Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x  Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the fiscal year ended December 31, 2008

o  Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the transition period from             to             

Commission File Number 1-7234

GP STRATEGIES CORPORATION

(Exact name of Registrant as specified in its charter)

(410) 379-3600
Registrant’s telephone number, including area code:

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

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   x

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

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   x No   o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.     x

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

The aggregate market value of the outstanding shares of the Registrant’s Common Stock, par value $.01 per share, held by non-affiliates as of June 30, 2008 was approximately $158,510,000.

The number of shares outstanding of the registrant’s Common Stock as of February 27, 2009:

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its 2009 Annual Meeting of Stockholders are incorporated herein by reference into Part III hereof.

Table of Contents

Table of Contents

Table of Contents

Cautionary Statement Regarding Forward-Looking Statements

This report 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.  The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward looking statements.  Forward—looking statements are not statements of historical facts, but rather reflect our current expectations concerning future events and results.  We use words such as “expects,” “intends,” “believes,” “may,” “will,” “should,” “could,” “anticipates,” “estimates,” “plans” and similar expressions to indicate forward-looking statements, but their absence does not mean a statement is not forward-looking. Because these forward-looking statements are based upon management’s expectations and assumptions and are subject to risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including, but not limited to, those factors set forth under Item 1A - Risk Factors and those other risks and uncertainties detailed in our periodic reports and registration statements filed with the Securities and Exchange Commission.  We caution that these risk factors may not be exhaustive.  We operate in a continually changing business environment, and new risk factors emerge from time to time.  We cannot predict these new risk factors, nor can we assess the effect, if any, of the new risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ from those expressed or implied by these forward-looking statements.

If any one or more of these expectations and assumptions proves incorrect, actual results will likely differ materially from those contemplated by the forward-looking statements. Even if all of the foregoing assumptions and expectations prove correct, actual results may still differ materially from those expressed in the forward-looking statements as a result of factors we may not anticipate or that may be beyond our control. While we cannot assess the future impact that any of these differences could have on our business, financial condition, results of operations and cash flows or the market price of shares of our common stock, the differences could be significant. We do not undertake to update any forward-looking statements made by us, whether as a result of new information, future events or otherwise.  You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report.

Company Information Available on the Internet

Our internet address is www.gpworldwide.com.  We make available free of charge through our internet site, our annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; and any amendment to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, (the “Exchange Act”) as soon as reasonably practicable after such material is electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (“SEC”).

PART I

Item 1:           Business

Introduction

GP Strategies Corporation (“GP Strategies” or the “Company”) was incorporated in Delaware in 1959. The Company is a New York Stock Exchange (“NYSE”) listed company traded under the symbol GPX.  The Company’s business consists of its training, engineering, technical services and consulting business operated by its subsidiary, General Physics Corporation (“General Physics” or “GP”) which was established in 1966. General Physics is a workforce development company that seeks to improve the effectiveness of organizations by providing training, management consulting, e-Learning solutions, engineering and technical services that are customized to meet the specific needs of clients. References in this report to “GP Strategies,” the “Company,” “we” and “our” are to GP Strategies and its subsidiaries, collectively.

General Development of Business

During the first four decades of our existence, we were engaged in a broad array of businesses, ranging from optical plastics to consulting services.  In June 2003, we embarked upon a plan to spin off non-core businesses and focus upon training, consulting, engineering and technical services.  On November 24, 2004, we completed the tax-free spin-off of National Patent Development Corporation (“NPDC”), which owned all of the stock of MXL Industries, Inc. (“MXL”),

1

Table of Contents

an interest in Five Star Products, Inc. (“Five Star”), and certain other non-core assets.  On September 30, 2005, we completed a taxable spin-off of our 57% interest in GSE Systems, Inc. (“GSE”), a stand alone publicly-owned company which provides simulation solutions and services to energy, process and manufacturing industries, through a dividend to our stockholders.  On January 19, 2006, we completed a restructuring of our capital stock, which included the repurchase of 2,121,500 shares of our common stock at a price of $6.80 per share, the repurchase of 600,000 shares of our Class B capital stock (“Class B stock”) at a price of $8.30 per share, and the exchange of 600,000 shares of our Class B stock into 600,000 shares of common stock for a cash premium of $1.50 per exchanged share.  The repurchase and exchange transactions had the effect of eliminating all outstanding shares of our Class B stock, which had ten votes per share.

We then began building our custom training business through internal growth and the acquisition of several complementary businesses.  On February 3, 2006, General Physics, through its wholly owned subsidiary, General Physics (UK) Ltd. (“GPUK”), completed the acquisition of Peters Management Consultancy Ltd. (“PMC”), a performance improvement and sales training company in the United Kingdom.  On January 23, 2007, General Physics completed the acquisition of the business of Sandy Corporation (“Sandy”), a leader in custom product sales training primarily in the U.S. automotive industry and previously part of the ADP Dealer Services division of ADP, Inc. (“ADP”). Subsequently, on June 1, 2007, General Physics, through its GPUK subsidiary, completed the acquisition of Smallpeice Enterprises Limited (“SEL”), a provider of business improvement and technical and management training services in the United Kingdom.  On October 1, 2007, General Physics acquired all of the outstanding membership interests of Via Training, LLC (“Via”), a U.S. custom e-Learning sales training company. On March 1, 2008, General Physics completed the acquisition of Performance Consulting Services, Inc. (“PCS”), an engineering and training company serving the power generation industry.

Company Overview

We are a leading independent provider of customized training solutions focused on performance improvement initiatives for our clients. We also provide consulting, engineering and technical services which enhance our customized training capabilities and diversify our service offerings. We serve a large customer base across a broad range of industries. We serve leading companies in the automotive, steel, oil and gas, power, chemical, electronics and technology, healthcare and food and beverage industries, as well as government agencies. We have over four decades of experience in developing solutions to optimize workforce performance by providing services and products to our clients that assist them in successfully integrating their employees, processes and technology.

Our training services and products support existing, as well as the launch of new, plants, products, equipment, technologies and processes. We offer a wide range of training business process outsourcing (“BPO”) services, including design, delivery and global management of comprehensive learning programs, to national and multinational businesses and government organizations and can deliver our services individually or as a complete, integrated training solution. We have global execution capabilities and currently provide custom training services in more than 30 countries to many industry leaders, such as CIGNA Corporation, Cisco Systems, Eli Lilly, ExxonMobil, General Motors, Microsoft, Toyota and United Technologies, as well as to government agencies including the U.S. Army. Our experience allows us to leverage our expertise across a wide variety of customer end markets ranging from heavy manufacturing such as automotive to the high tech bio-pharmaceutical industry. In 2008, for the fifth consecutive year, Training Industry, Inc., an industry trade organization, selected us as one of the Top 20 Companies in Training Outsourcing from among 400 companies. In addition, in 2008 Training Industry, Inc. selected us as one of the Top Sales Training Companies from among 200 companies.

Our consulting, engineering, and technical support services range from traditional business consulting, including lean enterprise consulting services, to specialized engineering and technical support services, such as design and evaluation services regarding facilities, processes and systems. Our consulting and engineering customers typically operate in technically complex industries such as oil and gas, power, chemical, aerospace, transportation and manufacturing industries, and include customers such as The Boeing Company, General Dynamics Corporation, Shell Oil Company, Mid-American Energy Company and Amerenue. We have a strong reputation for providing services for leading edge and emerging technologies and believe we are a leader in the rapidly developing field of design and construction of alternative fuel stations, including liquefied natural gas (“LNG”) fueling and hydrogen stations. In addition, our

2

Table of Contents

consulting services support regulatory and environmental compliance, modification of facilities and processes and plant performance improvement. We have a demonstrated track record of consulting and engineering performance.

Operating Segments

During the fourth quarter of 2008, we re-evaluated our reportable business segments under Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”) as a result of organizational and management reporting changes that were made primarily due to the retirement of one of our executive officers in 2008. We determined that the former Process, Energy & Government segment should be divided into two reportable segments. Prior to this change, we operated through three reportable business segments. As of December 31, 2008, we operated through four reportable business segments: (i) Manufacturing & BPO, (ii) Process & Government, (iii) Energy, and (iv) Sandy Training & Marketing (“Sandy”). In addition, during the first quarter of 2008, we transferred the management responsibility for our automotive technical training business unit from the Manufacturing & BPO segment to the Sandy segment. As a result of these changes, all prior period segment information has been reclassified to conform to the current year’s presentation.

We are organized by operating group, primarily based upon the markets served by each group and the services performed. Each operating group consists of strategic business units (“SBUs”) and business units (“BUs”) which are focused on providing specific products and services to certain classes of customers or within targeted markets. Across operating groups, SBUs and BUs, we integrate similar service lines, technology, information, work products, client management and other resources. Communications and market research, accounting, finance, legal, human resources, information systems and other administrative services are organized at the corporate level. Business development and sales resources are aligned with operating groups to support existing customer accounts and new customer development. Two of our reportable business segments, Manufacturing & BPO and Process & Government, represent an aggregation of certain operating groups in accordance with the aggregation criteria in SFAS No. 131, while our Energy and Sandy groups each represent one operating segment pursuant to SFAS No. 131. Further information regarding each business segment is discussed below.

