The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, our unaudited condensed consolidated financial statements and notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our consolidated financial statements and notes in our Annual Report on Form 10-K for the year ended December 31, 2008. We use the terms "GTSI," "we," "our," and "us" to refer to GTSI Corp. and its subsidiaries. Disclosure Regarding Forward-Looking Statements Readers are cautioned that this Quarterly Report on Form 10-Q 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, relating to our operations that are based on our current expectations, estimates, forecasts and projections. Words such as "expect," "plan," "believe," "anticipate," "intend" and similar expressions are intended to identify these forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results in future periods may differ materially from those expressed or projected in any forward-looking statements because of a number of risks and uncertainties, including:
• Our reliance on a small number of large transactions for significant portions of our sales and gross margins

• Our ability to shift our business model from a reseller of products to a high-end solutions provider

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

• Changes in Federal government fiscal spending

• Our ability to meet the covenants under our Credit Agreement in future periods

• Negativity to our business due to the current global economic and credit conditions

• Possible infrastructure failures

• Any material weaknesses in our internal control over financial reporting

• Possible net losses, if we fail to align costs with our sales levels

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

• Unsatisfactory performance by third parties with which we work could hurt our reputation, operating results and competitiveness

• Our ability to adapt to consolidation within the OEM market place

• Our ability to integrate any potential future acquisitions, strategic investments or mergers

For a detailed discussion of risk factors affecting GTSI's business and operations, see Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2008. We undertake no obligation to revise or update any forward-looking statements for any reason. 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 framework 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, Microsoft, Sun Microsystems, 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.
During the past several years, we have continued our realignment around solutions that we believe will provide us with a greater opportunity for sustained return on investment. We have 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. GTSI has grown the professional services organization to handle the increase in engineering, maintenance, and management services supporting our solutions. Additionally, GTSI offers leasing arrangements to allow government agencies to acquire access to technology as an evenly distributed operating expense, rather than the much more budget-sensitive and discontinuous capital expenses. We believe this model represents a distinctive advantage to our customers.
The Company's financial results for the first six months of 2009 were somewhat impacted by the ongoing weak economy along with the delay in the release of funding by the U.S. Government with the change in administration and implementation of the government spending plan. The Company has continued to aggressively manage and reduce operating expenses where possible. The Company expects to see improvement in its financial results in the last six months of 2009 as funding is released by government agencies.
For the quarter ended June 30, 2009 compared to the quarter ended June 30, 2008:
• Total sales increased $5.4 million.

• Gross margin increased $3.6 million.

• Selling, General & Administrative expenses increased $1.6 million.

• Loss before income taxes decreased $2.4 million.

• Cash provided by operations decreased $13.8 million.

• Interest and other income increased $0.4 million.

For the six months ended June 30, 2009 compared to the six months ended June 30, 2008:
• Total sales increased $6.7 million.

• Gross margin decreased $2.1 million.

• Selling, General & Administrative expenses decreased $1.4 million.

• Loss before income taxes decreased $0.7 million.

• Cash provided by operations decreased $10.4 million.

• Interest and other income increased $1.4 million.

Critical Accounting Estimates and Policies Our unaudited condensed consolidated financial statements are based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make significant assumptions. We believe that some of the more critical estimates and related assumptions that affect our financial condition and results of operations pertain to revenue recognition, financing receivables, valuation of inventory, capitalized internal use software, estimated payables and income taxes. For more information on critical accounting estimates and policies see the MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2008. We have discussed the application of these critical accounting estimates and policies with the Audit Committee of our Board of Directors.
Historical Results of Operations
The following table illustrates the unaudited percentage of sales represented by items in our condensed consolidated statements of operations for the periods presented.

