enterprise products and services to government-serving prime contractors including systems integrators through open market procurements. Certain contract vehicles allow a small percentage of open market pricing to be included to supplement those products and services that are on contract.

Solutions, Services and Products

GTSI continuously monitors and evaluates existing and emerging technologies and trends to ensure that we offer our customers the most appropriate technology for their demanding applications. GTSI provides our customers IT infrastructure solutions and services custom to their specific needs.

Technology Lifecycle Management

GTSI’s TLM methodology combines professional and financial services with strong industry partnerships into a comprehensive framework for managing each phase of IT infrastructure. TLM has three core elements: planning of the entire process of IT Infrastructure Optimization, in which we identify and assess, acquire, implement and integrate, support, refresh and disposal before acquisition; ongoing Program Management of the above lifecycle elements; and separating the acquisition necessities of IT Infrastructure Optimization from realities of three-year budget cycles and narrowly defined budget line items. By proactively planning for each phase with a long term approach, funding and management of IT programs can be more effectively aligned with business goals and realization of benefits. GTSI TLM helps customers reduce total cost of ownership and risk, while increasing flexibility and efficiencies.

Solutions

In 2009, we continued our realignment around solutions providing us with the greater opportunity for sustained return on investment. GTSI embraced the evolving government requirements in IT Infrastructure including Data Center, Data Networks and Security. This enabled us to further focus, deepen and align the development of our capabilities to consistently provide IT Infrastructure solutions tailored to specific customer environments in a manner consistent with government planning and investing. Using a TLM approach, GTSI Solutions combine professional services, program management services, support services, integration services, financial services and leading Original Equipment Manufacturer (“OEM”) products based on individual customer requirements in key areas, including:

	•		Client, including Desktop Virtualization and Thin Client
	•		Networking, including Unified Communications and Visual Information Systems
	•		Data Center, including Server Virtualization, Power & Cooling, and Disaster Recovery
	•		Security — Cyber and Physical
	•		IT Service Management, including Asset Management, Network and Data Center Management

Services

GTSI Services provide our government customers with the resources to design, configure, implement and support state-of-the art technology products and solutions; and facilitates the Technology Lifecycle Management method of managing scalable, IT infrastructure as a service. Our services ensure the products we deliver are interoperable, efficient, support the customer environment, and protect customers’ investments. The Services strategy supports our government contracts, company sales and partner efforts for growth in the market. We believe that providing these services along with industry-leading manufacturer products differentiates GTSI from its competition.

GTSI Services is comprised of four main areas — Professional Services, Integration Services, Support Services and Financial Services.

Professional Services

The Professional Services team includes solutions architects, technical engineers, security consultants and project managers. Skilled engineers possess the technical certifications that align with GTSI’s manufacturing partners which allow us to successfully implement customer solutions. This team also maintains pertinent professional certifications, such as ITIL and CISSP, and security cleared resources to ensure GTSI is able to provide services across all government agencies. Project Managers lead engagements using PMBOK best practices. They hold Project Management Institute professional certifications and are skilled in managing projects using Earned Value Management standards.

GTSI’s Professional Services start with site surveys and assessments, through to infrastructure design, implementation, and ongoing support. Expertise areas include network infrastructure, data management, enterprise computing, cyber security, physical security, and enterprise software. We use industry best practices to create standard tools and procedures to deliver successful engagements to optimize performance. GTSI leverages resource experience, knowledge and past performance, with the use of the Plan, Design, Implement, Operate (“PDIO”) methodology for repeatable, predictable, and efficient delivery and execution.

Integration Services

Integration Services provides engineering, integration, asset management, and logistical support for complex assembly of hardware and software. Industry and professionally certified experts operate in our own ISO 9001:2000 Integration and Distribution Center to upgrade, install, test, and configure systems to agency standards. Each project is assigned a dedicated manager to oversee logistics support and fulfillment of services to streamline deployment, reduce downtime and manage costs. GTSI integration engineers and consultants have proven experience in leading integration platforms. Our knowledge of our government customers, coupled with strong industry and technology expertise, help mitigate the risks involved in integrating new technologies.

GTSI’s Asset Management technology provides comprehensive asset management systems that inventory, track and securely dispose of an organization’s assets. Our solution includes Radio Frequency Identification (“RFID”), Unique Identification (“UID”), and Real-Time Location System (“RTLS”) capabilities. GTSI has a scalable asset management solution to enable an agency to track inventory, monitor asset location, manage software libraries, schedule maintenance, track financial information, and be alerted to high priority events or changes. This solution helps agencies meet compliance and regulatory standards. Asset Disposal services provide agencies with a method to eliminate unnecessary equipment in a safe, cost effective manner that are in compliance with DOD standards, and includes certificates of destruction.

Support Services

GTSI’s proactive approach to the sustainability of the IT infrastructure is reinforced by the Support Services offerings to help customers increase productivity and extend the life of IT assets. GTSI Support Services help overcome day-to-day technology challenges and allow agencies to stay focused on key business objectives. Our portfolio of renewable, post-implementation services ensures rapid problem resolution and a reduction in total cost of ownership through decreased downtime and proactive support. These capabilities include global replacement of parts, multi-vendor first-call and onsite support, online monitoring of support status, and software updates.

We believe that two additional significant capabilities provide a differentiator from the competition to help customers maintain technology infrastructures — Support Service Center and SupportNet. Support Service Center offers dedicated representative, first call support for single or multi-vendor requirements 24 x 7 via phone or web portal, where customers may also track incident management reports. SupportNet provides customers a secure portal with warranty and maintenance data for multi-vendor inventories. It allows customers a comprehensive view to proactively manage, aggregate and co-terminate support contracts.

Financial Services

GTSI Financial Services is a dedicated team of finance professionals who apply their understanding of government policies and regulations into creating a procurement strategy that helps customers gain quicker access to the technology that meets their needs. GTSI Financial Services provides flexible financing options for the entire technology lifecycle, using an agency’s operating and maintenance budget as a more flexible and predictable means than a capital expenditure.

Products

GTSI has strong strategic relationships with hardware and software industry leading OEMs. GTSI includes these products in the solutions provided to our customers. For example, GTSI includes leading hardware servers and virtualization software in virtualization solutions, security, routers and switches for voice and data network modernization, and rugged digital cameras and sensors for physical security solutions.

The following table indicates, for the years ended December 31 (dollars in millions), the approximate sales by product category and related percentages of total sales.

Sales Type		2009								2008								2007
Hardware		$	495.6				65.1	%		$	585.7				71.3	%		$	530.0				73.3	%
Software			182.4				23.9	%			159.7				19.4	%			111.6				15.4	%
Services			55.6				7.3	%			56.5				6.9	%			59.7				8.3	%
Financing			28.3				3.7	%			19.3				2.4	%			22.2				3.0	%
Total		$	761.9				100.0	%		$	821.2				100.0	%		$	723.5				100.0	%

Strategic Partner Relationships

GTSI maintains strong relationships with a core set of strategic partners. These partners are industry leaders and are established in the government market. GTSI facilitates business to government customers on behalf of partners through our TLM methodology, while our partners enable GTSI to deliver technology solutions to our customers. Our major strategic partners include: Cisco, Sun Microsystems, Microsoft, Hewlett Packard, Panasonic, and Network Appliance.

Additionally, we establish and grow alliances with specialized technology companies that complement our core partners which then comprehensively address our customer needs for their solutions environment.

GTSI brings our partners several advantages in the government market by providing:

	•		The unique ability to design, procure, install, operate, and refresh solutions through our Infrastructure as a Service business model
	•		A gateway to the complex government market through a significant number of diverse contract vehicles
	•		Access to the government customer through GTSI’s proactive sales force providing solutions, services and products
	•		Lower cost overhead associated with government contractor compliance and procurement regulations

GTSI has several Partner Managers who support our Strategic Partners. Their goal is ensure that those partners remain at the core of our Infrastructure as a Service business model.

The terms of agreements with our vendors vary, but typically permit us to purchase products to combine with integration and professional services for transactions with government customers. Very few of our agreements require us to purchase any specified quantity of product. GTSI usually requires our partners to provide us with supply and price protection for the duration of specifically signed government contracts. Other than supply agreements under term government contracts, our vendor agreements are typically terminable by GTSI or the vendor on short notice, at will or immediately upon default by either party, and may contain limitations on vendor liability. These vendor agreements also generally permit GTSI to return previous product purchases at no charge within certain time limits for a restocking fee or in exchange for other products of such vendor.

Our strategic partners may provide us with various forms of marketing and sales assistance, including sales incentives, market development funds, cooperative advertising and sales events. They typically provide funding to offset all or part of the costs of such efforts. Partners may also provide sell-through and other sales incentives in connection with certain product promotions.

Inventory Management

We purchase products for resale both directly from manufacturers and indirectly through distributors and resellers. During 2009, we purchased approximately 67% of the products we sold directly from manufacturers and the remaining amount from distributors and resellers. Product is shipped to our customers both from our ISO 9001:2000 Integration and Distribution Center and directly from our suppliers. The receiving, inventory, and shipping processes in our Integration and Distribution Center are highly automated. Products are tracked as they move through the facility via radio frequency scanning of UPC bar codes. Our shipping process captures product model numbers and serial numbers via bar code scan and ties them directly to order and carrier information. We ship products with a wide variety of carriers, using automation which selects the best carrier based on customer location, size of shipment, and desired service levels. We are able to negotiate favorable rates with many carriers including FedEx and UPS.

We perform a wall-to-wall physical inventory each January and supplement that with regularly scheduled, system-controlled cycle counts throughout the year. Our cycle count schedule is constructed to result in complete inventory coverage approximately every two months.

We implemented an RFID tagging solution in January 2005, updated in 2007, which enables us to apply RFID labels to case and pallet-load shipments that meet published DoD Gen-2 requirements.

Marketing and Sales

GTSI’s strategic marketing initiatives continue to focus on communicating the Company’s transformation into a systems integrator, with substantial solutions and services capabilities. In 2009, GTSI utilized radio advertising, seminars, tradeshows, and webinars as primary marketing tools to reach key audiences. GTSI also launched its Customer Briefing Center and Solutions Lab, as a means to market the Company’s growing capabilities and best practices for addressing the key challenges that today’s government IT decision makers face. The marketing and branding efforts reaffirm the Company’s belief that it has the resources and expertise to deliver best business practices, engineering skills, and financial options that combine myriad benefits into a single-source delivery of leading-edge information technology to governments.