Manufacturing & BPO. Our Manufacturing & BPO segment delivers training, curriculum design and development, staff augmentation, e-Learning services, system hosting, integration and help desk support, training business process outsourcing, and consulting and technical services primarily to large companies in the electronics and semiconductors, steel, healthcare, financial and other industries as well as to government agencies. Our October 2007 acquisition of Via has expanded our delivery capabilities and diversified our core client base in the software, electronics and semiconductors and retail markets.  Our ability to deliver a wide range of training services allows us to take over the entire learning function for the client, including their training personnel.

Process & Government. Our Process & Government segment has over four decades of experience providing consulting, engineering, technical and training services, including emergency preparedness, safety and regulatory compliance, chemical demilitarization and environmental services primarily to federal and state government agencies, large government contractors and petroleum and chemical refining companies. This segment also provides design and construction of alternative fuel stations, including LNG fueling and hydrogen stations.

Energy. Our Energy segment provides engineering services, products and training primarily to electric power utilities. Our proprietary EtaProTM Performance Monitoring and Optimization System provides a suite of performance solutions for power generation plants and is installed at over 600 power generating units in over 25 countries. In addition, this segment provides web-based training through our GPiLearnTM portal to over 25,000 power plant personnel in the U.S. and in over 30 countries. Our March 2008 acquisition of PCS strengthened and expanded our service offering to clients in the power generation industry.

Sandy Training & Marketing. Acquired in January 2007, Sandy is a provider of custom product sales training and has been a leader in serving manufacturing customers in the U.S. automotive industry for over 30 years. Sandy provides custom product sales training designed to better educate customer sales forces with respect to new product features and designs, in effect rapidly increasing the sales force knowledge base and enabling them to address detailed customer queries. Furthermore, Sandy helps our clients assess their customer relationship management strategy, measure performance against competitors and connect with their customers on a one-to-one basis. As mentioned

3

Table of Contents

above, our automotive technical training business unit was transferred from the Manufacturing & BPO segment to the Sandy segment during the first quarter of 2008.

Segment Financial Information

For financial information about our business segments and geographic operations and revenue, see Note 14 to the accompanying Consolidated Financial Statements.

Services and Products

Our personnel bring a wide variety of professional, technical and military backgrounds together to create cost-effective solutions for modern business and governmental challenges. Our primary service and product categories are discussed in more detail below.

Custom Training, Sales Training and Performance Improvement. We provide custom training services and products to support existing, as well as the launch of new, plants, products, equipment, technologies and processes. The range of services includes fundamental analysis of a client’s training needs, curriculum design, instructional material development (in hard copy, electronic/software or other format), information technology service support and delivery of training. Training products include custom instructor and student training manuals, and instructional materials suitable for web-based and blended learning solutions. Our instructional delivery capabilities include traditional classroom, structured on-the-job training (OJT), just-in-time methods, computer-based, web-based, video-based and the full spectrum of e-Learning technologies. Our e-Learning services enable us to function as a single-source e-Learning solutions provider through our integration services and hosting, the development and provisioning of proprietary content and the aggregation and distribution of third party content.  In addition, our Sandy segment provides customer relationship marketing (CRM) products including brand loyalty publications and other related products. Sandy develops personalized publications for automotive and non-automotive clients which establish a link between the manufacturer/dealer and each customer. Sandy has also produced brand specific portfolios that are installed in the gloveboxes of new cars and trucks at the time of vehicle assembly.

Business Process Outsourcing. We provide end-to-end business process outsourcing solutions, including the management of our customers’ training departments, as well as administrative processes, such as tuition assistance program management, vendor management, call center / help desk administration and learning management system (LMS) administration. Our training BPO services encompass a wide spectrum of learning engagements from transactional multi-week assignments focused on a single aspect of a learning process to multi-year contracts where we manage the learning infrastructure of our customer. In addition, we automate a large amount of our customers’ tuition reimbursement programs by utilizing our own proprietary software, Tuition Outsourced Processing Services (TOPS).

Consulting. Consulting services include not only training-related consulting services, but also more traditional business management, engineering and other disciplines. We are able to provide high-level lean enterprise consulting services, as well as training in the concept, methods and application of lean enterprise and other quality practices, organizational development and change management. We also provide engineering consulting services to support regulatory and environmental compliance, modification of facilities and processes, plant performance improvement, reliability-centered maintenance practices and plant start-up activities. Consulting services also include operations continuity assessment, planning, training and procedure development. Consulting products include proprietary training and reference materials.

Technical Support and Engineering. We are staffed and equipped to provide engineering and technical support services and products to clients. We have civil, mechanical and electrical engineers who provide consulting, design and evaluation services regarding facilities, processes and systems. We believe that we are a leader in the design and construction of alternative fuel stations, cryogenic systems and high pressure systems. Technical support services include procedure writing and configuration control for capital intensive facilities, plant start-up assistance, logistics support (e.g., inventory management and control), implementation and engineering assistance for facility or process modifications, facility management for high technology training environments, staff augmentation and help-desk

4

Table of Contents

support for standard and customized client desktop applications. Technical support products include our proprietary EtaPRO™ and Virtual PlantTM software applications that serve the power generation industry.

Competitive Strengths

We believe our key competitive strengths include:

Independent and Single-Source Custom Training Solutions Provider. We believe we are one of the largest independent single-source custom training solutions providers in the markets in which we compete. We provide business process outsourcing solutions spanning the full life-cycle of the training process, including the management of training departments and administrative processes for our customers. We believe that the breadth of our service and product offerings, which encompass fully integrated training business process outsourcing solutions as well as discrete services, allows us to better serve the needs of our clients by providing them with a single-source solution for custom training, consulting and technical and engineering services. We believe that the integration of our services into a single platform, together with our international presence and delivery capabilities, allows our customers to leverage an enterprise-wide solution to address their performance improvement needs in a way that streamlines their internal operations, improves the speed and efficiency at which critical know-how is disseminated on a firm-wide basis, and enables them to achieve their desired performance improvement goals.

Scalable Technology Platform. Our training programs are delivered online, in classroom settings or a combination of both. We have the ability to work with outside information technology (IT) vendors in combination with our own proprietary software in order to deliver a scalable technology platform capable of addressing training needs of various size and commitment, ranging from a one-time project to a multi-year training program.

Legacy Technical Expertise. In the 1960’s, we began providing technical services to the U.S. Navy Nuclear submarine program and nuclear power generation industry and have since maintained and expanded our reputation for providing technically complex consulting, engineering, and training services. Many of our employees have engineering degrees, technical training or years of relevant technical industry experience. Through repeat projects with industry leaders, such as ExxonMobil, Applied Materials and The Boeing Company, we have acquired significant industry experience in providing highly technical consulting services. We believe that our technical expertise allows us to address market opportunities for complex business challenges that require in-depth expertise and certifications typically acquired over several years of specialized training and many years of experience. We also believe that our ability to provide both training-related and business consulting services allows us to gain insight into operations of our customers, understand the challenges they face and develop optimal solutions to meet these challenges. We also believe that the knowledge that we develop while working with our clients provides us with a significant competitive advantage as those clients look to expand the scope of services outsourced to third party service providers.

Well Positioned to Capitalize on the Large Product Sales Training Market. We believe that the introduction of new products with advanced features, combined with the growing amount and accessibility of information available to consumers, requires companies to maintain a highly skilled and technologically current sales force to most effectively capture customer interest and confidence. In-house implementation of product sales training programs can be expensive and time-consuming as these programs typically involve significant levels of face-to-face training, in some cases across a large sales force that can be located around the globe. In addition, product sales training tends to be a continuous process, as the pace of new products and features in many cases requires year-round updating of the sales force. We have what we believe to be one of the industry’s leading product sales training platforms, and are well positioned to benefit from increased training outsourcing as companies look for ways to reduce costs.

Business Model Supports Visibility of Revenues. We believe the nature of our business, which includes established relationships with our clients, average project tenure of one year, as well as many long term contracts with our customers provides us with a platform from which to drive revenues and gives us visibility into our future performance. We have long-standing relationships with many of our clients, with over 60% of our top 25 clients having used our services for five or more years.  Additionally, over 90% of our annual revenue is generated by existing prior year clients. We also had a backlog for services under executed contracts of $131.7 million as of December 31, 2008, most of which we anticipate will be recognized as revenue during 2009.