                                           Three Months Ended                 Six Months Ended
                                                June 30,                          June 30,
                                          2009             2008             2009            2008
Sales                                       100.0 %          100.0 %          100.0 %         100.0 %
Cost of sales                                86.0 %           87.8 %           87.5 %          86.5 %

Gross margin                                 14.0 %           12.2 %           12.5 %          13.5 %
Selling, general, and
administrative expenses                      14.8 %           14.3 %           15.3 %          16.1 %

Loss from operations                         (0.8 )%          (2.1 )%         (2.8. )%         (2.6 )%
Interest and other income
(expense), net                                0.6 %            0.3 %            0.4 %           0.0 %

Loss before taxes                            (0.2 )%          (1.8 )%          (2.4 )%         (2.6 )%
Income tax benefit                            0.1 %              -              1.0 %             -

Net Loss                                     (0.1 )%          (1.8 )%          (1.4 )%         (2.6 )%

The following tables indicate, for the periods indicated, the approximate sales by type and vendor along with related percentages of total sales (in millions).

                             Three Months Ended                               Six Months Ended
                                  June 30,                                        June 30,
 Sales by Type          2009                    2008                    2009                    2008
 Hardware        $ 114.1        69.4 %   $ 109.7        68.9 %   $ 192.6        62.4 %   $ 206.3        68.3 %
 Software           35.7        21.7 %      33.3        20.9 %      85.0        27.5 %      64.3        21.3 %
 Service            12.6         7.6 %      13.4         8.4 %      26.9         8.7 %      25.3         8.4 %
 Financing           2.2         1.3 %       2.8         1.8 %       4.2         1.4 %       6.1         2.0 %

 Total           $ 164.6       100.0 %   $ 159.2       100.0 %   $ 308.7       100.0 %   $ 302.0       100.0 %

                                           Three Months Ended                                   Six Months Ended
Sales by Vendor (based on                       June 30,                                            June 30,
YTD 2009 sales)                      2009                      2008                      2009                      2008
Microsoft                    $  14.5          8.8 %    $  19.6         12.3 %    $  52.3         16.9 %    $  38.0         12.6 %
Cisco                           34.5         21.0 %       31.4         19.7 %       51.5         16.7 %       52.4         17.4 %
Sun Microsystems                27.5         16.7 %       17.8         11.2 %       36.2         11.7 %       35.1         11.6 %
Panasonic                       12.9          7.8 %       15.5          9.7 %       23.5          7.6 %       27.3          9.0 %
HP                              10.9          6.6 %        9.3          5.8 %       23.2          7.5 %       17.4          5.8 %
Others, net of reserves
and adjustments                 64.3         39.1 %       65.6         41.3 %      122.0         39.6 %      131.8         43.6 %

Total                        $ 164.6        100.0 %    $ 159.2        100.0 %    $ 308.7        100.0 %    $ 302.0        100.0 %

Three Months Ended June 30, 2009 Compared With the Three Months Ended June 30, 2008
Sales
Total sales, consisting of product, service and financing revenue, increased $5.4 million, or 3.4% from $159.2 million for the three months ended June 30, 2008 to $164.6 million for the three months ended June 30, 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 sales increased $6.8 million, or 4.7%, from $143.1 million for the three months ended June 30, 2008 to $149.9 million for the three months ended June 30, 2009. Product revenue as a percent of total revenue increased 1.2% from 89.9% for the three months ended June 30, 2008 to 91.1% for the three months ended June 30, 2009. Overall product revenue was up 4.7%, with hardware and software revenue growing modestly for the three months ended June 30, 2009 as compared to the same period of 2008.
Service revenue includes the sale of professional services, resold third-party service products, hardware warranties and maintenance on hardware; we net revenues where we are not the primary obligor, we netted approximately $21.0 million and $21.2 million for the three months ended June 30, 2009 and 2008, respectively. Service revenue decreased $0.8 million, or 5.8% from $13.4 million for the three months ended June 30, 2008 to $12.6 million for the three months ended June 30, 2009. Service revenue as a percent of total revenue decreased 0.8% from 8.4% for the three months ended June 30, 2008 to 7.6% for the three months ended June 30, 2009. The majority of the decrease in service revenue is a result of decreased sales of delivered services. Delivered service revenue decreased $0.5 million, from $9.5 million for the three months ended June 30, 2008 to $9.0 million for the three months ended June 30, 2009. Financing revenue consists of lease related transactions and includes the sale of leases that are properly securitized having met the sale criteria under FAS 140, the annuity streams of in-house leases and leases that are not securitized or have not met the sale criteria under FAS 140, and the sale of previously leased equipment. Financing revenue decreased $0.6 million, or 21.9%, from $2.8 million for the three months ended June 30, 2008 to $2.2 million for the three months ended June 30, 2009; due to decreased lease residual sales of $1.2 million; partially offset by $0.2 million increase in new lease sales and $0.2 million increase in amortized lease interest income.
Although we offer our customers access to products from hundreds of vendors, 60.9% of our total sales in the second quarter of 2009 were products from five vendors; Cisco was our top vendor in the second quarter of 2009 with sales of $34.5 million. Sales from these five vendors increased by $6.7 million, or 7.2% for the three months ended June 30, 2009. As a percent of total sales the second quarter of 2009 top five vendors increased 2.2 percentage points to 60.9% for the three months ended June 30, 2009 from 58.7% for the three months ended June 30, 2008. Our top five vendors may fluctuate between periods because of the timing of certain large contracts. Consistent with 2008, our strategic partners in 2009 are Cisco, Microsoft, Sun Microsystems, Hewlett Packard, Panasonic and Network Appliance.