Our sales organization is focused on understanding the current and emerging demands of our customers, and demonstrating how the Company delivers comprehensive solutions that encompass the products and services that meet those needs. The efforts continue to provide coverage that supports existing customers, while at the same time advancing initiatives that focus on new accounts and new solution offerings to potential customers. To accelerate those activities, in 2009, the sales and marketing organizations were integrated under the same leadership, enabling the teams to increase collaboration and alignment of marketing efforts and to better respond to the technology priority sectors of President Obama’s administration.

Competition

The government IT market is highly competitive with a wide variety of technology and service players. GTSI’s competition includes traditional hardware and software manufacturers and resellers, mid-tier systems integrators, and IT infrastructure solutions and service providers.

We believe that the principal competitive factors in the government IT market include:

	•		Past performance within the government market
	•		Expertise in government procurement processes (where standardized contracts exist)

	•		Existing customer and partner relationships (for which there is traditionally a high barrier to entry)
	•		Technical expertise
	•		Logistical capability
	•		Customer service and support

The growing trend in government to consolidate and reduce operational costs as well as the current economic environment will increase the needs of government agencies to extend the lifecycle of their existing legacy systems to deliver mission-critical services. In addition, flexible styles of IT infrastructure service are emerging such as infrastructure as a service (IaaS) and private clouds. Government agencies need guidance developing migration strategies and technology solution maps to extract more from their existing infrastructure while working toward those managed services environments.

We are well positioned with our agility and deep IT infrastructure expertise to help our customers migrate, implement and operate these new infrastructure environments. To enhance our strategic position in the government infrastructure services market, we are investing in our service and solution offerings as well as training and certification programs for our engineering and technical staff.

Scale and scope are important dimensions in the government infrastructure market. A number of our competitors are much larger than GTSI and have greater financial, marketing and technological resources. This difference in scale could in some cases produce a material impact on the promotional and sales support requirements of our business. We believe however, that we have a competitive advantage over our competition because of our more than 26 years of service to government, strong relationships with our customers, strategic small business relationships, TLM approach, deep technical expertise, extensive contract portfolio, financial services, and our ability to quickly adapt and respond to our customer requirements.

Backlog

We identify an order as backlog as soon as we receive and accept a written customer purchase order. Backlog fluctuates significantly from quarter to quarter because of the seasonality of the U.S. Federal Government ordering patterns and changes in inventory availability of various products. Our backlog includes hardware and software orders that have not shipped or delivered (“unshipped backlog”) as well as orders that have shipped or delivered but cannot be recognized as revenue at the end of the reporting period, since title passes to our customers when the orders reach the destination. Backlog also includes services that have not been performed. Total backlog, excluding leasing revenue, as of December 31, 2009 was $144.9 million compared to $125.6 million as of December 31, 2008. Unshipped backlog as of December 31, 2009 was approximately $127.8 million, compared to $116.1 million as of December 31, 2008.

Employees

At February 26, 2010 we had 615 employees, including 368 in sales, marketing and professional services; 80 in operations; and 167 in finance, IT, contracts and legal, and other support functions. None of our employees are represented by a labor union and we have not experienced any labor-related work stoppages.

Available Information

GTSI is traded on the NASDAQ Global Market under the symbol GTSI (See Item 5 of this Form 10-K). Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements for our annual stockholders’ meeting, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on our web site at www.GTSI.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. All of GTSI’s current required Exchange Act filings with the SEC, as well as press releases and other investor relations’ information, may be obtained free of charge by request to: Investor Relations, GTSI Corp., 2553 Dulles View Drive, Suite 100, Herndon, VA 20171-5219. Telephone (703) 502-2540.

ITEM 1A.		RISK FACTORS

There are many factors that affect our business and results of operations, some of which are beyond our control. The following is a description of some important factors that may cause actual results to differ materially from those in forward-looking statements and from historical trends.

We rely on a small number of large transactions for significant portions of our sales and gross margins, and our operating results and cash flows may decline significantly if we fail to secure additional large transactions.

We rely on Federal Government agencies and departments to provide a substantial portion of our sales either directly or through prime contractors with which we work. We have derived, and believe that we will continue to derive, a significant portion of our sales from a limited number of projects and transactions with the Federal Government. For the year ended December 31, 2009, approximately 95% of our sales came from the Federal Government. The completion or cancellation of a large project or a significant reduction in scope could significantly reduce our sales and gross margins. In addition, if we fail to secure an equal number of large transactions in the future, our results could be negatively impacted. Any dispute, failure to exercise an extension, or contract not renewed as a result of a re-compete could have a material adverse impact on our future operating results and gross margins.

We continue to shift our business model from a reseller of products to a high-end solutions provider and this new model has certain risks, including increased competition, which may impact future results.

We continue to evolve our business from one which resells commodity IT products to one which provides value-added solutions to our government customers. A number of risks are inherent in this strategy. We may not be able to successfully maintain workforce which has the technical skills to provide more complex technology to customers. Services and solutions require different internal accounting, tracking, and project management procedures, and there is no assurance we will be able implement and maintain those necessary procedures. We are now competing against organizations which have greater experience and past performance in selling solutions to government customers. Some of these competitors also have significantly greater financial, technical and marketing resources, generate greater sales and have greater name recognition than we do. Additionally, efforts spent on evolving to a high-end solutions business model may detract from operating results.

We believe our ability to continue to compete also depends in part on a number of competitive factors, including:

•

Expertise in government procurement processes where standardized contracts exist

•

Existing customer and vendor relationships (for which there is traditionally a high barrier to entry)

	•		Technical expertise
	•		Logistical capability
	•		The ability of our clients or competitors to hire and retain project managers and other senior technical staff
	•		The price at which others offer comparable technical solutions
	•		The extent of our competitors’ responsiveness to client needs

If we are unable to compete effectively we could experience operating losses and our market share may decline, adversely affecting our results of operations and financial condition. We also will need to continue to develop additional internal technical capabilities to identify, develop, market and sell more complex solutions, and there is no assurance we will be successful in these endeavors.

Any issue that compromises our relationship with agencies of the Federal Government would cause serious harm to our business.

Our sales are highly dependent on the government’s demand for IT products. Direct and indirect sales to numerous agencies and departments of the Federal Government accounted for 95%, 93% and 90% of our sales in 2009, 2008 and 2007, respectively. We believe that Federal Government contracts will continue to be a source of the majority of our sales for the foreseeable future. For this reason, any issue that compromises our relationship with agencies of the Federal Government would cause serious harm to our business. A material decline in overall sales to the Federal Government as a whole, or to certain key agencies thereof, could have a materially adverse effect on our results of operations. Among the key factors in maintaining our relationships with Federal Government agencies are:

	•		Our performance on individual contracts and delivery orders
	•		The strength of our professional reputation
	•		The relationships of our key executives with customer personnel
	•		Our compliance with complex procurement laws and regulations related to the formation, administration and performance of Federal Government contracts

To the extent that our performance does not meet customer expectations, or our reputation or relationships deteriorate, this would cause a negative effect on our sales, profitability and cash flow. Noncompliance with government procurement regulations or contract provisions could result in substantial monetary fines or damages, suspension or debarment from doing business with the Federal Government, and civil or criminal liability.

Substantially, all of our government contracts are terminable at any time at the government’s convenience or upon default. If a government customer terminates one of our contracts for convenience, we may recover, at most, only our incurred or committed costs, settlement expense, and profit on work completed prior to the termination. Upon termination of a government contract for default, the government reserves the right to recover the excess costs of procuring the specified goods and services from a different contractor although GTSI would reserve the right to appeal. The effect of unexpected contract terminations would negatively impact our financial results.

Adverse changes in Federal Government fiscal spending could have a negative effect on our sales, gross margin, and cash flow.

Changes in Federal Government spending policies or budget priorities could directly affect our financial performance. Among the factors that could materially harm our business are:

	•		A significant decline in spending by the Federal Government in general or by specific departments or agencies in particular
	•		Changes in the structure, composition and/or buying patterns of the Federal Government
	•		The adoption of new laws or regulations changing procurement practices
	•		Delays in the payment of our invoices by government payment offices

These or other factors could cause Federal Government agencies and departments to reduce their purchases under contracts, to exercise their right to terminate contracts, or not to exercise options to renew contracts, any of which would cause us to lose future revenue.

If we fail to comply with any material provision or covenant of our Credit Agreement, we may not be able to continue to operate our business.

The affirmative, negative and financial covenants of our Credit Agreement impose certain operating restrictions and financial and reporting covenants on us. These restrictions and conditions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. The financial covenants require us, among other restrictions, to:

•

Maintain Tangible Net Worth not less than or equal to $45 million as dated the end of each fiscal month

•

Maintain Ratio of Total Liabilities to Tangible Net Worth not greater than 5.25 to 1.00 as dated the end of each fiscal month

•

Maintain Current Ratio not less than (i) 1.20 to 1.00 as of the last business day of the fiscal months of January, February, March, April, May, June, October, November and December and (ii) 1.15 to 1.00 as of the last business day of the fiscal months of July, August and September.

•

Maintain minimum Total Debt Service Coverage Ratio of 1.25 to 1.00 as dated the end of each fiscal month

The Company was in compliance with all financial covenants as set forth in the Credit Agreement as of December 31, 2009.

While the Company believes that we will remain in compliance with all of the financial and reporting covenants in the Credit Agreement, there can be no assurance that we will do so. A breach of any of the covenants or restrictions in the Credit Agreement could result in an event of default under the Credit Agreement. Such a default could result in the lenders discontinuing lending or declaring all outstanding borrowings, including our inventory financing, to be due and payable. If any of these events occur, we would need to find additional or alternative financing, if available, to refinance any such accelerated obligations. There can be no assurance that such financing would be available.

Our business may be negatively affected by current global economic and credit conditions.

Our $135 million Credit Agreement, which expires in May 2011, is provided by a syndication of several financial institutions that share the committed financing under the Credit Agreement. Economic and credit market conditions have presented banks and financial institutions with significant challenges, which has led a number of such entities to seek capital from the U.S. federal government. Although we monitor the ability of the financial institutions within the syndication to fulfill their counterparty responsibilities, future market conditions could affect the ability of one or more of these financial institutions to provide the financing that has been committed under the Credit Agreement. The inability to access our Credit Agreement would have a material, adverse effect on our business, results of operations, and liquidity.

Infrastructure failures could have a material adverse effect on our business.

We are highly dependent on our infrastructure to process orders, track inventory, ship products in a timely manner, prepare invoices to our customers, recognize revenue and otherwise carry on our business in the ordinary course. In 2005, GTSI implemented a new supply chain management system, the GTSI Enterprise Management System (“GEMS”), with software provided by a third party. During 2006, a significant number of enhancements and additional reporting capabilities were added which enabled management to make better decisions based on the information available. In May 2008, GTSI launched a large upgrade to the enterprise systems to gain advantage of features provided by the software vendor as well as utilize new architecture tools for supply chain fulfillment. As of December 31, 2009, GTSI continued to enjoy stabilized systems, but we cannot be assured that possible failures will not occur in the future. GTSI continues to plan for risk mitigation should a minor infrastructure disruption occur and as such will enforce operational continuity plans which are from time to time updated as needed.