5

Table of Contents

Highly Qualified and Dedicated Employees and Tenured Management Team. Our most important asset is our people, as the diverse skill set of our workforce enables us to serve our diverse and expanding global client base. As a result, we are committed to the continued development of our employees. We provide our employees with technical, functional, industry, managerial and leadership skill development and training throughout their careers with us. We seek to reinforce our employees’ commitment to our clients, culture and values through a comprehensive performance management system and a career philosophy that rewards both individual performance and teamwork. We also benefit from the skill and experience of our executive management team, who together have a combined 100 years experience in the training industry and have an average tenure with our company of over 20 years.

Contracts

We currently perform under fixed price (including fixed-fee per transaction), time-and-materials and cost-reimbursable contracts. Our contracts with the U.S. Government have predominantly been cost-reimbursable contracts and fixed price contracts. We are required to comply with Federal Acquisition Regulations and Government Cost Accounting Standards with respect to services provided to the U.S. Government and its agencies. These Regulations and Standards govern the procurement of goods and services by the U.S. Government and the nature of costs that can be charged with respect to such goods and services. All such contracts are subject to audit by a designated government audit agency, which in most cases is the Defense Contract Audit Agency (the “DCAA”). The DCAA has audited our contracts through 2004 without any material disallowances.

The following table illustrates the percentage of our total revenue attributable to each type of contract for the year ended December 31, 2008:

Fixed price contracts provide for payment to us of pre-determined amounts as compensation for the delivery of specific products or services, without regard to the actual costs incurred. We bear the risk that increased or unexpected costs required to perform the specified services may reduce our profit or cause us to sustain a loss, but we have the opportunity to derive increased profit if the costs required to perform the specified services are less than expected. Fixed price contracts generally permit the client to terminate the contract on written notice; in the event of such termination we would typically be paid a proportionate amount of the fixed price.

Time-and-materials contracts generally provide for billing of services based upon the hourly billing rates of the employees performing the services and the actual expenses incurred multiplied by a specified mark-up factor up to a certain aggregate dollar amount. Our time-and-materials contracts include certain contracts under which we have agreed to provide training, engineering and technical services at fixed hourly rates. Time-and-materials contracts generally permit the client to control the amount, type and timing of the services to be performed by us and to terminate the contract on written notice. If a contract is terminated, we are typically paid for the services we have provided through the date of termination.

Cost-reimbursable contracts provide for us to be reimbursed for our actual direct and indirect costs plus a fee. These contracts also are generally subject to termination at the convenience of the client. If a contract is terminated, we are typically reimbursed for our costs through the date of termination, plus the cost of an orderly termination and paid a proportionate amount of the fee.

International

We conduct our business outside of the United States in over 30 countries primarily through General Physics’ wholly owned subsidiaries located in the United Kingdom, France, Germany, Canada, Mexico, Singapore, Malaysia, China and India. Through these subsidiaries, we are capable of providing substantially the same services and products as are available to clients in the United States, although modified as appropriate to address the language, business practices

6

Table of Contents

and cultural factors unique to each client and country. In combination with our subsidiaries, we are able to coordinate the delivery to multi-national clients of services and products that achieve consistency on a global, enterprise-wide basis.  Revenue from operations outside the United States represented approximately 13% of our consolidated revenue for the year ended December 31, 2008 (see Note 14 to the accompanying Consolidated Financial Statements).

Customers

During 2008, we provided services to over 500 customers. Significant customers include multinational automotive manufacturers, such as General Motors Corporation, Ford Motor Company and Hyundai Motor Company; commercial electric power utilities, such as Bruce Power, L.P., Mid-American Energy Company and Luminant Energy; governmental agencies, such as the U.S. Department of Defense, U.S. Department of Treasury, Office of Personnel Management, and U.S. Social Security Administration; U.S. government prime contractors, such as Bechtel National, Inc. and URS Corporation; and other large multinational companies, such as Cisco Systems, Inc., Texas Instruments, Microsoft, Eli Lilly & Co., United Technologies Corporation, Agilent Technologies, Inc., CIGNA Corporation, The Boeing Company, Exxon Mobil and United States Steel Corporation.

We have a concentration of revenue from General Motors Corporation and its affiliates (“General Motors”) as well as a market concentration in the automotive sector. Revenue from General Motors accounted for approximately 20% of our consolidated revenue for the year ended December 31, 2008, and revenue from the automotive industry accounted for approximately 28% of our consolidated revenue for the year ended December 31, 2008.  In addition, revenue from the U.S. Government accounted for approximately 18% of our consolidated revenue for the year ended December 31, 2008. Revenue was derived from many separate contracts with a variety of government agencies that are regarded by us as separate customers. No other customer accounted for more than 10% of our revenue in 2008.

Employees

Our principal resource is our personnel. As of December 31, 2008, we had 1,777 employees and access to over 100 adjunct instructors and consultants. Our future success depends to a significant degree upon our ability to continue to attract, retain and integrate into our operations instructors, engineers, technical personnel and consultants who possess the skills and experience required to meet the needs of our clients.

We utilize a variety of methods to attract and retain personnel. We believe that the compensation and benefits offered to our employees are competitive with the compensation and benefits available from other organizations with which we compete for personnel. In addition, we encourage the professional development of our employees, both internally via GP University (our own internal training resource) and through third parties, and we also offer tuition reimbursement for job-related educational costs. We believe that we have good relations with our employees.

Competition

We face a highly competitive environment. The principal competitive factors are the experience and capability of service personnel, performance, quality and functionality of products, reputation and price. The training industry is highly fragmented and competitive, with low barriers to entry and no single competitor accounting for a significant market share. Our competitors include several large publicly traded and privately held companies, vocational and technical training schools, degree-granting colleges and universities, continuing education programs and thousands of small privately held training providers and individuals. In addition, many of our clients maintain internal training departments, which have the resources and ability to provide the same or similar services in-house. Some of our competitors offer services and products at lower prices, and some competitors have significantly greater financial, managerial, technical, marketing and other resources. Moreover, we expect to face additional competition from new entrants into the training and performance improvement market due, in part, to the evolving nature of the market and the relatively low barriers to entry. There can be no assurance that we will be successful against such competition.

Engineering and consulting services such as those that we provide are performed by many of the customers themselves, large architectural and engineering firms that have expanded their range of services beyond design and construction activities, large consulting firms, information technology companies, major suppliers of equipment and individuals and independent service companies similar to us. The engineering and construction markets are highly competitive and require substantial resources and capital investment in equipment, technology and skilled personnel.

7

Table of Contents

Many of our competitors for our engineering and technical consulting services have greater financial resources than we do.  Competition also places downward pressure on our contract prices and profit margins.  We cannot provide any assurance that we will be able to compete successfully, and the failure to do so could adversely affect our business and financial condition.

Marketing

Business development and sales resources are aligned with our operating groups to support existing customer accounts and new customer development. We use attendance at trade shows, presentations of technical papers at industry and trade association conferences, press releases, webinars and workshops given by our personnel to serve an important marketing function. We also carry out selective advertising and send a variety of sales literature to current and prospective clients. By staying in contact with clients and looking for opportunities to provide further services, we sometimes obtain contract awards or extensions without having to undergo competitive bidding. In other cases, clients request us to bid competitively. In both cases, we submit proposals to the client for evaluation. The period between submission of a proposal to final award can range from 30 days or less (generally for noncompetitive, short-term contracts), to a year or more (generally for large, competitive multi-year contracts).

Backlog

Our backlog for services under executed contracts and subcontracts was approximately $131.7 million and $140.3 million as of December 31, 2008 and 2007, respectively. We anticipate that most of our backlog as of December 31, 2008 will be recognized as revenue during 2009. However, the rate at which services are performed under certain contracts, and thus the rate at which backlog will be recognized, is at the discretion of the client and most contracts are, as mentioned above, subject to termination by the client upon written notice.

Environmental Statutes and Regulations

We provide environmental engineering services to our clients, including the development and management of site environmental remediation plans. Due to the increasingly strict requirements imposed by federal, state and local environmental laws and regulations (including, without limitation, the Clean Water Act, the Clean Air Act, Superfund, the Resource Conservation and Recovery Act and the Occupational Safety and Health Act), our opportunities to provide such services may increase.

Our activities in connection with providing environmental engineering services may also subject us to federal, state and local environmental laws and regulations. Although we subcontract most remediation construction activities and all removal and offsite disposal and treatment of hazardous substances, we could still be held liable for clean-up or violations of such laws as an “operator” or otherwise under such federal, state and local environmental laws and regulations with respect to a site where we have provided environmental engineering and support services. We believe, however, that we are in compliance in all material respects with such environmental laws and regulations.

Item 1A:  Risk Factors

The following are some of the factors that we believe could cause our actual results to differ materially from historical results and from the results contemplated by the forward-looking statements contained in this report and other public statements made by us.  Additional risks and uncertainties not presently known to us, or that we currently see as immaterial, may also harm our business.  Most of these risks are generally beyond our control.  If any of the risks or uncertainties described below, or any such additional risks and uncertainties actually occur, our business, results of operations and financial condition could be materially and adversely affected.