Gross Margin
Total gross margin, consisting of product, service and financing revenue less their respective cost of sales, increased $3.6 million, or 18.6%, from $19.4 million for the three months ended June 30, 2008 to $23.0 million for the three months ended June 30, 2009. As a percentage of total sales, gross margin for the three months ended June 30, 2009 increased 1.8% percentage points from the three months ended June 30, 2008. The gross margin activity of each of the three product lines are discussed below.
Product gross margin increased $2.9 million, or 21.4%, from $13.7 million for the three months ended June 30, 2008 to $16.7 million for the three months ended June 30, 2009. Product gross margin as a percentage of sales increased 1.5 percentage points from 9.6% for the three months ended June 30, 2008 to 11.1% for the three months ended June 30, 2009. The increase in product gross margin was positively impacted by $1.6 million higher gross margin for the three months ended June 30, 2009 from strategic partner programs as compared to the same period of 2008.
Service gross margin increased $0.4 million, or 8.7%, from $4.5 million for the three months ended June 30, 2008 to $4.9 million for the three months ended June 30, 2009. Service gross margin as a percentage of sales increased 5.2 percentage points to 39.2% for the three months ended June 30, 2009 from 34.0% for the three months ended June 30, 2008. These gross margin increases were driven by increases in integration and support services.
Financing gross margin increased $0.3 million, or 25.2% from $1.1 million for the three months ended June 30, 2008 to $1.4 million for the three months ended June 30, 2009. Gross margin as a percentage of sales increased 25 percentage points from 41.4% for the three months ended June 30, 2008 to 66.4% for the three months ended June 30, 2009, due to increased margin percentages from in-house leases.
Selling, General & Administrative Expenses ("SG&A") During the three months ended June 30, 2009, SG&A expenses increased $1.6 million, or 7.0% from the same period in 2008. SG&A as a percentage of sales increased to 14.8% in the second quarter of 2009 from 14.3% for the same period in 2008. The increase in SG&A expenses was mainly due to higher personnel related costs of $1.2 million attributed to higher margins resulting in an increase of incentive and commission compensation expense and higher payroll taxes of $0.2 million and a $0.1 million increase in facilities expense; partially offset by a $0.2 million decrease in travel and entertainment expense. Interest and Other Income, Net
Interest and other income (expense), net, for the three months ended June 30, 2009 was $0.9 million as compared $0.5 million for the same period in 2008. The improvement in interest income, net, was due to higher equity income from affiliates in 2009, settlement of a legal matter in 2009 and higher interest income in 2009 due to higher cash levels in 2009 as compared with prior year; partially offset by the $1.5 million write-off of unamortized deferred financing costs recorded to interest expense which related to the terminated Credit Facility. Equity income from affiliates related to our equity investments in Eyak Technology, LLC increased by $1.4 million in 2009 compared with prior year. Income Taxes
GTSI had losses of $0.5 million and $2.9 million before income taxes for the three months ended June 30, 2009 and 2008, respectively. For the three months ended June 30, 2009, an income tax benefit of $0.2 million was recorded. The income tax benefit includes less than $0.1 million related to the accrual of interest and penalties for uncertain tax positions and payment of state income tax notices which was fully offset by a decrease in accrued interest and penalties due to the expiration of applicable statute of limitations. For the three months ended June 30, 2008, there was no tax benefit reported for the quarter because the current quarter income did not exceed prior quarters losses and it was management's assessment under FASB Interpretation No. 18 (as amended), Accounting for Income Taxes in Interim Periods ("FIN 18") that there was insufficient evidence to record a tax benefit on the year to date loss in the quarter. For the three months ended June 30, 2008, GTSI recorded less than $0.1 million in income tax expense as a result of a reduction in a FIN 48 liability and related accrued interest.