Any material weaknesses in our internal control over financial reporting could have a material adverse effect on our business and a negative impact on our stock price.

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Any evaluation of the effectiveness of controls is subject to risks that those internal controls may become inadequate in future periods because of changes in business conditions, changes in accounting practice or policy, or that the degree of compliance with the revised policies or procedures deteriorates. Our ability to maintain effective internal controls over all processes depends on our continued success at hiring and preserving adequate resources for ensuring that the accounting for all areas of the business complies with U.S. generally accepted accounting principles.

If we fail to align costs with our sales levels, net losses may result in future years.

Our profitability is a function of our ability to generate sales, improve our efficiency, and control costs. We plan our operating expense levels based primarily on forecasted sales levels. These expenses and the impact of long-term commitments are relatively fixed in the short-term. A short fall in sales could lead to operating results being below expectations because we may not be able to quickly reduce our fixed expenses in response to short term business changes. In addition any reductions in workforce may have significant risks, including decreases in employee morale and the failure to meet operational targets due to the loss of employees.

During 2006, we incurred significant costs due to restatement related efforts, refinancing fees, and the impairment of our deferred tax asset. In addition, expenses related to our accounting and finance department increased during 2007, related to the remediation of previously disclosed material weaknesses in internal control over financial reporting and the on-going remediation of significant deficiencies and material weaknesses in internal control.

If we are unable to control our costs or generate sales to cover the costs required to run our business and correct our material weaknesses in internal control over financial reporting, net losses may result in future years and our business could be adversely affected.

Our quarterly sales, operating results and cash flows are volatile, which makes our future financial results difficult to forecast.

Our sales, operating results and cash flows have been, and are expected to continue to be, subject to significant fluctuations from quarter to quarter due to a number of factors including:

	•		The seasonality of our business due to the Federal Government’s buying and funding patterns
	•		Fluctuations in our gross margins due to variations in the mix of products sold and excess or obsolete inventory charges
	•		The number, size and scope of orders from our customers
	•		Demand for our services generated by strategic partnerships and certain prime contractors
	•		Availability of price protection, purchase discounts and rebate programs from vendors
	•		Contractual terms and degree of completion of projects
	•		Changes in our sales cycles as we move towards solution selling

Our recent level of product gross margins may not be sustainable. In addition, changes in services gross margin may result from various factors such as changes in the mix between technical support services and advanced services, as well as the timing of service contract initiations and renewals. As a consequence, sales volumes and operating results for future periods are difficult to predict and, therefore, prior results are not necessarily indicative of results to be expected in future periods.

Because we sometimes work with third parties, any failure by these third parties to satisfactorily perform their obligations could hurt our reputation, operating results and competitiveness.

We offer certain of our services to our customers through various third-party service providers engaged to perform these services on our behalf. In addition, we outsource parts of our operations to third-parties and may continue to explore opportunities to outsource others. In these engagements, we may engage subcontractors or we may act as subcontractor to the prime contractor of an engagement. If these third parties fail to maintain adequate levels of support, do not provide high quality services or cease or reduce operations, our business, operations, customer relations and sales may be negatively impacted and we may be required to pursue replacement third-party relationships, which we may not be able to obtain on as favorable terms or at all. In addition, the inability to negotiate terms of a contract with a third party, the refusal or inability of these third parties to permit continued use of their services by us, or the termination by the client or prime contractor of our services or the services of a key subcontractor would harm our operating results.

Our dependence on certain strategic partners (vendors) makes us vulnerable to the extent we rely on them.

We rely on a concentrated number of strategic partners for the majority of our hardware, software and related services needs. The terms of agreements with our vendors vary, but typically permit us to purchase products and services, that may be combined with integration and professional services for transactions with our government customers. Our vendor agreements are typically terminable by GTSI or the vendor on short notice, at will or immediately upon default by either party. If we can no longer obtain our hardware and software needs from our major suppliers due to mergers, acquisitions or consolidation within the marketplace, material changes in their partner programs, their refusal to continue to supply to us on reasonable terms or at all, and we cannot find suitable replacement suppliers, it could have a material adverse impact on our future operating results and gross margins.

We may not qualify as a small business for new contract awards.

GTSI maintains a “small business” status under its GSA Schedule contract, ITES contract and several BPAs it held in 2008 based upon GTSI’s size status at the time of the contracts’ original award dates. As a result, GTSI enjoys certain benefits, including being able to compete for small business orders, qualifying as a small business subcontractor, bidding pursuant to small purchase procedures directed to non-manufacturer small business, and offering government agencies an avenue to meet their internal small business purchase goals.

A company’s size status under a contract is based on the North American Industry Classification System (“NAICS”) Code referenced in the subject contract’s solicitation. Depending on the NAICS Code referenced in a solicitation, GTSI may or may not qualify as a small business for new contract awards; further, new Federal Acquisition Regulations, effective June 30, 2007, will require a small business contractor to recertify their size status prior to an extension for a contract with a term of longer than five years, and in other specific circumstances.

GTSI is still currently negotiating for their new GSA IT Schedule 70 and upon award of the new GSA Schedule Contract, GTSI will be classified as a “Large Business”.

Any potential future acquisitions, strategic investments or mergers may subject us to significant risks, any of which could harm our business.

Our long-term strategy may include identifying and acquiring, investing in or merging with suitable candidates on acceptable terms. In particular, over time, we may acquire, make investments in, or merge with providers of product offerings that complement our business. Currently, our financing agreement prohibits any acquisitions without our lender’s prior consent. Acquisitions would involve a number of risks and present financial, managerial and operational challenges, including:

	•		Diversion of management attention from running our existing business
	•		Possible additional material weaknesses in internal control over financial reporting
	•		Increased expenses including legal, administrative and compensation expenses related to newly hired employees
	•		Increased costs to integrate the technology, personnel, customer base and business practices of the acquired company with our own
	•		Potential exposure to material liabilities not discovered in the due diligence process

	•		Potential adverse effects on our reported operating results due to possible write-down of goodwill and other intangible assets associated with acquisitions
	•		Acquisition financing may not be available on reasonable terms or at all

Any acquired business, technology, service or product could significantly under-perform relative to our expectations, and we may not achieve the benefits we expect from our acquisitions. For all these reasons, our pursuit of an acquisition, investment or merger could cause our actual results to differ materially from those anticipated.

Any potential future new lines of business may subject us to significant risks, any of which could harm our business.

Our long-term strategy may include new lines of business within the federal and commercial business arena, including but not to limited healthcare solutions and management consulting services. Any new lines of business would involve a number of risks and could present financial, managerial and operational challenges. The results could significantly under-perform relative to our expectations, and we may not achieve the benefits we expect, which could have a material short term adverse impact on our future operating results (and gross margins).

ITEM 1B.		UNRESOLVED STAFF COMMENTS

None.

ITEM 2.		PROPERTIES

GTSI’s primary business is conducted from its corporate headquarters complex and distribution center located in Northern Virginia. We do not own any real property. In December 2007, GTSI executed a new 10-year lease for a new corporate headquarters in Herndon, Virginia and moved into the approximately 104,000 square feet facility in November 2008. In June 2008, GTSI relocated its datacenter to a separate location owned and operated by a third party. The 42-month agreement, which includes options for additional years, calls for the hosting and providing power services for a company installed datacenter. GTSI’s primary distribution and integration operations are located in a facility of approximately 142,000 square feet in Chantilly under a lease expiring in December 2011.

Our new corporate headquarters is a multi-tenant facility located in Herndon, Virginia approximately five miles from our existing distribution and integration center directly on the Route 28 corridor, across from Dulles International Airport. The facility has an efficient space plan that has allowed for the reduction of overall square footage, but incorporates a number of resources that enhances our business development such as a Client Solutions Center, upgraded testing labs, and meeting spaces to enable our employees to take advantage of a number of amenities that are provided to the tenants of the facility and enhance GTSI’s recruiting and retention of employees. GTSI has a number of lease options for current and future space commitments under its 10-year term lease.

We believe the facilities we are retaining are in good condition and suitable to meet our current needs for the conduct of our business. For additional information regarding our obligations under leases, see Note 15 of the consolidated financial statements in Part II, Item 8 of this Form 10-K.

ITEM 3.		LEGAL PROCEEDINGS

We have, in the normal course of business, certain claims, including legal proceedings, against us and against other parties. We believe the resolution of these claims will not have a material adverse effect on our results of operations or financial position. However, the results of any legal proceedings cannot be predicted with certainty.

Further, from time-to-time, agencies of the U.S. Government investigate whether our operations are being conducted in accordance with applicable regulatory requirements. U.S. Government investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. Government contracting. U.S. Government investigations often take years to complete and many result in no adverse action against us. We believe, based upon current information, that the outcome of any such government disputes and investigations will not have a material adverse effect on our financial position.

ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of GTSI’s security holders during the fourth quarter of 2009.

PART II

ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The annual meeting of GTSI’s stockholders is scheduled to be held at 10:00 a.m. on April 21, 2010, at the Company’s headquarters located at 2553 Dulles View Drive, Suite 100, Herndon, VA.

Price Range of Common Stock

GTSI’s common stock is traded on the NASDAQ Global Market under the symbol GTSI. As of February 26, 2010, there were 322 stockholders of record of the Company’s common stock. The following stock prices are the high and low sales prices of GTSI’s common stock during the calendar quarters indicated.

		2009								2008
Quarter		High				Low				High				Low
First		$	5.99			$	3.40			$	9.90			$	7.22
Second		$	6.09			$	3.68			$	8.40			$	6.82
Third		$	8.11			$	5.35			$	8.00			$	6.20
Fourth		$	8.04			$	4.96			$	6.43			$	4.51

GTSI’s transfer agent is American Stock Transfer & Trust Company, 59 Maiden Lane Plaza Level, New York, NY 10038; telephone 1-800-937-5449.

Dividends

The Company has never paid any cash dividends and does not anticipate paying cash dividends on its common stock in the foreseeable future. Also, as discussed in Note 8 to GTSI’s consolidated financial statements, included in Part II, Item 8 of this Form 10-K, GTSI Credit Agreement prohibits the payment of dividends.