Changing economic conditions in the United States, the United Kingdom and the other countries in which we conduct our operations could harm our business, results of operations and financial condition.

Our revenues and profitability are related to general levels of economic activity and employment primarily in the United States and the United Kingdom.  As a result, the current economic recession in both of those countries could harm our business and financial condition, as already seen in part by a decrease in our revenue during the fourth quarter of 2008. A significant portion of our revenues is derived from Fortune 500 companies and their international

8

Table of Contents

equivalents, which historically have decreased expenditures for external training during economic downturns.  If the economies in which these companies operate remain or are further weakened in any future period, these companies may reduce their expenditures on external training, and other products and services supplied by us, which could materially and adversely affect our business, results of operations and financial condition.  As we expand our business globally, we might be subject to additional risks associated with economic conditions in the countries into which we enter or in which we expand our operations.

Our revenue and financial condition could be adversely affected by the loss of business from significant customers, including automotive manufacturers, the U.S. Government and other customers.

During the years ended December 31, 2008 and 2007, revenue from General Motors accounted for approximately 20% and 21%, respectively, of our consolidated revenue and revenue from our customers in the automotive industry, including General Motors, accounted for approximately 28% and 30%, respectively, of our consolidated revenue.  In addition, accounts receivable from General Motors totaled $14.4 million as of December 31, 2008. In recent periods, General Motors and other auto manufacturers have reported a sharp reduction in vehicle sales which has resulted in substantial losses and severe liquidity problems, leading to efforts to restructure their operations to remain solvent and to seek government funding.  Further cost-cutting, a lack of sufficient funding, potential bankruptcy or a decision to cease or reduce contract awards to us, could adversely affect our business and financial condition. In addition, default in payment of accounts receivable from General Motors or other significant customers could cause us to incur substantial losses.

For the years ended December 31, 2008, 2007 and 2006, revenue from the U.S. Government represented approximately 18%, 18% and 29% of our consolidated revenue, respectively.  However, the revenue was derived from a number of separate contracts with a variety of government agencies we regard as separate customers.  Government contracts are subject to various uncertainties, restrictions and regulations, including oversight audits by government representatives and profit and cost controls.  If we fail to comply with all of the applicable regulations, requirements or laws, our existing contracts with the government could be terminated and our ability to seek future government contracts or subcontracts could be adversely affected.  In addition, the funding of government contracts is subject to Congressional appropriations.  Budget decisions made by the U.S. Government are outside of our control and could result in a reduction or elimination of contract funding.  A shift in government spending to other programs in which we are not involved or a reduction in general government spending could have a negative impact on our financial condition.  The U.S. Government is under no obligation to maintain funding for or to continue to fund our contracts or subcontracts.

Although no other customers account for more than 10% of our consolidated revenue, we experienced declines in our revenue during the fourth quarter of 2008 from certain other customers, primarily in the manufacturing sector. A further loss of business from these or other customers could adversely affect our revenue and financial condition. In addition, substantially all of our contracts are subject to termination on written notice and, therefore, our operations are dependent upon our customers’ continued satisfaction with our services and their continued inability or unwillingness to perform those services themselves or to engage other third-parties to deliver such services.

The price of our common stock is highly volatile and could further decline regardless of our operating performance.

The market price of our common stock could fluctuate in response to, among other things:

9

Table of Contents

These factors might adversely affect the trading price of our common stock and prevent you from selling your common stock at or above the price at which you purchased it.  In addition, in recent periods, the stock market has experienced significant price and volume fluctuations.  This volatility has had a significant impact on the market price of securities issued by many companies, including ours and others in our industry.  These changes can occur without regard to the operating performance of the affected companies.  As a result, the price of our common stock could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce our share price.

We incurred a goodwill impairment charge of $5.5 million for the year ended December 31, 2008 and may incur further material goodwill and other intangible asset impairment charges in future periods.

We recognized a goodwill impairment loss of $5.5 million for the year ended December 31, 2008 related to the Sandy segment primarily due to a significant decline in our market capitalization during the fourth quarter of 2008 and uncertainty regarding the automotive industry. See the Management Discussion of Critical Accounting Policies section in Item 7 for further discussion regarding the factors leading to the goodwill impairment and the valuation methodologies and assumptions used in the goodwill impairment test. As of December 31, 2008 after recognizing an impairment charge of $5.5 million, we had remaining goodwill of $60.3 million and other intangible assets of $6.7 million in connection with acquisitions. In accordance with U.S. generally accepted accounting principles, goodwill is reviewed annually for impairment unless circumstances or events indicate that an impairment test should be performed sooner to determine if there has been any impairment to value.  The review for impairment is based on several factors requiring judgment. A decrease in expected cash flows or change in market conditions, among other things, may indicate potential impairment of recorded goodwill.

Our acquisitions in recent years have not involved the acquisition of significant tangible assets and, as a result, a significant portion of the purchase price in each case was allocated to goodwill and other intangible assets. We will continue to test for impairment on an annual basis, coinciding with our fiscal year-end, or on an interim basis if events and circumstances indicate a possible impairment. However, we may incur further material goodwill or other intangible asset impairment charges in the future related to past acquisitions.

Our financial results are subject to quarterly fluctuations, which may result in volatility or declines in our stock price.

We experience, and expect to continue to experience, fluctuations in quarterly operating results. Consequently, you should not deem our results for any particular quarter to be necessarily indicative of future results.  Factors that may affect quarterly operating results in the future include:

In addition, we provide domestic preparedness and emergency management services, including hurricane and other disaster recovery services, which can result in revenue volatility associated with the unpredictability of certain events occurring and the need for these types of services.  Accordingly, it is difficult for us to forecast our growth and results of operations on a quarterly basis.  If we fail to meet expectations of investors or analysts, our stock price may fall

10

Table of Contents

rapidly and without notice.  Furthermore, the fluctuation of quarterly operating results may render less meaningful period-to-period comparisons of our operating results.

We are vulnerable to the cyclical nature of the markets we serve.

The demand for our services and products is dependent upon training and marketing budgets and the existence of projects with training, engineering, procurement, construction or management needs.  Although downturns can impact our entire business, the automotive, construction, alternative fuels and energy markets are examples of businesses that are cyclical in nature and have been affected from time to time by fluctuations in either national or worldwide demand for these projects.  Industries such as these and many of the others we serve have historically been and might continue to be vulnerable to general downturns and are and might continue to be cyclical in nature.  During economic downturns, our clients might demand better terms.  In addition, many of our training contracts are subject to modification in the event of certain material changes in the business or demand for our services.  Our government clients also might face budget deficits that prohibit them from funding proposed and existing projects.  As a result, our past results have varied considerably and could continue to vary depending upon the demand for future projects in the industries that we serve.

We may continue making acquisitions as part of our growth strategy, which subjects us to numerous risks that could have a material adverse effect on our business, financial condition and results of operations.

As part of our growth strategy, we may continue to pursue selective acquisitions of businesses that broaden our service and product offerings, deepen our capabilities and allow us to enter attractive new domestic and international markets.  Pursuit of acquisitions exposes us to many risks, including that:

Our failure to successfully accomplish future acquisitions or to manage and integrate completed or future acquisitions could have a material adverse effect on our business, financial condition or results of operations.  We can provide no assurances that we:

In addition, acquisitions might involve our entry into new businesses that might not be as profitable as we expect.  We can provide no assurances that our expectations regarding the profitability of future acquisitions will prove to be accurate. Acquisitions might also increase our exposure to the risks inherent in certain markets or industries.  For example, Sandy’s business is heavily oriented toward providing product sales training to auto manufacturers in the U.S. and, consequently, this acquisition increased our exposure to the risks of the auto manufacturing industry.

As a result of completed and possible future acquisitions, our past performance is not indicative of future performance, and investors should not base their expectations as to our future performance on our historical results.

11

Table of Contents

Future acquisitions may require that we incur debt or issue dilutive equity.

Future acquisitions may require us to incur debt, under our existing credit facility or otherwise, or issue equity, resulting in additional leverage or dilution of ownership.

Difficulties in integrating acquired businesses could result in reduced revenues and income.

We might not be able to integrate successfully any business we have acquired or could acquire in the future.  The integration of the businesses will be complex and time consuming and will place a significant strain on our management, administrative services personnel and information systems.  This strain could disrupt our business.  Furthermore, we could be adversely impacted by unknown liabilities of acquired businesses.  We could encounter substantial difficulties, costs and delays involved in integrating common accounting, information and communication systems, operating procedures, internal controls and human resources practices, including incompatibility of business cultures and the loss of key employees and customers.  Also, depending on the type of acquisition, a key element of our strategy may include retaining management and key personnel of the acquired business to operate the acquired business for us.  Our inability to retain these individuals could materially impair the value of an acquired business. These difficulties could reduce our ability to gain customers or retain existing customers, and could increase operating expenses, resulting in reduced revenues and income and a failure to realize the anticipated benefits of acquisitions.