Six Months Ended June 30, 2009 Compared With the Six Months Ended June 30, 2008 Sales
Total sales, consisting of product, service and financing revenue, increased $6.7 million, or 2.2% from $302.0 million for the six months ended June 30, 2008 to $308.7 million for the six months ended June 30, 2009. The sales activity of each of the three product lines are discussed below.
Product sales increased $6.9 million, or 2.6%, from $270.7 million for the six months ended June 30, 2008 to $277.6 million for the six months ended June 30, 2009. Product revenue as a percent of total revenue increased 0.3% from 89.6% for the six months ended June 30, 2008 to 89.9% for the six months ended June 30, 2009. Overall product revenue was up 2.6%, with software revenue growing and hardware revenue declining for the six months ended June 30, 2009 as compared to the same period of 2008.
Service revenue increased $1.6 million, or 6.3% from $25.3 million for the six months ended June 30, 2008 to $26.9 million for the six months ended June 30, 2009. We net revenues where we are not the primary obligor, we netted approximately $49.4 million and $44.7 million for the six months ended June 30, 2009 and 2008, respectively. Service revenue as a percent of total revenue increased 0.3% from 8.4% for the six months ended June 30, 2008 to 8.7% for the six months ended June 30, 2009. The majority of the increase in service revenue is a result of increased sales of delivered services. Delivered service revenue increased $2.5 million, from $17.6 million for the six months ended June 30, 2008 to $20.1 million for the six months ended June 30, 2009.
Financing revenue decreased $1.8 million, or 30.3%, from $6.1 million for the six months ended June 30, 2008 to $4.2 million for the six months ended June 30, 2009; due to decreased sales of new leases that were properly securitized under FAS 140 of $1.3 million.
Although we offer our customers access to products from hundreds of vendors, 60.4% of our total sales in the first six months of 2009 were products from five vendors. Sales from these five vendors increased by $16.6 million, or 9.7% for the six months ended June 30, 2009. As a percent of total sales, 2009's top five vendors increased 4.0 percentage points to 60.4% for the six months ended June 30, 2009 from 56.4% for the six months ended June 30, 2008. Gross Margin
Total gross margin decreased $2.1 million, or 5.2%, from $40.8 million for the six months ended June 30, 2008 to $38.7 million for the six months ended June 30, 2009. As a percentage of total sales, gross margin for the six months ended June 30, 2009 decreased 1.0% from the six months ended June 30, 2008. The gross margin activity of each of the three product lines are discussed below. Product gross margin decreased $0.9 million, or 3.4% from $26.5 million for the six months ended June 30, 2008 to $25.6 million for the six months ended June 30, 2009. Product gross margin as a percentage of sales decreased 0.6 percentage points from 9.8% for the six months ended June 30, 2008 to 9.2% for the six months ended June 30, 2009. During the six months ended June 30, 2009, the Company was impacted by an overall decrease in hardware revenue, competitive pricing pressure within certain pockets of the hardware commodity segment and a higher mix of software revenue which generally carries a lower gross margin.
Service gross margin decreased $0.8 million, or 7.6%, from $10.7 million for the six months ended June 30, 2008 to $9.9 million for the six months ended June 30, 2009. Service gross margin as a percentage of sales decreased 5.5 percentage points to 37.0% for the six months ended June 30, 2009 from 42.5% for the six months ended June 30, 2008. These gross margin decreases were the result of lower margins in delivery services and support services.
Financing gross margin decreased $0.4 million, or 11.7% from $3.6 million for the six months ended June 30, 2008 to $3.2 million for the six months ended June 30, 2009 due to a decreased gross margin of $0.9 million related to the sale of new leases that were properly securitized under FAS 140 that have been negatively impacted by the current credit conditions in the financial markets; partially offset by increased gross margin of $0.5 million on the other financing related activities. Gross margin as a percentage of sales increased 15.8 percentage points from 59.4% for the six months ended June 30, 2008 to 75.2% or the six months ended June 30, 2009, due to higher margins on amortized interest income on leases that are not securitized or have not met the sale criteria under FAS 140 and the sale of previously leased equipment.