Issuer Purchases of Equity Securities

On December 19, 2008, the Company’s Board of Directors (the “Board”) authorized a program for periodic purchases of GTSI common stock over a 24 month period in an aggregate amount not to exceed two million shares. On June 8, 2009, the Board authorized a program for periodic purchases of GTSI common stock through May 27, 2011 for an aggregate purchase price not to exceed $5 million (as discussed in Note 9 to GTSI’s consolidated financial statements, included in Part II, Item 8 of this Form 10-K), replacing GTSI’s stock repurchase program announced in December 2008. The Company did not purchase any of its common stock in 2008, except for shares acquired through net share settlements on option exercises. The following table sets forth the repurchases we made during the three months ended December 31, 2009:

		(a)								Total Number of				Maximum Dollar
		Total								Shares Purchased				Value of Shares
		Number				Average				as Part of				that May Yet Be
		of Share				Price Paid				Publicly Announced				Purchased Under the
Period		Purchased				per Share				Plans or Programs				Plans or Programs
October 1 to October 31			18,163			$	7.91				17,815			$	3,164,365
November 1 to November 30			18,724			$	6.60				18,589			$	3,041,678
December 1 to December 31			25,984			$	5.26				25,850			$	2,641,814
			62,871			$	6.43				62,254

Equity Compensation Plans

The following table summarizes information regarding GTSI’s equity compensation plans as of December 31, 2009.

Number of Shares

Number of Shares to be

Remaining Available for

Issued upon Exercise /

Future Issuance Under

Lapse of Outstanding

Weighted Average

Equity Compensation Plans

Options / Restricted

Exercise Price of

(excluding shares reflected

Stock Awards

Outstanding

in column (a))

Plan Category

(a)

Options

( c )

Equity compensation plans approved by stockholders

2,388,028

$

8.25

133,570

Equity compensation plans not approved by stockholders*

9,000

$

9.14

N/A

Total

2,397,028

$

4.35

133,570

PERFORMANCE GRAPH

The following graph is furnished per SEC regulations. It compares the annual percentage change in the cumulative total return on Common Stock with the cumulative total return of the NASDAQ Composite Index and a Peer Index of companies with the same four-digit standard industrial classification (SIC) code as the Company (SIC Code 5045 — Computers and Peripheral Equipment and Software)¹ for the period commencing January 1, 2004 and ending December 31, 2009. The stock price performance shown on the graph below is not necessarily indicative of future price performance.

		Dec. 31,				Dec. 31,				Dec. 31,				Dec. 31,				Dec. 31,				Dec. 31,
		2004				2005				2006				2007				2008				2009
GTSI Corp.			100.00				66.60				87.84				93.82				57.09				47.19
NASDAQ Market Index			100.00				102.20				112.68				124.57				74.71				108.56
SIC Code Index1			100.00				92.57				103.52				92.96				57.86				109.80

Since last year’s proxy statement, EN POINTE TECHNOLOGIES and POMEROY IT SOLUTIONS, INC. were deleted from SIC Code 5045 and the following 29 companies were added to SIC Code 5045:

ADAPTEC, INC.; AMERICAN SOFTWARE, INC.; AVNET, INC.; BELL MICROPRODUCTS, INC.; CHINA TECHNOLOGY GLOBAL CORPORATION; CIRCUIT CITY STORES, INC.; CIRTRAN CORPORATION; CONTINENTAL INFORMATION SYSTEMS CORPORATION; DEGAMA SOFTWARE SOLUTIONS, INC.; DUALSTAR TECHNOLOGIES CORPORATION; HENRY JACK & ASSOCIATES, INC; HITACHI, LTD.; IB3 NETWORKS, INC.; KONINKLIJKE PHILIPS ELECTRONICS, N.V.; MERISEL, INC.; NETTEL HOLDINGS, INC.; OFFICE DEPOT, INC.; PARLAY ENTERTAINMENT, INC.; PEERLESS SYSTEMS CORPORATION; PROGRESSIVE GAMING INTERNATIONAL CORPORATION; PROXYMED, INC.; SECURE NETWORKS, INC.; SED INTERNATIONAL HOLDINGS, INC.; SHARP HOLDING CORPORATION; STAPLES, INC.; SUPER LUCK, INC.; TRANS-LUX CORPORATION; TRANSNET CORPORATION; and UNITED STATIONERS, INC.

ITEM 6.		SELECTED FINANCIAL DATA

The following selected financial data is qualified in its entirety by reference to, and should be read in conjunction with, the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-K. The statement of operations data set forth below for the three years ended December 31, 2009, 2008 and 2007 and the balance sheet data as of December 31, 2009 and 2008 has been derived from GTSI’s audited consolidated financial statements which are included in Part II, Item 8 of this Form 10-K. The statement of operations data for the year ended December 31, 2006 and 2005 and the balance sheet data as of December 31, 2007, 2006 and 2005 is derived from audited consolidated financial statements of GTSI that are not included herein.

In reviewing the statement of operations data for the five years ended December 31, 2009, 2008, 2007, 2006 and 2005 and the balance sheet data as of December 31, 2009, 2008, 2007, 2006 and 2005 the following material items should be considered. Our net income and earnings per share for the year ended December 31, 2008, and our loss from operations, net loss and loss per share for the years ended December 31, 2006 and 2005 were materially affected by certain items, which affects the comparability of the information presented with other years’ results. Income tax benefit for the year ended December 31, 2008 included the reversal of the tax valuation allowance of $4.6 million as discussed in Note 13 to the consolidated financial statements. Cost of sales for the year ended December 31, 2006 included the positive effects of the derecognition of aged accrued payables of $5.8 million; a change in estimate of vendor rebates of $1.1 million; and a change in estimate of vendor payable amounts of $4.0 million. As a result of these items, loss from operations and net loss for the year ended December 31, 2006 was $10.9 million lower. Cost of sales for the year ended December 31, 2005 included the positive effects of a change in estimate of vendor payable amounts of $1.6 million, which was offset by a $5.6 million charge recorded in cost of sales to write-down inventory to its market value. As a result of these items, loss from operations and net loss for the year ended December 31, 2005 was $4.0 million higher. All notes referenced are in Item 8 of this Form 10-K. Our historical results are not necessarily indicative of our results for any future period.

Statement of Operations Data:

		For the years ended December 31,
		2009				2008				2007				2006				2005
		(in thousands, except per share data)
SALES		$	761,870			$	821,165			$	723,465			$	862,977			$	887,155
COST OF SALES			660,418				713,812				618,745				749,198				789,316
GROSS MARGIN			101,452				107,353				104,720				113,779				97,839
SELLING, GENERAL & ADMINISTRATIVE EXPENSES			98,107				103,848				106,335				115,240				114,514
IMPAIRMENT CHARGE			—				—				—				—				981
TOTAL OPERATING EXPENSES			98,107				103,848				106,335				115,240				115,495
INCOME (LOSS) FROM OPERATIONS			3,345				3,505				(1,615	)			(1,461	)			(17,656	)
INTEREST AND OTHER INCOME (EXPENSE), NET			6,320				2,524				416				(1,663	)			757
INCOME (LOSS) BEFORE TAXES			9,665				6,029				(1,199	)			(3,124	)			(16,899	)
INCOME (PROVISION) TAX BENEFIT			(4,209	)			1,806				(568	)			110				3,226
NET INCOME (LOSS)		$	5,456			$	7,835			$	(1,767	)		$	(3,014	)		$	(13,673	)
EARNINGS (LOSS) PER SHARE
Basic		$	0.56			$	0.80			$	(0.18	)		$	(0.32	)		$	(1.49	)
Diluted		$	0.56			$	0.79			$	(0.18	)		$	(0.32	)		$	(1.49	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic			9,706				9,760				9,571				9,371				9,166
Diluted			9,762				9,865				9,571				9,371				9,166

		As of December 31,
(in thousands)		2009				2008				2007				2006				2005
Working capital		$	62,167			$	67,473			$	69,985			$	70,197			$	60,208
Total assets			288,631				247,629				226,667				330,681				345,907
Borrowings under credit facility			—				22,387				18,031				30,912				48,014
Long-term liabilities, including debt			17,598				5,101				20,432				33,888				19,072
Total liabilities			192,344				157,515				148,954				253,998				267,740
Stockholders’ equity			96,287				90,114				77,713				76,683				78,167

ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, our audited consolidated financial statements and notes included in Part II, Item 8 of this Form 10-K. Historical results and percentage relationships among any amounts in the consolidated financial statements are not necessarily indicative of trends in operating results for any future period. We use the terms “GTSI,” “Company,” “we,” “our,” and “us” to refer to GTSI Corp. and its subsidiaries.

Overview

GTSI has over 26 years of experience in selling IT products and solutions primarily to U.S. Federal, state and local governments and to prime contractors who are working directly on government contracts. We believe our key differentiators to be our strong brand among government customers, extensive contract portfolio, close relationships with wide variety of vendors, and a technology lifecycle management approach.

The IT solutions we offer to our customers have a strong product component, along with a services component on many solutions. We connect IT’s leading vendors, products and services inside the core technology areas most critical to government success by partnering with global IT leaders such as Cisco, Sun Microsystems, Microsoft, Hewlett Packard, Panasonic and Network Appliance. GTSI has strong strategic relationships with hardware and software industry leading OEMs and includes these products in the solutions provided to our customers.

In 2009, we have continued our realignment around solutions that we believe will provide us with a greater opportunity for sustained return on investment. We directed our attention to government solutions, including mobile evidence capture, unified communications, mobile clinical applications, green IT, virtualization and cloud computing.

To help our customers acquire, manage and refresh this technology in a strategic and application-appropriate manner, GTSI has created a mix of professional and financial services capable of managing and funding the entire technology lifecycle. Additionally, GTSI offers leasing arrangements to allow government agencies to acquire access to technology as an evenly distributed operating expense, rather than on the much more budget-sensitive and discontinuous capital expense basis. We believe this model represents a distinctive advantage to our customers.

As discussed in more detail below:

	•		Our sales decreased approximately $59.3 million, or 7.2%, from 2008 to 2009;
	•		Gross margin decreased $5.9 million however gross margin as a percentage of sales increased 0.2 percentage points from 2008 to 2009;
	•		In 2009, Selling, General and Administrative Expenses (“SG&A”) decreased approximately $5.7 million however SG&A expenses as a percentage of sales increased 0.3 percentage points from 2008 to 2009;
	•		Our net income for the year ended December 31, 2009 was $5.5 million;
	•		Cash used in operations totaled $1.7 million for the year ended December 31, 2009;

Our business experiences significant fluctuations in our quarterly sales, operating (loss) income and net (loss) income as a result of the buying patterns of the federal government, our primary customer. In 2008, our results were positively affected by the reversal of the tax valuation allowance of $4.6 million, which was recorded as an income tax benefit and increased our net income by $4.6 million or an increase of $0.47 per share. For additional details, see the further MD&A discussion below, and Note 1 and 12 of the consolidated financial statements included in Part II, Item 8 of this Form 10-K.