Our business and financial condition could be adversely affected by government limitations on contractor profitability.

A significant portion of our revenue and profit is derived from contracts with the U.S. Government and subcontracts with prime contractors of the U.S. Government.  The U.S. Government places limitations on contractor profitability; therefore, government-related contracts might have lower profit margins than the contracts we enter into with commercial customers.

A negative audit or other actions by the U.S. Government could adversely affect our future operating performance.

As a U.S. Government contractor, we must comply with laws and regulations relating to U.S. Government contracts and are subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities to which companies with solely commercial customers are not subject.  We are subject to audit and investigation by the DCAA and other government agencies with respect to our compliance with federal laws, regulations and standards.  These audits may occur several years after the period to which the audit relates.  The DCAA, in particular, also reviews the adequacy of, and our compliance with, our internal control systems and policies, including our purchasing, property, estimating, compensation and management information systems.  Any payments received by us from the U.S. Government for allowable direct and indirect costs are subject to adjustment after audit by government auditors and repayment to the government if the payments exceed allowable costs as defined in the government contracts, which could result in a material adjustment of the payments received by us under such contracts.  In addition, any costs found to be improperly allocated to a specific contract will not be reimbursed.  If we are found to be in violation of the law, we may be subject to civil or criminal penalties or administrative sanctions, including contract termination, the assessment of penalties and suspension or debarment from doing business with U.S. Government agencies.  For example, many of the contracts we perform for the U.S. Government are subject to the Service Contract Act, which requires hourly employees to be paid certain specified wages and benefits.  If the Department of Labor determines that we violated the Service Contract Act or its implementing regulations, we could be suspended for a period of time from winning new government contracts or renewals of existing contracts, which could materially and adversely affect our future operating performance.

Furthermore, our reputation could suffer serious harm if allegations of impropriety were made against us. If we are suspended or prohibited from contracting with the U.S. Government, or any significant U.S. Government agency, if our reputation or relationship with U.S. Government agencies becomes impaired or if the U.S. Government otherwise ceases doing business with us or significantly decreases the amount of business it does with us, it could materially and adversely affect our operating performance and could result in additional expenses and a loss of revenue.

12

Table of Contents

We are a party to fixed price contracts and may enter into similar contracts in the future, which could result in reduced profits or losses if we are not able to accurately estimate or control costs.

A significant portion of our revenue is attributable to contracts entered into on a fixed price basis, which allows us to benefit from cost savings, but we carry the burden of cost overruns.  If our initial estimates are incorrect, or if unanticipated circumstances arise, we could experience cost overruns which would result in reduced profits or even result in losses on these contracts.  Our financial condition is dependent upon our ability to maximize our earnings from our contracts.  Lower earnings or losses caused by cost overruns could have a negative impact on our financial results.

Under time and materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses.  Under cost-reimbursable contracts, which are subject to a contract ceiling amount, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based.  However, if costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, we may not be able to obtain reimbursement for all such costs.

Our inability to successfully estimate and manage costs on each of these contract types may materially and adversely affect our financial condition. Cost overruns also may adversely affect our ability to sustain existing programs and obtain future contract awards.

Our revenues may be adversely affected if we fail to win competitively awarded contracts or to receive renewal or follow-on contracts.

We obtain many of our significant contracts, including U.S. Government contracts, through a competitive bidding process. Competitive bidding presents a number of risks, including, without limitation:

There are no assurances that we will continue to win competitively awarded contracts or to receive renewal or follow-on contracts. Renewal and follow-on contracts are important because our contracts are for fixed terms. These terms vary from shorter than one year to over five years, particularly for contracts with extension options. The loss of revenues from our possible failure to win competitively awarded contracts or to obtain renewal or follow-on contracts may be significant because competitively awarded contracts account for a substantial portion of our sales.

Our backlog is subject to reduction and cancellation, which could negatively impact our future revenues or earnings.

Our backlog for services under executed contracts (including subcontracts and purchase orders) was approximately $131.7 million, $140.3 million and $85.3 million as of December 31, 2008, 2007 and 2006, respectively.  There can be no assurance that the revenues projected in our backlog will be realized or, if realized, will result in profits.  Further, contract terminations or reductions in the original scope of contracts reflected in our backlog might occur at any time as discussed below in more detail.

13

Table of Contents

Our backlog consists of projects for which we have signed contracts from customers.  The rate at which services are performed under contracts, and thus the rate at which backlog will be recognized, is at the discretion of the client.  We cannot predict with certainty when or if backlog will be performed.  In addition, even where a project proceeds as scheduled, it is possible that customers could default or otherwise fail to pay amounts owed to us.  Material delays, terminations or payment defaults under contracts included in our backlog could have a material adverse effect on our business, results of operations and financial condition.

In addition, most of our contracts are subject to termination by the client upon written notice.  Reductions in our backlog due to termination by a customer or for other reasons could materially and adversely affect the revenues and earnings we actually receive from contracts included in our backlog.  If we experience terminations of significant contracts or significant scope adjustments to contracts reflected in our backlog, our financial condition, results of operations, and cash flow could be materially and adversely impacted.

We rely on third parties, including subcontractors, suppliers and joint venture partners, to perform a portion of the services we must provide to our customers and disputes with or the failure to perform satisfactorily of such a third party could materially and adversely affect our performance and our ability to obtain future business.

Many of our contracts involve subcontracts or agreements with other companies upon which we rely to perform a portion of the services we must provide to our customers.  There is a risk that we may have disputes with our subcontractors, including disputes regarding the quality and timeliness of work performed by the subcontractor, customer concerns about the subcontractor, our failure to extend existing task orders or issue new task orders under a subcontract or our hiring of personnel of a subcontractor.  A failure by one or more of our subcontractors to satisfactorily provide, on a timely basis, the agreed upon services may materially and adversely impact our ability to perform our obligations as the prime contractor.  Subcontractor performance deficiencies could expose us to liability and have a material adverse effect on our ability to compete for future contracts and orders.

Also, from time to time we have entered, and expect to continue to enter, into joint venture, teaming and other similar arrangements which involve risks and uncertainties. These risks and uncertainties could result in reduced profits or, in some cases, significant losses for us with respect to the joint venture, teaming and other similar arrangements.

We maintain a workforce based upon anticipated staffing needs.  If we do not receive future contract awards or if these awards are delayed or reduced in scope or funding, we could incur significant costs.

Our estimates of future staffing requirements depend in part on the timing of new contract awards.  We make our estimates in good faith, but our estimates could be inaccurate or change based upon new information.  In the case of larger projects, it is particularly difficult to predict whether we will receive a contract award and when the award will be announced.  In some cases the contracts that are awarded require staffing levels that are different, sometimes lower, than the levels anticipated when the work was proposed.  The uncertainty of contract award timing and changes in scope or funding can present difficulties in matching our workforce size with our contract needs.  If an expected contract award is delayed or not received, or if a contract is awarded for a smaller scope of work than proposed, we could incur significant costs associated with making or failing to make reductions in staff.

Failure to continue to attract and retain qualified personnel could harm our business.

Our principal resource is our personnel.  A significant portion of our revenue is derived from services and products that are delivered by instructors, engineers, technical personnel and consultants.  Our consulting, technical training and engineering services require the employment of individuals with specific skills, training, licensure and backgrounds.  An inability to hire or maintain employees with the required skills, training, licensure or backgrounds could have a material adverse effect on our ability to provide quality services, to expand the scope of our service offerings or to attract or retain customers or to accept contracts, which could negatively impact our business and financial condition.  In order to initiate and develop client relationships and execute our growth strategy, we must continue to hire and maintain qualified salespeople.  We must also continue to attract and develop capable management personnel to guide our business and supervise the use of our resources.

Similarly, our U.S. Government contracts require employment of individuals with specified skills, work experience, licensures, security clearances and backgrounds.  An inability to hire or maintain employees with the required skills,

14

Table of Contents

work experience, licensure, security clearances or backgrounds could have a material adverse effect on our ability to win new contracts or satisfy existing contractual obligations, and could result in additional expenses or possible loss of revenue.

In addition, certain of our contracts require our employment of skilled engineers.  There is, however, a significant shortage of skilled engineers. Certain high-growth industries, such as the oil and gas and energy industries in particular, are experiencing significant shortages of skilled engineers due to the rapid technological advancement and expansion in those industries coupled with minimal increases in the total number of skilled engineers.  As a result, the unemployment rate for such skilled engineers is low and it has been difficult for both us and our clients and competitors to attract and retain qualified personnel.

Competition for qualified personnel can be intense.  We cannot assure you that qualified personnel will continue to be available to us or will be available to us when our needs arise or on terms favorable to us.  Any failure to attract or retain qualified instructors, engineers, technical personnel, consultants, salespeople and managers in sufficient numbers could have a material adverse effect our business and financial condition.