Selling, General & Administrative Expenses ("SG&A") During the six months ended June 30, 2009, SG&A expenses decreased $1.4 million, or 2.9% from the same period in 2008. SG&A as a percentage of sales decreased to 15.3% in the first six months of 2009 from 16.1% for the same period in 2008. The decrease in SG&A expenses was mainly due to lower consulting costs of $0.8 million attributed to remediation efforts in the first quarter of 2008, lower personnel related costs of $1.2 million attributed to lower margins resulting in a decrease of incentive compensation and bonus expense; partially offset by a $0.6 million increase in facilities expense. Interest and Other Income, Net
Interest and other income (expense), net, for the six months ended June 30, 2009, was interest income, net, of $1.3 million as compared to interest expense, net of $0.1 million for the same period in 2008. The improvement in interest income, net, was due to lower interest expense, higher equity income from affiliates in 2009 and the settlement of a legal matter in 2009; partially offset by the $1.5 million write-off of unamortized deferred financing costs recorded to interest expense which related to the terminated Credit Facility. The lower interest expense was due to lower debt balances in 2009 and $0.3 million of costs in 2008 related to the pay-off of the Term Loan in February 2008. Equity income from affiliates related to our equity investments in Eyak Technology, LLC increased by $1.8 million in 2009 compared with prior year.
Income Taxes
GTSI had losses of $7.3 million and $8.0 million before income taxes for the six months ended June 30, 2009 and 2008, respectively. For the six months ended June 30, 2009, an income tax benefit of $3.1 million was recognized as it is management's assessment under FIN 18 that there is sufficient evidence to record the tax benefit on the year to date loss. The net income tax benefit includes an income tax expense of less than $0.1 million related to the accrual of interest and penalties for uncertain tax positions and payment of state income tax notices. Such expense was fully offset by the decrease in accrued interest and penalties due to the expiration of applicable statute of limitations. For the six months ended June 30, 2008, there was no tax benefit reported for the quarter because the current quarter income did not exceed prior quarters losses and it was management's assessment under FIN 18 that there is insufficient evidence to record a tax benefit on the year to date loss in the quarter. For the six months ended June 30, 2008, GTSI recorded less than $0.1 million in income tax benefit as a result of a reduction in a FIN 48 liability and related accrued interest.
Seasonal Fluctuations
Historically, over 90% of our annual sales have been earned from departments and agencies of the U.S. Federal Government, either directly or indirectly through system integrators to which GTSI is a sub-contractor. We have historically experienced, and expect to continue to experience, significant seasonal fluctuations in our operations as a result of government buying and funding patterns, which also affect the buying patterns of GTSI's prime contractor customers. These buying and funding patterns historically have had a significant positive effect on our bookings in the third quarter ended September 30 each year (the Federal government's fiscal year end), and consequently on sales and net income in the third and fourth quarters of each year. Conversely, sales during the first quarter of our fiscal year have traditionally been the weakest for GTSI, consisting of less than 20% of our annual sales. Our SG&A expenses are more level throughout the year, although our sales commissions programs generally result in marginally increased expenses in the fourth quarter of our fiscal year.
Quarterly financial results are also affected by the timing of contract awards and the receipt of products by our customers. The seasonality of our business, . . .