We continue to evolve as a provider of value-added infrastructure solutions that include both products and services to our government and system integrator customers. We are continually identifying and eliminating certain redundancies within the Company and have terminated activities which have failed to yield adequate profitability. In 2009, we continued to be successful in providing technical assistance to support complex, multi-vendor solutions and in priming as well as subcontracting with other service providers. While the larger infrastructure solutions sales transactions represent a small percentage of our total transactions, they represent the majority of our margin and profits. Going forward, we will continue to focus on these larger, more profitable transactions, and drive processes and changes to make the delivery of the smaller transactions more profitable. In addition, we will continue to take other action to maintain a profitable company.

Critical Accounting Estimates and Policies

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We have included below our policies that are both important to our financial condition and operating results, and require management’s most subjective and complex judgments in determining the underlying estimates and assumptions.

The following list of critical accounting estimates and policies is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements in Item 8 of this Form 10-K. Accounting policies and estimates that management believes are most important to our financial condition and require management’s significant judgments and estimates pertain to revenue recognition, transfer of receivables, valuation of inventory, capitalized internal use software, accounts payable and income taxes. We have discussed the application of these critical accounting estimates and policies with the Audit Committee of our Board of Directors.

Revenue Recognition

We recognize revenue when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectibility is reasonably assured. The majority of our sales relates to physical products and is generally recognized when title and risk of loss to the products sold passes to the customer. Based on our standard shipping terms, title generally passes upon the customer’s receipt of the products. This requires us to analyze sales near the end of reporting periods to estimate the amount of products in transit to the customer that cannot be recognized as revenue. Many of our sales of physical products are shipped to our customers directly from our vendor partners. The accurate recording of revenue for these transactions relies upon the accuracy of shipment dates we receive from our vendors and is subject to additional estimates and judgments by management.

In accordance with FASB ASC 985-25, Software Revenue Recognition, the Company recognizes software related revenue from re-selling third party software licenses that do not require significant production, modification or customization, when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured.

When a customer order contains multiple items such as hardware, software and services which are delivered at varying times, the Company determines whether the delivered items can be considered separate units of accounting as prescribed under FASB ASC 605-25, Revenue Recognition, Multiple-Element Arrangement. ASC 605-25 states that delivered items should be considered separate units of accounting if delivered items have value to the customer on a standalone basis, there is objective and reliable evidence of the fair value of undelivered items, and if delivery of undelivered items is probable and substantially in GTSI’s control.

We also offer lease and other financing arrangements to customers to acquire technology. These arrangements typically have terms from two to four years and are generally accounted for as sales-type leases under FASB ASC 840, Leases.

Certain of our service and solution agreements require the evaluation of pattern of performance. Revenues on professional service contracts are generally recognized using the proportional-performance basis of accounting. For some professional services engagements the completed-performance method is used when there are customer-specified subjective acceptance criteria.

At the time of sale, we record an estimate for product returns based on historical experience. Management reviews the assumptions regarding the lag time and volume of sales returns at least on a quarterly basis, and changes in the estimates are recorded in the period in which they occur.

In accordance with FASB ASC 605-50, Revenue Recognition, Customer Payments and Incentives, we record vendor rebates received under our vendor incentive programs pursuant to a binding arrangement as a reduction of cost of sales based on a systematic and rational allocation that results in progress by the Company toward earning the rebate provided the amounts are probable and reasonably estimable. If the rebate is not probable and reasonably estimable, it is recognized as the milestones are achieved.

Financing Receivables

We enter into complex agreements with our customers to provide IT solutions with payment terms generally spread over a two to four year period. Usually we monetize these future revenue streams by selling such receivables to third party financial institutions. We have master service agreements with multiple lenders each with varying terms. These agreements, as well as the individual transaction agreements, require significant analysis to determine whether the transfer of the receivable should be accounted for as a sale or a secured borrowing with pledge of collateral based on FASB ASC 860, Transfers and Servicing, criteria that requires GTSI to effectively surrender control over the asset. The technical accounting and legal requirements involved are complex and subject to interpretation. Significant judgment is required to determine if we have effectively surrendered control over the asset. If certain criteria are met and control is surrendered, the transaction is recorded as financing revenue and associated expenses as cost of sales. If the transfer does not meet the criteria for a sale, the transaction is reported as a secured borrowing with pledge of collateral. The collateral remains on our balance sheet and revenues and cost of sales are recognized over the term of the agreement. Differing conclusions in these statements could impact total assets, total liabilities, interest expense and earnings (loss) per share on our consolidated financial statements.

Stock-Based Compensation

Effective January 1, 2006, we adopted FASB ASC 718, Compensation-Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payments on estimated fair values. We adopted this standard using the modified-prospective transition method.

Inventory

Our inventory is stated at the lower of average cost or market value. We reduce the value of our inventory for excess and obsolete inventory based on assumptions about future demand and market conditions. Our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess or obsolete inventory. In the future, if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we would be required to increase our expense to write-down inventory to market value and our gross margin could be adversely affected.

Capitalized Internal Use Software

Significant judgment is required to determine what expenditures qualify for capitalization of internal use software. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task that it previously did not perform. Capitalized internal use software is required to be tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. If the carrying value exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the asset, an impairment charge is recognized for the amount by which the carrying value exceeds fair market value.

Accounts Payable

We purchase significant amounts of inventory each year and record an estimate of the payable based on purchases as of the balance sheet date and the historic rate of purchase price variances, which is analyzed and adjusted on a quarterly basis. For products shipped directly from our vendors to our customers, management makes significant estimates regarding the payable for shipped goods. As invoices are received, we record adjustments for purchase price variances. Changes in our estimate of the payable balance may be caused by changes in price between the order date and the receipt date related to volume discounts, changes in market rates, or special pricing promotions offered by our vendors.

Bids and Proposals

We amortize costs that are directly related to the acquisition of a long-term contract and that would have not been incurred but for the acquisition of that contract (incremental direct acquisition costs). As long-term contracts are awarded the related up-front incentive costs, which are specific incremental costs associated with the acquisition of long-term contracts, are recorded as prepaid/deferred assets and amortized over the term of the contract or five years, whichever is shorter.

Income Taxes

Determining our effective tax rate, provision for tax expense, deferred tax assets and liabilities and the related valuation allowance involves judgments and estimates. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and the basis reported in our consolidated financial statements. Deferred tax liabilities and assets are determined based on the difference between financial statement and tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse. Valuation allowances are provided against assets, including net operating losses, if it is anticipated that the asset is not more likely than not to be realized through future taxable earnings or implementation of tax planning strategies. We record reserves for uncertain tax positions, which management believes are adequate. As of December 31, 2009, management believes it is more likely than not that the net deferred tax assets will be realized and no valuation allowance is required. In 2008, management concluded that it is more likely than not that the net deferred tax assets would be realized and released the full valuation allowance of $4.6 million based on our 2008 pre-tax book income of approximately $6.0 million and management’s projections of future profitability. Our effective tax rate in a given period could be impacted if we determine the allowance is or is not required, or if we were required to pay amounts in excess of established reserves. See Note 13 of the consolidated financial statements in Item 8 of this Form 10-K.

Historical Results of Operations

The following table illustrates the percentage of sales represented by items in our consolidated statements of operations for the years ended December 31:

		2009				2008				2007
Sales			100.0	%			100.0	%			100.0	%
Cost of sales			86.7	%			86.9	%			85.5	%
Gross margin			13.3	%			13.1	%			14.5	%
Operating expenses:
Selling, general, and administrative			12.9	%			12.6	%			14.7	%
Total operating expenses			12.9	%			12.6	%			14.7	%
Income (loss) from operations			0.4	%			0.5	%			(0.2	)%
Interest and other income, net			0.9	%			0.3	%			0.1	%
Income (loss) before taxes			1.3	%			0.8	%			(0.1	)%
Income (provision) tax benefit			(0.6	)%			0.2	%			(0.1	)%
Net income (loss)			0.7	%			1.0	%			(0.2	)%

The following table indicates, for the years ended December 31, the approximate sales by vendor and product category along with related percentages of total sales (dollars in millions):

Sales by Vendor
(based on 2009 sales)		2009								2008								2007
Cisco		$	202.1				26.5	%		$	168.0				20.5	%		$	136.8				18.9	%
Sun Microsystems			90.7				11.9	%			88.1				10.7	%			90.2				12.5	%
Microsoft			84.5				11.1	%			73.1				8.9	%			59.0				8.2	%
Dell			65.0				8.5	%			68.9				8.4	%			27.5				3.8	%
HP			62.5				8.2	%			81.3				9.9	%			105.4				14.6	%
Others, net of reserves and adjustments			257.1				33.8	%			341.8				41.6	%			304.6				42.0	%
Total		$	761.9				100.0	%		$	821.2				100.0	%		$	723.5				100.0	%

Sales Type		2009								2008								2007
Hardware		$	495.6				65.1	%		$	585.7				71.3	%		$	530.0				73.3	%
Software			182.4				23.9	%			159.7				19.4	%			111.6				15.4	%
Services			55.6				7.3	%			56.5				6.9	%			59.7				8.3	%
Financing			28.3				3.7	%			19.3				2.4	%			22.2				3.0	%
Total		$	761.9				100.0	%		$	821.2				100.0	%		$	723.5				100.0	%

Year Ended December 31, 2009 Compared with Year Ended December 31, 2008

Sales

Total sales, consisting of product, service and financing revenue, decreased $59.3 million, or 7.2%, from $821.2 million in 2008 to $761.9 million in 2009. The sales activity of each of the three product lines are discussed below.

Product revenue includes the sale of hardware, software and license maintenance on the related software. Product revenue decreased $67.4 million, or 9.0%, from $745.4 million in 2008 to $678.0 million in 2009. Product revenue as a percent of total revenue decreased 1.8 percentage points from 90.8% in 2008 to 89.0% in 2009. The decrease in product revenue is the result of lower hardware sales during the six months ended December 31, 2009. Overall product revenue was down 9.0%, with hardware revenue declining 15.4% and software revenue growing 14.2% for 2009 as compared to 2008. The majority of the hardware revenue decline resulted during the six months ended December 31, 2009 as compared to the same period in 2008, as the Company was impacted by the ongoing weak economy, delays in contracts being awarded and competitive pricing pressure.

Service revenue includes the sale of professional services, resold third-party service products, hardware warranties and maintenance on hardware; as detailed in Note 1, we net revenues where we are not the primary obligor, we netted approximately $124.8 million and $160.5 million in 2008 and 2009, respectively. Sales decreased $0.9 million, or 1.6%, from $56.5 million in 2008 to $55.6 million in 2009. Service revenue as a percent of total revenue increased from 6.9% in 2008 to 7.3% in 2009. Professional service revenue increased $0.3 million from $39.2 million in 2008 to $39.5 million in 2009, whereas integration and support service revenue declined in 2009 as compared to 2008.