The loss of our key personnel, including our executive management team, could harm our business.

Our success is largely dependent upon the experience and continued services of our executive management team and our other key personnel.  The loss of one or more of our key personnel and a failure to attract, develop or promote suitable replacements for them could materially and adversely affect our business, results of operation or financial condition.

Competition could materially and adversely affect our performance.

The training industry is highly fragmented and competitive, with low barriers to entry and no single competitor accounting for a significant market share.  Our competitors include divisions of several large publicly traded and privately held companies, vocational and technical training schools, degree-granting colleges and universities, continuing education programs and thousands of small privately held training providers and individuals.  In addition, many of our clients maintain internal training departments, which have the resources and ability to provide the same or similar services in-house.  Some of our competitors offer similar services and products at lower prices, and some competitors have significantly greater financial, managerial, technical, marketing and other resources.  Moreover, we expect to face additional competition from new entrants into the training and performance improvement market due, in part, to the evolving nature of the market and the relatively low barriers to entry.

The engineering and construction markets in which we compete are also highly competitive.  Many of our competitors are niche engineering and construction companies.  In some instances, it is necessary for us to partner with those competitors who meet the small business administration’s criteria for a small business in order to win contract awards.  This competition places downward pressure on our contract prices and profit margins.  Intense competition is expected to continue in our training, engineering and technical services markets, presenting us with significant challenges in our ability to maintain strong growth rates and acceptable profit margins.  If we are unable to meet these competitive challenges, we could lose market share to our competitors and experience an overall reduction in our profits.

We cannot provide any assurance that we will be able to compete successfully in the industries or markets in which we compete, and the failure to do so could materially and adversely affect our business, results of operations and financial condition.

Failure to keep pace with technology and changing market needs could harm our business.

Our future success will depend upon our ability to adapt to changing client needs, to gain expertise in technological advances rapidly and to respond quickly to evolving industry trends and market needs.  Many of our clients are demanding that our services be available across the U.S. and worldwide.  We cannot assure you that we will be able to expand our operations into all geographic areas into which our multinational clients seek to use our services or that we will be able to attract and retain qualified personnel to provide our services in all such geographic areas.  We also cannot assure you that we will be successful in adapting to advances in technology or marketing our services and products in advanced formats.  In addition, services and products delivered in the newer formats might not provide

15

Table of Contents

comparable training results. Furthermore, subsequent technological advances might render moot any successful expansion of the methods of delivering our services and products.  If we are unable to develop new means of delivering our services and products due to capital, personnel, technological or other constraints, our business, results of operations and financial condition could be materially and adversely affected.

We have only a limited ability to protect the intellectual property rights that are important to our success, and we face the risk that our services or products may infringe upon the intellectual property rights of others.

Our future success depends, in part, upon our ability to protect our proprietary methodologies and other intellectual property, including our EtaPROTM software.  Existing laws of some countries in which we provide or license or intend to provide or license our services or products may offer only limited protection of our intellectual property rights.  We rely upon a combination of trade secrets, confidentiality policies, non-disclosure and other contractual arrangements and copyright and trademark laws to protect our intellectual property rights.  The steps we take in this regard might not be adequate to prevent or deter infringement or other misappropriation of our intellectual property, and we may not be able to detect unauthorized use or take appropriate and timely steps to enforce our intellectual property rights.  Protecting our intellectual property rights might also consume significant management time and resources.

We cannot be sure that our services and products, or the products of others that we offer to our clients, do not infringe on the intellectual property rights of third parties, and we might have infringement claims asserted against us or against our clients.  These claims might harm our reputation, result in financial liabilities and prevent us from offering some services or products.  We have generally agreed in our contracts to indemnify our clients against expenses or liabilities resulting from claimed infringements of the intellectual property rights of third parties.  In some instances, the amount of these indemnities could be greater than the revenues we receive from the client.  Any claims or litigation in this area, whether we ultimately win or lose, could be time-consuming and costly, injure our reputation or require us to enter into royalty or licensing arrangements.  We might not be able to enter into these royalty or licensing arrangements on acceptable terms.  Any limitation on our ability to provide or license a service or product could cause us to lose revenue-generating opportunities and require us to incur additional expenses to develop new or modified solutions for future projects.

Our information technology systems are subject to risks that we cannot control.

Our information technology systems are dependent upon global communications providers, web browsers, telephone systems, and other aspects of the Internet infrastructure that have experienced system failures and electrical outages in the past.  Our systems are susceptible to slow access and download times, outages from fire, floods, power loss, telecommunications failures, break-ins, and similar events.  Our servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer systems.  The occurrence of any of these events could disrupt or damage our information technology systems and inhibit our internal operations, our ability to provide services to our customers, and the ability of our customers to access our information technology systems.  This could result in our loss of customers, loss of revenue or a reduction in demand for our services.

A breach of our security measures could harm our business, results of operations and financial condition.

Our databases contain confidential data of our clients and our clients’ customers, employees and vendors.  A party who is able to circumvent our security measures could misappropriate such confidential information or interrupt our operations.  Many of our contracts require us to comply with specific data security requirements.  If we are unable to maintain our compliance with these data security requirements or any person, including any of our current or former employees, penetrates our network security or misappropriates sensitive data, we could be subject to significant liabilities to our clients for breaching these data security requirements or other contractual confidentiality provisions.  Furthermore, unauthorized disclosure of sensitive or confidential data of our clients or other parties, whether through breach of our computer systems, systems failure or otherwise, could also damage our reputation and cause us to lose existing and potential clients.  We may also be subject to civil actions for breaches related to such data or need to expend significant capital and other resources to continue to protect against security breaches or to address any problem they may cause.

16

Table of Contents

Our international sales and operations expose us to various political and economic risks, which could have a material adverse effect on our business, results of operations and financial condition.

Our revenue outside of the U.S. was approximately 13%, 11% and 12% of our total revenue for the years ended December 31, 2008, 2007 and 2006, respectively. We conduct our business primarily in the U.S., the United Kingdom, Canada, Mexico, Malaysia and Singapore, but also in other developed and developing countries, including India and China.  We intend to continue to expand our global operations which could involve expanding into countries other than those in which we currently operate.  It could also involve expanding into less developed countries, which may have less political, social or economic stability and less developed infrastructure and legal systems.  International sales and operations might be subject to a variety of risks, including:

As we expand our business into new countries, we may increase our exposure to the risks discussed above. An adverse development relating to one or more of these risks could affect our relationships with our customers or could have a material adverse effect on our business, results of operations and financial condition.

We are subject to risks associated with currency fluctuations, which could have a material adverse effect on our results of operations and financial condition.

Approximately 13% of our revenue and costs for the year ended December 31, 2008 were denominated in foreign currencies, including the British Pound Sterling, the Canadian Dollar and the Euro, and, to a lesser extent, the Mexican Peso, the Malaysian Ringgit, the Indian Rupee, the Singapore Dollar and the Chinese Yuan. British Pound Sterling-denominated revenue represented approximately 10% of our revenue for the year ended December 31, 2008.  As a result, changes in the exchange rates of these foreign currencies to the U.S. Dollar will affect our consolidated U.S. dollar revenue, cost of revenue and operating margins and could result in exchange losses. The impact of future exchange rate fluctuations on our results of operations cannot be accurately predicted.

Business disruptions could adversely affect our future sales, financial condition, reputation or stock price or increase costs and expenses.

Our business, and that of our key suppliers and customers, may be impacted by disruptions including, but not limited to, threats to physical security, information technology attacks or failures, damaging weather or other acts of nature and pandemics or other public health crises.  Such disruptions could affect our internal operations or services provided to customers, adversely impacting our sales, financial condition, reputation or stock price or increase our costs and expenses.

We are subject to potential liabilities which are not covered by our insurance.

We engage in activities in which there are substantial risks of potential liability.  We provide services involving electric power distribution and generation, nuclear power, chemical weapons destruction, petrochemical process

17

Table of Contents

training, pipeline operations, volatile fuels such as hydrogen and liquefied natural gas (“LNG”), environmental remediation, engineering design and construction management.  We maintain a consolidated insurance program (including general liability coverage) covering the companies we currently own, including General Physics, as well as certain risks associated with companies we no longer own, including GSE and NPDC.  Claims by or against any covered insured could reduce the amount of available insurance coverage for the other insureds and for other claims. In addition, certain liabilities might not be covered at all, such as deductibles, self-insured retentions, amounts in excess of applicable insurance limits and claims that fall outside the coverage of our policies.

Although we believe that we currently have appropriate insurance coverage, we do not have coverage for all of the risks to which we are subject and we may not be able to obtain appropriate coverage on a cost-effective basis in the future.

Our policies exclude coverage for incidents involving nuclear liability, and we may not be covered by U.S. laws or industry programs providing liability protection for licensees of the Nuclear Regulatory Commission (typically utilities) for damages caused by nuclear incidents; we are not a licensee and few of our contracts with clients have contained provisions waiving or limiting their liability.  Therefore, we could be materially and adversely affected by a nuclear incident.  In addition, certain environmental risks, such as liability under the Comprehensive Environmental Response, Compensation, and Liability Act, as amended, (“Superfund”), also might not be covered by our insurance.

Some of our policies, such as our professional liability insurance policy, provide coverage on a “claims-made” basis covering only claims actually made during the policy period then in effect.  To the extent that a risk is not insured within our then-available coverage limits, insured under a low-deductible policy, indemnified against by a third party or limited by an enforceable waiver or limitation of liability, claims could be material and could materially and adversely affect our business, results of operations and financial condition.

We could incur substantial costs as a result of violations of, or liabilities under, environmental laws.

We provide environmental engineering services, including the development and management of site environmental remediation plans.  Although we subcontract most remediation construction activities, and in all cases subcontract the removal and off-site disposal and treatment of hazardous substances, we could be subject to liability relating to the environmental services we perform directly or through subcontracts. For example, if we were deemed under federal or state laws, including Superfund, to be an “operator” of sites to which we provide environmental engineering and support services, we could be subject to liability for cleanup costs or violations of applicable environmental laws and regulations at such sites.  Any incurrence of any substantial Superfund or other environmental liability could materially and adversely affect our business, results of operations or financial condition by reducing profits, causing us to incur losses related to the cost of resolving such liability or otherwise.

In addition, our environmental engineering services involve professional judgments about the nature of physical and environmental conditions, including the extent to which hazardous substances are present, and about the probable effect of procedures to mitigate or otherwise affect those conditions.  If the judgments and the recommendations based upon those judgments are incorrect, we may be liable for resulting damages incurred by our clients.

We are subject to potential liabilities related to operations we have discontinued.

In November 2004, we completed the spin-off to our stockholders of the shares of stock we owned in NPDC.  Prior to the spin-off, we provided certain financial guarantees and entered into transactions involving assets owned by NPDC or subsequently contributed by us to NPDC.  We may be contingently liable for certain lease obligations of NPDC subsequent to the spin-off.  We no longer have the assets of NPDC available to us to use to satisfy these obligations, and if NPDC fails to satisfy obligations for which we continue to guarantee, we could be responsible for satisfying those obligations, which could adversely impact our financial condition.

18

Table of Contents

Our authorized preferred stock and certain provisions in our amended and restated by-laws could make a third party acquisition of us difficult.

Our restated certificate of incorporation, as amended, (“restated certificate”), allows us to issue up to 10,000,000 shares of preferred stock, the rights, preferences, qualifications, limitations and restrictions of which may be fixed by the Board of Directors without any further vote or action by the stockholders.  In addition, our amended and restated bylaws provide, among other things, that stockholders seeking to bring business before or to nominate candidates for election as directors at an annual meeting of stockholders must provide us with timely advance written notice of their proposal in a prescribed form.  Our amended and restated bylaws also provide that stockholders desiring to call a special meeting for any purpose, must submit to us a request in writing of stockholders representing a majority of all of the shares of stock outstanding and entitled to vote and stating the purpose of such meeting.  The ability to issue preferred stock and such provisions in our bylaws might have the effect of delaying, discouraging or preventing a change in control that might otherwise be beneficial to stockholders and might materially and adversely affect the market price of our common stock.

In addition, some provisions of Delaware law, particularly the “business combination” statute in Section 203 of Delaware General Corporation Law, might also discourage, delay or prevent someone from acquiring us or merging with us.  As a result of these provisions in our charter documents and Delaware law, the price investors might be willing to pay in the future for shares of our common stock might be limited.

Our restated certificate allows us to redeem or otherwise dispose shares of our common stock owned by a foreign stockholder if certain U.S. Government agencies threaten termination of any of our contracts as a result of such an ownership interest.

The United States Departments of Energy and Defense have policies regarding foreign ownership, control or influence over government contractors who have access to classified information, and might conduct an inquiry as to whether any foreign interest has beneficial ownership of 5% or more of a contractor’s or subcontractor’s voting securities.  If either Department determines that an undue risk to the defense and security of the United States exists as a result of foreign ownership, control or influence over a government contractor (including as a result of a potential acquisition), it might, among other things, terminate the contractor’s or subcontractor’s existing contracts.  Our restated certificate allows us to redeem or require the prompt disposition of all or any portion of the shares of our common stock owned by a foreign stockholder beneficially owning 5% or more of the outstanding shares of our common stock if either Department threatens termination of any of our contracts as a result of such an ownership interest.  These provisions may have the additional effect of delaying, discouraging or preventing a change in control and might materially and adversely affect the market price of our common stock.

Item 1B:         Unresolved Staff Comments

None.

Item 2:           Properties

We do not own any significant real property, but we and our subsidiaries lease an aggregate of approximately 260,000 square feet of primarily office and related space at various locations throughout the United States, the United Kingdom, Canada, Mexico, Malaysia, India and China, typically, under long-term leases. We occupy approximately 30,700 square feet in an office building in Elkridge, Maryland for our corporate headquarters under a lease which expires in 2013, and approximately 60,000 square feet in an office building in Troy, Michigan under a sublease which expires in 2015.

We believe that our properties have been well maintained, are suitable and adequate for us to operate at present levels and the productive capacity and extent of utilization of the facilities are appropriate for our existing real estate requirements. Upon expiration of these leases, we do not anticipate any difficulty in obtaining renewals or alternative space.

19

Table of Contents

Item 3:           Legal Proceedings

We discuss our legal proceedings in Note 17 to the accompanying Consolidated Financial Statements.

Item 4:           Submission of Matters to a Vote of Security Holders

On December 11, 2008, we held our annual meeting of shareholders. At that meeting, the following matters were voted upon:

1.                    Our stockholders elected the Directors listed below for terms continuing until the 2009 annual meeting of stockholders by the following votes:

2.                    Our stockholders ratified the appointment of KPMG LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2008. Our stockholders cast 14,178,677 votes for ratification of KPMG LLP, 96,799 votes against ratification of KPMG LLP, and there were 11,718 abstentions.

PART II

Item 5:           Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock, $0.01 par value, is traded on the New York Stock Exchange. The following table presents our high and low market prices for the last two fiscal years. During the periods presented below, we have not paid any cash dividends.

The number of shareholders of record of our common stock as of February 27, 2009 was 1,098 and the closing price of our common stock on the New York Stock Exchange on that date was $3.39.

20

Table of Contents

We have not declared or paid any cash dividends on our common stock during the two most recent fiscal years. We do not anticipate paying cash dividends on our common stock in the foreseeable future and intend to retain future earnings to finance the growth and development of our business. In addition, the General Physics Credit Agreement (see Item 7) contains restrictive covenants regarding future acquisitions, incurrence of debt and the payment of dividends. The Credit Agreement permits General Physics to provide GP Strategies up to an additional $10 million of cash to repurchase shares of its outstanding common stock in the open market beginning on August 14, 2008. General Physics is otherwise currently restricted under the Credit Agreement from paying dividends or management fees to GP Strategies in excess of $1.0 million in any fiscal year, with the exception of a waiver which permitted General Physics to provide up to $8.1 million in cash to repay debt obligations which matured in 2008 and the funding of stock repurchases discussed above.

Performance Graph

The following graph assumes $100 was invested on January 1, 2004 in GP Strategies Common Stock, and compares the share price performance with the Education Training Services Index (Hemscott Group Index) and the NYSE Market Index.  This chart does not reflect the dividends to our shareholders of shares of NPDC in November 2004 and shares of GSE in September 2005 in connection with the spin-offs. Values are as of December 31 of the specified year assuming that all dividends were reinvested.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN

AMONG GP STRATEGIES CORP.,

NYSE MARKET INDEX AND HEMSCOTT GROUP INDEX

ASSUMES $100 INVESTED ON JAN.1, 2004

ASSUMES DIVIDEND REINVESTED

FISCAL YEAR ENDING DEC. 31, 2008

21

Table of Contents

Issuer Purchases of Equity Securities

The following table provides information about our share repurchase activity for the three months ended December 31, 2008:

(1)  Represents shares repurchased in the open market in connection with our share repurchase program under which we may repurchase shares of our common stock from time to time in the open market subject to prevailing business and market conditions and other factors. There is no expiration date for the repurchase program.

22

Table of Contents

Item 6:           Selected Financial Data

The selected financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and our consolidated financial statements and the notes thereto included elsewhere in this report. Our consolidated statement of operations data for the years ended December 31, 2008, 2007, and 2006 and our consolidated balance sheet data as of December 31, 2008 and 2007 have been derived from our audited consolidated financial statements included elsewhere in this report. Our consolidated statement of operations data for the years ended December 31, 2005 and 2004 and our consolidated balance sheet data as of December 31, 2006, 2005, and 2004 have been derived from audited consolidated financial statements, which are not presented in this report.