Financing revenue consists of lease related transactions and includes the sale of leases that are properly securitized having met the sale criteria under FASB ASC 860, Transfers and Servicing (“ASC 860”), the annuity streams of in-house leases and leases that are not securitized or have not met the sale criteria under ASC 860 and the sale of previously leased equipment. Financing revenue increased $9.0 million, or 46.8%, from $19.3 million in 2008 to $28.3 million in 2009; due to higher sales of new leases that were properly securitized under ASC 860. Leases sold that were properly securitized increased $11.3 million, from $11.0 million in 2008 to $22.3 million in 2009.

Although we offer our customers access to products from hundreds of vendors (2009 vs 2008 comparison based on 2009 top vendor sales), 66.2% of our total sales in 2009 were products from our top five vendors, Cisco was our top vendor in 2009 with sales of $202.1 million. Sales from our top five vendors increased by $25.4 million, or 5.3%; and as a percent of total sales the top five vendors increased 7.8 of a percentage point to 66.2% in 2009 from 58.4% in 2008. The higher percentage of sales with our top five vendors reflects our continued focused vendor strategy.

Sales from Cisco, Sun Microsystems and Microsoft increased by $34.1 million, $2.6 million and $11.4 million, respectively, year over year. Sales of Dell and HP decreased by $3.9 million and $18.8 million, respectively year over year. Our sixth and seventh largest vendors in 2009 were Panasonic and IBM, sales totaled $50.4 million and $22.5 million, respectively in 2009, compared to $58.1 million and $2.7 million, respectively in 2008.

Gross Margin

Total gross margin, consisting of product, service and financing revenue, decreased $5.9 million, or 5.5%, from $107.4 million in 2008 to $101.5 million in 2009. As a percentage of total sales, gross margin increased 0.2 percentage points from 13.1% in 2008 to 13.3% in 2009. The gross margin activity of each of the three product lines are discussed below.

Product gross margin decreased $4.9 million, or 6.8%, from $71.5 million in 2008 to $66.7 million in 2009. The lower product sales in 2009 were slightly offset by a higher product gross margin in 2009 compared to 2008, as the Company was impacted by the ongoing weak economy, delays in contracts being awarded and competitive pricing pressure. Product gross margin as a percentage of sales increased 0.2 percentage points from 9.6% in 2008 to 9.8% in 2009, as the Company continued its focus on our strategic partners.

Service gross margin decreased $2.6 million, or 10.4%, from $25.0 million in 2008 to $22.4 million in 2009, due to the decreases in margin for professional and third party services. Service gross margin as a percentage of sales decreased 4.0 percentage points to 40.2% for 2009 from 44.2% in 2008. These gross margin decreases were mainly the result of lower margins in professional services.

Gross margin from financing activities increased $1.5 million, or 14.2%, from $10.9 million in 2008 to $12.4 million in 2009, due to the increase in the sale of leases that are properly securitized; partially offset lower annuity streams of in-house leases along with current credit conditions in the financial markets that have negatively impacted the gross margin on the sale of leases that were properly securitized in 2009. Financing gross margin as a percentage of sales decreased 12.5 percentage points from 56.4% in 2008 to 43.9% in 2009.

Selling, General & Administrative Expenses (“SG&A”)

SG&A expenses for 2009 decreased $5.7 million, or 5.5% as compared to the prior year. SG&A expenses as a percentage of sales increased to 12.9% for 2009 from 12.6% in 2008. The decrease in SG&A expenses was mostly due to lower personnel related costs of $4.5 million attributed to lower margins resulting in a $3.1 million reduction of incentive and commission compensation expense, lower consulting related costs of $0.9 million and lower credit card fees of $0.9 million; partially offset by higher facility related costs of $0.7 million related to our new corporate headquarters.

Interest and Other Income, Net

Interest and other income, net, for 2009 was $6.3 million compared to $2.5 million in the prior year, an increase of $3.8 million. Equity income related to our equity investments in Eyak Technology, LLC increased $3.4 million in 2009 compared with prior year due to much higher sales in 2009. Interest and other income increased $0.2 million as compared with prior year due to higher purchase discounts in 2009. Interest and other income in 2009 includes a legal settlement gain and a legal settlement loss that totaled $0.1 million of other income, net. Interest expense was $0.3 million lower in 2009 due to lower interest expense of $0.7 million; partially offset by the write-off in the second quarter of 2009 of unamortized deferred financing costs related to the terminated Credit Facility. There were no borrowings under the Credit Facility or Credit Agreement since March 2009.

Income Taxes

In 2009, we recorded a tax provision of $4.2 million, based on an effective tax rate of 43.5%, as compared to a tax benefit of $1.8 million in 2008. The tax benefit recorded during 2008 was due to the reversal of the tax valuation allowance of $4.6 million, partially offset by income tax expense of $2.8 million, primarily attributable to income from continuing operations.

Year Ended December 31, 2008 Compared with Year Ended December 31, 2007

Sales

Total sales, consisting of product, service and financing revenue, increased $97.7 million, or 13.5%, from $723.5 million in 2007 to $821.2 million in 2008. The sales activity of each of the three product lines are discussed below.

Product revenue includes the sale of hardware, software and license maintenance on the related software. Product revenue increased $103.8 million, or 16.2%, from $641.6 million in 2007 to $745.4 million in 2008. Product revenue as a percent of total revenue increased 2.1 percentage points from 88.7% in 2007 to 90.8% in 2008. The increase in product revenue is the result of higher hardware sales during the six months ended December 31, 2008. The Company was able to close several large orders within various programs with the Department of Defense and other Civilian Agencies, along with improved traction in other agencies, which significantly increased product revenue in 2008 as compare to 2007.

Service revenue includes the sale of professional services, resold third-party service products, hardware warranties and maintenance on hardware; as detailed in Note 1, we net revenues where we are not the primary obligor, we netted approximately $84.9 million and $124.8 million in 2007 and 2008, respectively. Sales decreased $3.1 million, or 5.2%, from $59.7 million in 2007 to $56.5 million in 2008. This decrease is due to an increased proportion of third-party service sales netted during 2008 and one significant project during the three months ended September 30, 2007. Service revenue as a percent of total revenue decreased from 8.2% in 2007 to 6.9% in 2008.

Financing revenue consists of lease related transactions and includes the sale of leases that are properly securitized having met the sale criteria under ASC 860, the annuity streams of in-house leases and leases that are not securitized or have not met the sale criteria under ASC 860 and the sale of previously leased equipment. Financing revenue decreased $3.0 million, or 13.4%, from $22.2 million in 2007 to $19.3 million in 2008; due to lower lease residual sales because of an unusual high volume of sales during the three months ended September 30, 2007; partially offset by higher sales of new leases that were properly securitized under ASC 860. Lease residual sales decreased $8.7 million, from $11.8 million in 2007 to $3.1 million in 2008; whereas leases sold that were properly securitized increased $6.0 million, from $5.0 million in 2007 to $11.0 million in 2008.

Although we offer our customers access to products from hundreds of vendors (2008 vs 2007 comparison based on 2008 top vendor sales), 58.4% of our total sales in 2008 were products from our top five vendors, Cisco was our top vendor in 2008 with sales of $168.0 million. Sales from our top five vendors increased by $60.5 million, or 14.4%; and as a percent of total sales the top five vendors increased 0.4 of a percentage point to 58.4% in 2008 from 58.0% in 2007. The higher percentage of sales with our top five vendors reflects our continued focused vendor strategy.

Sales from Cisco, Microsoft and Dell increased by $31.2 million, $14.1 million and $41.4 million, respectively year over year. Sales of Sun Microsystems and HP decreased by $2.1 million and $24.1 million, respectively year over year. Our sixth and seventh largest vendors in 2008 were Panasonic and Symbol Technologies, sales totaled $58.1 million and $48.4 million, respectively in 2008, compared to $104.6 million and $12.9 million, respectively in 2007.

Gross Margin

Total gross margin, consisting of product, service and financing revenue, increased $2.6 million, or 2.5%, from $104.7 million in 2007 to $107.4 million in 2008. As a percentage of total sales, gross margin decreased 1.4 percentage points from 14.5% in 2007 to 13.1% in 2008. The gross margin activity of each of the three product lines are discussed below.

Product gross margin decreased $1.8 million, or 2.5%, from $73.3 million in 2007 to $71.5 million in 2008. The higher product sales in 2008 were offset by a lower product gross margin in 2008 compared to 2007. Product gross margin as a percentage of sales decreased 1.8 percentage points from 11.4% in 2007 to 9.6% in 2008, primarily due to competitive pricing pressure within certain pockets of the hardware commodity segment during 2008.

Service gross margin increased $5.9 million, or 31.1%, from $19.0 million in 2007 to $25.0 million in 2008, due to the increases in margin for professional and third party services. Service gross margin as a percentage of sales increased 12.3 percentage points to 44.2% for 2008 from 31.9% in 2007.

Gross margin from financing activities decreased $1.5 million, or 12.1%, from $12.4 million in 2007 to $10.9 million in 2008, due to the decrease in lease residual sale transactions along with current credit conditions in the financial markets that have negatively impacted the gross margin on the sale of leases that were properly securitized in 2008. Financing gross margin as a percentage of sales increased 0.9 of a percentage point to 56.4% in 2008 from 55.5% in 2007.

Selling, General & Administrative Expenses (“SG&A”)

SG&A expenses for 2008 decreased $2.5 million, or 2.3% as compared to the prior year. SG&A expenses as a percentage of sales decreased to 12.6% for 2008 from 14.7% in 2007. The decrease in SG&A expenses was mostly due to lower consulting costs of $3.7 million attributed to remediation efforts in 2007 and lower marketing related costs of $1.2 million; partially offset by higher personnel related costs of $3.1 million consisting mainly of $2.1 million in higher health related costs due to increase claims activity in 2008.

Interest and Other Income, Net

Interest and other income, net, for 2008 was $2.5 million compared to $0.4 million in the prior year, an increase in income of $2.1 million. Equity income related to our equity investments in Eyak Technology, LLC increased $1.1 million in 2008 compared with prior year. Interest expense was $1.4 million lower in 2008 due to lower debt levels.

Interest and other income decreased $0.5 million as compared with prior year due to a $0.4 million decrease in 2008 related to purchase discounts.

Income Taxes

We recorded a tax benefit of $1.8 million in 2008 as compared to a tax provision of $0.6 million in 2007. The tax benefit recorded during 2008 was due to the reversal of the tax valuation allowance of $4.6 million, partially offset by income tax expense of $2.8 million, primarily attributable to income from continuing operations. The tax provision recorded during 2007 resulted from federal alternative minimum tax and state taxes on current year taxable income and a change in the tax reserve under FASB ASC 740, Income Taxes (“ASC 740”).

Seasonal Fluctuations

We have historically experienced and expect to continue to experience significant seasonal fluctuations in our operations as a result of the U.S. Federal Government buying and funding patterns. The unpredictability of the factors affecting such seasonality makes our annual and quarterly financial results difficult to predict and subject to significant fluctuation. While sales to the Federal government are usually weaker in the first and second quarter and stronger in the third and fourth quarter, our SG&A expenses are more level throughout the year. As such, first and second quarter earnings are typically well below those of the third and fourth quarters. Our stock price could be adversely affected if any such financial results fail to meet the financial community’s expectations.

The following tables show our results of operations on a quarterly basis. We believe that this information includes all adjustments necessary for a fair presentation of such quarterly information when read in conjunction with the notes to consolidated financial statements included in Item 8 of this Form 10-K. The operating results for any quarter are not necessarily indicative of the results for any future period. This information has been included to provide additional insight into the seasonal nature of our business.

		2009 (unaudited)
		(in millions except per share data)
		Q1				Q2				Q3				Q4				Total
Sales		$	144.1			$	164.6			$	209.7			$	243.5			$	761.9
Cost of sales			128.4				141.6				180.8				209.6				660.4
Gross margin		$	15.7			$	23.0			$	28.9			$	33.9			$	101.5
Selling, general & administrative expenses			22.9				24.4				23.8				27.0				98.1
Income (loss) from operations		$	(7.2	)		$	(1.4	)		$	5.1			$	6.8			$	3.3
Interest and other income, net			0.3				0.9				2.0				3.1				6.3
Income (loss) before taxes		$	(6.9	)		$	(0.5	)		$	7.1			$	10.0			$	9.7
Income tax benefit			3.0				0.2				(3.2	)			(4.2	)			(4.2	)
Net income (loss)		$	(3.9	)		$	(0.3	)		$	3.9			$	5.8			$	5.5
Basic earnings (loss) per share		$	(0.39	)		$	(0.03	)		$	0.40			$	0.61			$	0.56
Diluted earnings (loss) per share		$	(0.39	)		$	(0.03	)		$	0.39			$	0.60			$	0.56

		2008 (unaudited)
						(in millions except per share data)
		Q1				Q2				Q3				Q4				Total
Sales		$	142.8			$	159.2			$	257.1			$	262.1			$	821.2
Cost of sales			121.4				139.8				222.3				230.3				713.8
Gross margin		$	21.4			$	19.4			$	34.8			$	31.8			$	107.4
Selling, general & administrative expenses			25.9				22.8				27.5				27.6				103.8
Income (loss) from operations		$	(4.5	)		$	(3.4	)		$	7.3			$	4.1			$	3.5
Interest and other income, net			(0.6	)			0.5				0.9				1.7				2.5
Income (loss) before taxes		$	(5.1	)		$	(2.9	)		$	8.2			$	5.8			$	6.0
Income tax benefit			—				—				—				1.8				1.8
Net income (loss)		$	(5.1	)		$	(2.9	)		$	8.2			$	7.6			$	7.8
Basic earnings (loss) per share		$	(0.52	)		$	(0.30	)		$	0.84			$	0.77			$	0.80
Diluted earnings (loss) per share		$	(0.52	)		$	(0.30	)		$	0.83			$	0.77			$	0.79

The Company’s tax benefit (provision) was determined on a quarterly basis for the years ended December 31, 2009 and 2008 using the overall annual effective rate pursuant to FASB ASC 270, Interim Reporting. As of December 31, 2007, we had provided a valuation allowance against the full amount of the deferred tax assets. This valuation allowance of $4.6 million was reversed in the fourth quarter of 2008.

Liquidity and Capital Resources

		2009				2008				Change
		(in millions)
Cash (used in) provided by operating activities		$	(1.7	)		$	8.9			$	(10.6	)
Cash used in investing activities		$	(1.3	)		$	(5.1	)		$	3.8
Cash (used in) provided by financing activities		$	10.9			$	(4.7	)		$	15.6

During 2009, our cash balance increased $7.9 million from our December 31, 2008 balance. The non-interest bearing floor plan loans under the new Credit Agreement, which are classified as Accounts Payable — floor plan on our consolidated balance sheets, are included as a financing activity on our consolidated statements of cash flows.

Cash used in operating activities for 2009 was $1.7 million, a decrease of $10.6 million compared to last year. The 2009 decrease was primarily due to a $18.9 million increase in accounts receivable for the year ended 2009; partially offset by a $6.2 million increase in accounts payable, $6.0 million decrease in deferred costs and $3.7 million decrease in other current assets. The 2008 increase was primarily due to a $18.8 million increase in accounts payable, $8.1 million decrease in inventory and $3.1 million decrease in accrued expenses; partially offset by a $25.4 million increase in accounts receivable.

Cash used in investing activities for 2009 was $1.3 million, a decrease of $3.8 million as compared to 2008. This decrease was due to higher purchases of assets in 2008 related to GTSI’s Enterprise Management System along with 2008 purchases of furniture and fixtures for the new corporate headquarters.

Cash provided by financing activities for 2009 was $10.9 million, a change of $15.6 million as compared with cash used in financing activities of $4.7 million for 2008. The change was due to $34.9 million of floor plan loans in 2009 related to the Credit Agreement and the $10 million pay-off of the Term Loan during the three months ended March 31, 2008; partially offset by net repayments under the Credit Facility of $22.4 million during 2009 as compared to $4.4 million net borrowings for 2008 and common stock purchases of $2.3 million during 2009 as compared to $0.2 million of net share settlements for 2008.

Credit Facility and Credit Agreement

In 2006, the Company entered into a $135 million credit agreement with a group of lenders (the “Credit Facility”). This Credit Facility was terminated on May 27, 2009 and the related unamortized deferred financing costs of $1.5 million were written-off.

On May 27, 2009, we entered into a $135 million credit agreement with Castle Pines Capital LL (“CPC”) and other lenders (the “Credit Agreement”), which includes inventory financing. The Credit Agreement provides a “vendor and distributor program” under which we receive financing for inventory purchases from several of our largest CPC approved vendors with extended payment terms. The Credit Agreement, which matures on May 27, 2011, carries an interest rate indexed at 1-Month LIBOR plus 300 basis points for revolving loan advances and 1-Month LIBOR plus 350 basis points for floor plan loans. Borrowing under the Credit Agreement at any time is limited to the lesser of (a) $135 million or (b) a collateral-based borrowing base (eligible accounts receivable and inventory) less outstanding obligations relating to any borrowings, floor plan loans and stand-by letters of credits.

As of December 31, 2009, borrowing capacity and availability under the Credit Agreement was as follows (in thousands):

Total Credit Agreement		$	135,000
Borrowing base limitation			(12,070	)
Total borrowing capacity			122,930
Less: interest-bearing borrowings			—
Less: non-interest bearing advances (floor plan loans)			(34,889	)
Less: letters of credit			(5,138	)
Total unused availability		$	82,903

As of December 31, 2009, the Company had no outstanding loan balance (other than non-interest bearing floor plan loans) under the Credit Agreement and as reflected above, available credit thereunder of $82.9 million.

The Credit Agreement contains customary covenants limiting our ability to, among other things (a) incur debt; (b) make guarantees or grant or suffer liens; (c) repurchase of our common stock for an aggregate purchase price in excess of $5 million, (d) make certain payments (including cash dividends), purchase of other businesses or investments; (e) enter into transactions with affiliates; (f) dissolve, change names, merge or enter into certain other material agreement regarding changes to the corporate entities; (g) acquire real estate; and (h) enter into sales and leaseback transactions.

The financial covenants of the Credit Agreement requires us, among other restrictions, to:

	•		Maintain Tangible Net Worth not less than or equal to $45 million as dated the end of each fiscal month
	•		Maintain Ratio of Total Liabilities to Tangible Net Worth not greater than 5.25 to 1.00 as dated the end of each fiscal month
	•		Maintain Current Ratio not less than (i) 1.20 to 1.00 as of the last business day of the fiscal months of January, February, March, April, May, June, October, November and December and (ii) 1.15 to 1.00 as of the last business day of the fiscal months of July, August and September.
	•		Maintain minimum Total Debt Service Coverage Ratio of 1.25 to 1.00 as dated the end of each fiscal month

Furthermore, the Credit Agreement contains information covenants requiring the Company to provide the lenders certain information. The Company was in compliance with all financial and informational covenants as set forth in the Credit Agreement as of December 31, 2009. If the Company fails to comply with any material provision or covenant of our Credit Agreement, it would be required to seek a waiver or amendment of covenants.

Capital Resources and Requirements

Our ongoing capital requirements depend on a variety of factors, including the extent to which we are able to fund the cash needs of our business from operations. During 2009 and 2008, we relied upon our cash provided by operating activities, vendor credit, inventory financing and the availability under the Credit Agreement to fund our operations. We anticipate continuing to rely upon these sources to finance our operating cash needs during the majority of 2010. We believe that such funds should be sufficient to satisfy our near term anticipated cash requirements for operations.

While the Company believes that we will remain in compliance with all of the financial and reporting covenants under the Credit Agreement, there can be no assurance that we will do so. A breach of any of the covenants or restrictions in the Credit Agreement could result in an event of default under the Credit Agreement. Such a default could result in the lenders discontinuing lending or declaring all outstanding borrowings to be due and payable. If any of these events occur, we would need to find additional or alternative financing, if available, to refinance any such accelerated obligations. There can be no assurance that such financing would be available.

Financed lease debt decreased from $9.1 million at December 31, 2008 to $0.8 million at December 31, 2009, bearing weighted average interest rates of 7.02% and 7.32%, respectively. These secured borrowings will be funded from the financing receivables of $9.9 million and $0.8 million as of December 31, 2008 and 2009, respectively.

During 2009 and 2008, we made capital expenditures of $1.3 million and $5.2 million, respectively. In 2009, the expenditures were mainly related to GEMS enhancements. In 2008 it was principally for capitalized costs associated with the implementation of a GEMS upgrade, the purchase of computer software for internal use and the purchase of furniture and fixtures for the new corporate headquarters.

Contractual Obligations

						Less Than 1												More than
In millions of dollars		Total				Year				1-3 Years				3-5 Years				5 Years				Other
Operating lease obligations		$	40.3			$	4.5			$	8.4				8.1			$	19.3				—
Borrowings under Credit Agreement			—				—				—				—				—				—
Financed lease debt			0.8				0.8				—				—				—				—
Tax liability for unrecognized tax benefits (a)			0.2				—				—				—				—				0.2
Total contractual obligations		$	41.3			$	5.3			$	8.4			$	8.1			$	19.3			$	0.2

At December 31, 2009, GTSI had an employment agreement with its Chief Executive Officer (also see Note 17 for the Subsequent Event footnote). This agreement provides for payments of 24 months of base salary plus bonus equal to the previous year’s bonus payments upon termination of employment except for cause. In addition, GTSI has change in control agreements with 14 additional executives and key employees and severance agreements with 8 executives. These arrangements provide for payments of as much as 18 months of total target compensation and continuation of benefits upon the occurrence of specified events. As of December 31, 2009, no accruals have been recorded for these agreements.

At December 31, 2008, GTSI was obligated under an operating lease to provide its landlord with a letter of credit in the amount of $0.2 million as a security deposit for all tenant improvements associated with the lease. This letter of credit was cancelled in January 2009 after GTSI moved to the new office space in November 2008.

The Company provided a letter of credit in the amount of $2.4 million as of December 31, 2009 and 2008 for the new office space lease signed in December 2007.

As of December 31, 2008, the Company had an outstanding letter of credit in the amount of $1.2 million to guarantee the performance by the Company of its obligations under customer contracts. The letter of credit was amended in February 2009 and increased to $2.7 million as of December 31, 2009.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements (as defined in Regulations S-K, Item 303, paragraph (a)(4)(ii)) that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources.

New Accounting Pronouncements

In June 2009, the FASB issued new guidance on accounting for transfers of financial assets, which is included in the Codification under FASB ASC 860, Transfers and Servicing. The guidance removes the concept of a qualifying special-purpose entity and requires enhanced disclosures to provide financial statement users with greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. The guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009. The adoption of this statement will not impact the Company’s financial position and results of operations.

In June 2009, the FASB issued amendments to the accounting and disclosure requirements for the consolidation of variable interest entities, which is included in the Codification under FASB ASC 810, Consolidation. The guidance affects the overall consolidation analysis and requires enhanced disclosures on involvement with variable interest entities. The guidance is effective for fiscal years beginning after November 15, 2009. The adoption of this statement will not impact the Company’s financial position and results of operations.

In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010, modify the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable. The guidance relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting and modifies the manner in which the transaction consideration is allocated across the individual deliverables. Also, the guidance expands the disclosure requirements for revenue arrangements with multiple deliverables. This guidance removes tangible products from the scope of the software revenue guidance if the products contain both software and non-software components that function together to deliver a product’s essential functionality and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are within the scope of the software revenue guidance. The guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after June 15, 2010, and may be applied retrospectively for all periods presented or prospectively to arrangements entered into or materially modified after the adoption date. The Company is currently evaluating the potential impact on its financial position and results of operations.

ITEM 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

GTSI had a $135 million Credit Facility indexed at the Prime Rate plus margin as of December 31, 2008. The Company terminated the Credit Facility on May 27, 2009 and entered into a $135 million credit agreement with Castle Pines Capital LLC (“CPC”) and other lenders (the “Credit Agreement”), which includes inventory financing. The Credit Agreement provides a “vendor and distributor program” under which we receive financing for inventory purchases from several of our largest CPC approved vendors with extended payment terms. The Credit Agreement, which matures on May 27, 2011, carries an interest rate indexed at 1-Month LIBOR plus 300 basis points for revolving loan advances and 1-Month LIBOR plus 350 basis points for floor plan loans.

This Credit Agreement exposes us to market risk from changes in interest rates. For purposes of specific risk analysis, we use sensitivity analysis to determine the effects that market risk exposures may have.

Our results of operations are affected by changes in interest rates due to the impact those changes have on borrowings under our Credit Agreement. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, which would require more cash to service our indebtedness. As of December 31, 2009, the Company had no outstanding loan balance (other than non-interest bearing floor plan loans) and an available credit of $82.9 million. As of December 31, 2008, we had $10.3 million of variable rate debt subject to interest. We have not used derivative instruments to alter the interest rate characteristics of our borrowings.

Included in our long-term debt are amounts related to lease transactions. We have reported these amounts in Note 5 as long-term financed lease debt. These amounts will amortize over the period of the lease instruments with no cash affect to the Company. The balances of these liabilities were $0 and $2.5 million at December 31, 2009 and 2008, respectively. A change in interest rates would result in no additional interest expense related to financed lease debt.

ITEM 8.		FINANCIAL STATEMENTS & SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Board of Directors and Stockholders
of GTSI Corp.:

In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows present fairly, in all material respects, the financial position of GTSI Corp. and its subsidiaries at December 31, 2009 and 2008 and the results of their operations and their cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the Company’s internal control over financial reporting based on our integrated audits. We did not audit the financial statements of Eyak Technology, LLC, an investment accounted for under the equity method, for which GTSI Corp. reflected in other assets of $8.0 million and $5.3 million as of December 31, 2009 and 2008, respectively, and reflected income from affiliate of $8.3 million and $4.9 million reflected for the years ended December 31, 2009 and 2008, respectively. The financial statements of Eyak Technology, LLC were audited by other auditors whose report thereon has been furnished to us, and our opinion on the financial statements expressed herein, insofar as it relates to the amounts included for Eyak Technology, LLC, is based solely on the report of the other auditors. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits and the report of other auditors provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Pricewaterhouse Coopers LLP

McLean, Virginia
March 5, 2010

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
Eyak Technology, LLC
Dulles, Virginia

We have audited the accompanying Consolidated Balance Sheets of Eyak Technology, LLC and Subsidiary as of December 31, 2009 and 2008, and the related Consolidated Statements of Income, Members’ Equity, and Cash Flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eyak Technology, LLC and Subsidiary as of December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

/s/ Aronson & Company
Rockville, Maryland
March 2, 2010

GTSI CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

		December 31,
		2009				2008
ASSETS
Current assets:
Cash and cash equivalents		$	7,894			$	—
Accounts receivable, net			209,595				190,740
Inventory			13,477				13,491
Deferred costs			1,807				7,849
Other current assets			4,140				7,807
Total current assets			236,913				219,887
Depreciable assets, net			10,960				13,664
Long-term receivables and other assets			40,758				14,078
Total assets		$	288,631			$	247,629
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Borrowings under credit facility		$	—			$	22,387
Accounts payable			109,723				103,553
Accounts payable — floor plan			34,889				—
Financed lease debt, current portion			831				6,538
Accrued liabilities			26,127				17,857
Deferred revenue			3,176				2,079
Total current liabilities			174,746				152,414
Long-term financed lease debt			—				2,530
Other liabilities			17,598				2,571
Total liabilities			192,344				157,515
Commitments and contingencies (See Note 11)
Stockholders’ equity
Preferred stock — $0.25 par value, 680,850 shares authorized; none issued or outstanding			—				—
Common stock — $0.005 par value, 20,000,000 shares authorized; 10,119,038 issued and 9,637,676 outstanding at December 31, 2009; and 10,140,757 issued and 9,866,662 outstanding at December 31, 2008			50				50
Capital in excess of par value			52,698				50,722
Retained earnings			44,925				39,469
Treasury stock, 277,850 shares at December 31, 2009 and 16,176 shares at December 31, 2008, at cost			(1,386	)			(127	)
Total stockholders’ equity			96,287				90,114
Total liabilities and stockholders’ equity		$	288,631			$	247,629

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

GTSI CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

		For the Years Ended December 31,
		2009				2008				2007
SALES
Product		$	677,966			$	745,366			$	641,560
Service			55,625				56,529				59,658
Financing			28,279				19,270				22,247
			761,870				821,165				723,465
COST OF SALES
Product			611,310				673,858				568,247
Service			33,236				31,551				40,609
Financing			15,872				8,403				9,889
			660,418				713,812				618,745
GROSS MARGIN			101,452				107,353				104,720
SELLING, GENERAL & ADMINISTRATIVE EXPENSES			98,107				103,848				106,335
INCOME (LOSS) FROM OPERATIONS			3,345				3,505				(1,615	)
INTEREST AND OTHER INCOME, NET
Interest and other income			923				760				1,191
Equity income from affiliates			8,261				4,892				3,802
Interest expense			(2,864	)			(3,128	)			(4,577	)
Interest and other income, net			6,320				2,524				416
INCOME (LOSS) BEFORE INCOME TAXES			9,665				6,029				(1,199	)
INCOME TAX (PROVISION) BENEFIT			(4,209	)			1,806				(568	)
NET INCOME (LOSS)		$	5,456			$	7,835			$	(1,767	)
EARNINGS (LOSS) PER SHARE
Basic		$	0.56			$	0.80			$	(0.18	)
Diluted		$	0.56			$	0.79			$	(0.18	)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic			9,706				9,760				9,571
Diluted			9,762				9,865				9,571

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

GTSI CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2009, 2008 and 2007
(In thousands)

		Common Stock								Capital in												Total
		Shares								Excess of				Retained				Treasury				Stockholders’
		Outstanding				Amount				Par Value				Earnings				Stock				Equity
Balance, December 31, 2006			9,512				49				45,110				33,717				(2,193	)			76,683
FIN 48 adoption			—				—				—				(316	)			—				(316	)
Common stock issued			189				—				161				—				1,126				1,287
Stock-based compensation			—				—				1,832				—				—				1,832
Tax impact from stock-based compensation			—				—				(6	)			—				—				(6	)
Net (loss)			—				—				—				(1,767	)			—				(1,767	)
Balance, December 31, 2007			9,701				49				47,097				31,634				(1,067	)			77,713
Common stock issued			104				—				(260	)			—				816				556
Common stock purchased			(24	)			—				—				—				(217	)			(217	)
Stock-based compensation			—				—				2,946				—				—				2,946
Restricted stock issued			86				1				(343	)			—				341				(1	)
Tax impact from stock-based compensation			—				—				1,282				—				—				1,282
Net income			—				—				—				7,835				—				7,835
Balance, December 31, 2008			9,867			$	50			$	50,722			$	39,469			$	(127	)		$	90,114
Common stock issued			156				—				—				—				717				717
Common stock purchased			(466	)			—				—				—				(2,251	)			(2,251	)
Stock-based compensation			—				—				2,387				—				—				2,387
Restricted stock issued			81				—				(275	)			—				275				—
Tax impact from stock-based compensation			—				—				(136	)			—				—				(136	)
Net income			—				—				—				5,456				—				5,456
Balance, December 31, 2009			9,638			$	50			$	52,698			$	44,925			$	(1,386	)		$	96,287