On September 30, 2005, we completed the spin-off of our majority ownership interest in GSE, and on November 24, 2004, we completed the spin-off of NPDC. The results of operations of GSE and NPDC have been reclassified as discontinued in the consolidated statements of operations for the years ended December 31, 2005 and 2004.

(1)   During 2004, based upon an assessment of the realizability of our deferred tax assets, management considered it more likely than not that its deferred tax assets would be realized and reduced its deferred tax valuation allowance by $12.2 million, resulting in a net income tax benefit for the year ended December 31, 2004.

(2)   Cash and cash equivalents include one-time cash receipts associated with the EDS arbitration award and litigation settlement in 2005.

23

Table of Contents

Item 7:           Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended December 31, 2008 which are located in Item 8 of this report.

General Overview

Our business consists of our principal operating subsidiary, General Physics, a global training, engineering, technical services and consulting company that seeks to improve the effectiveness of organizations by providing training, management consulting, e-Learning solutions, engineering and technical services and products that are customized to meet the specific needs of clients. Clients include Fortune 500 companies and manufacturing, process and energy companies and other commercial and governmental customers. We believe we are a global leader in performance improvement, with over four decades of experience in providing solutions to optimize workforce performance.

During the fourth quarter of 2008, we re-evaluated our reportable business segments under SFAS No. 131 as a result of organizational and management reporting changes that were made primarily due to the retirement of one of our executive officers in 2008. We determined that the former Process, Energy & Government segment should be divided into two reportable segments. Prior to this change, we operated through three reportable business segments. As of December 31, 2008, we operated through four reportable business segments: (i) Manufacturing & BPO, (ii) Process & Government, (iii) Energy, and (iv) Sandy Training & Marketing (“Sandy”). In addition, during the first quarter of 2008, we transferred the management responsibility for our automotive technical training business unit from the Manufacturing & BPO segment to the Sandy segment. As a result of these changes, all prior period segment information has been reclassified to conform to the current year’s presentation.

We are organized by operating group, primarily based upon the markets served by each group and the services performed. Each operating group consists of strategic business units (“SBUs”) and business units (“BUs”) which are focused on providing specific products and services to certain classes of customers or within targeted markets. Across operating groups, SBUs and BUs, we integrate similar service lines, technology, information, work products, client management and other resources. Communications and market research, accounting, finance, legal, human resources, information systems and other administrative services are organized at the corporate level. Business development and sales resources are aligned with operating groups to support existing customer accounts and new customer development. Two of our reportable business segments, Manufacturing & BPO and Process & Government, represent an aggregation of certain operating groups in accordance with the aggregation criteria in SFAS No. 131, while our Energy and Sandy groups each represent one operating segment pursuant to SFAS No. 131. We review our reportable business segments on a continual basis and could change our reportable business segments from time to time in the event of organizational changes.

Further information regarding each business segment is discussed below.

Manufacturing & BPO. Our Manufacturing & BPO segment delivers training, curriculum design and development, staff augmentation, e-Learning services, system hosting, integration and help desk support, training business process outsourcing, and consulting and technical services primarily to large companies in the electronics and semiconductors, steel, healthcare, financial and other industries as well as to government agencies. Our October 2007 acquisition of Via has expanded our delivery capabilities and diversified our core client base in the software, electronics and semiconductors and retail markets.  Our ability to deliver a wide range of training services allows us to take over the entire learning function for the client, including their training personnel.

Process & Government. Our Process & Government segment has over four decades of experience providing consulting, engineering, technical and training services, including emergency preparedness, safety and regulatory compliance, chemical demilitarization and environmental services primarily to federal and state government agencies, large government contractors, petroleum and chemical refining companies and electric power utilities. This segment also provides design and construction of alternative fuel stations, including LNG fueling and hydrogen stations.

24

Table of Contents

Energy. Our Energy segment provides engineering services, products and training primarily to electric power utilities. Our proprietary EtaProTM Performance Monitoring and Optimization System provides a suite of performance solutions for power generation plants and is installed at over 600 power generating units in over 25 countries. In addition, this segment provides web-based training through our GPiLearnTM portal to over 25,000 power plant personnel in the U.S. and in over 30 countries. Our March 2008 acquisition of PCS strengthened and expanded our service offering to clients in the power generation industry.

Sandy Training & Marketing. Acquired in January 2007, Sandy is a provider of custom product sales training and has been a leader in serving manufacturing customers in the U.S. automotive industry for over 30 years. Sandy provides custom product sales training designed to better educate customer sales forces with respect to new product features and designs, in effect rapidly increasing the sales force knowledge base and enabling them to address detailed customer queries. Furthermore, Sandy helps our clients assess their customer relationship management strategy, measure performance against competitors and connect with their customers on a one-to-one basis. As mentioned above, our automotive technical training business unit was transferred from the Manufacturing & BPO segment to the Sandy segment during the first quarter of 2008.

We discuss our business in more detail in Item 1.Business and the risk factors affecting our business in Item 1A. Risk Factors.

Business Strategy

We seek to increase shareholder value by pursuing the following strategies:

Continuously enhance our service offerings and capabilities.  We plan to continuously expand our services and capabilities through organic growth initiatives based upon our technical expertise as well as through targeted acquisitions.  For example, our acquisitions of PMC, Sandy and Via in 2007 added product sales training to our services offerings and expanded our e-Learning capabilities and our acquisition of PCS in 2008 strengthened and enhanced our service offerings to clients in the energy industry.  We believe that the breadth of our service and product offerings allows us to effectively compete for customers by offering a comprehensive and single-source solution for custom training, consulting, engineering and technical services.  We will continue to focus on increasing our capabilities to drive incremental growth from new, as well as existing, clients.

Develop and maintain strong customer relationships.  We plan to preserve and grow our business by cross-selling our services and capabilities across and within our existing client base. We have a successful track record of increasing the scope of our work for a number of our clients, many of whom we estimate currently outsource only a fraction of their training expenditures.  We believe that as our clients benefit from the effective, cost-efficient and flexible training solutions and services that we provide, many of them will find it beneficial to increase the scope of training services that they outsource to third party providers.  We believe that the strength of our relationships with our existing clients, including the insight and knowledge into their operations that we have developed through these relationships, when combined with the broad range of our service and product offerings, provide us with an advantage when competing for these additional expenditures. We realize that many companies are reducing their external training expenditures due to the current economic recession; however, we will strive to preserve our relationships and increase our proportion of our customers’ total spend.

Remain competitive in the current economic environment. We anticipate that the changing global economy and current recession will impact our operations in 2009, primarily due to a slow down in certain of the end market sectors we serve, such as automotive and electronics and semiconductors, which may result in reduced expenditures by these customers for our training and consulting services.  We have implemented a cost management strategy to ensure that we remain competitive in the current economic environment and are well positioned when the economy recovers. We have recently taken certain cost-cutting measures to achieve this goal, including reducing the number of personnel in certain areas of our business to re-align costs with anticipated reductions in revenue streams, restricting salary increases, reducing our matching contribution to the Retirement Savings Plan and increasing our employees’ share of the cost of health insurance coverage. In addition, in an effort to preserve operating cash flow, we have changed our standard payment terms to our vendors from net thirty days to net forty-five days. We believe that these actions will

25

Table of Contents

enable us to maintain a strong competitive and financial position to compete during these difficult times. We will continue to evaluate our cost management strategy throughout the year as circumstances change.

Invest in our Energy services business. In recent years, we have experienced significant organic growth in training and engineering services provided to customers in the energy sector and we believe there will be continued growth in this sector due to the ever-increasing demand for products and services that help power generation plants deliver energy in an efficient, environmentally compliant and profitable manner. To take advantage of the opportunities in the energy sector, we plan to continue to enhance and expand our product and service offerings to this industry.

Leverage BPO capabilities. We have a demonstrated ability to provide training services across a wide spectrum of learning engagements from transactional multi-week assignments focused on a single aspect of a learning process to multi-year contracts where we manage the learning infrastructure of our customer. Integrated BPO engagements typically require us to assume responsibility for the development, delivery and administration of learning functions and are generally carried out under multi-year agreements. We intend to leverage our BPO capabilities to expand the customers and markets we serve.

Maintain our international presence. We believe international markets offer compelling and underpenetrated growth opportunities for our services. We intend to leverage our current international presence as well as continue pursuing our strategy of enhancing our international platform by selectively acquiring businesses in targeted geographies and following our current clients into new geographic markets. In our experience, many of our clients are seeking access to these and other attractive international markets and as such we intend to enhance our international capabilities. In order to support their business expansion we are providing employee training solutions across organizations in different countries and different languages, while maintaining quality and consistency in the overall training program.  By moving into specific international markets with our existing clients, we are able to not only deepen our relationships with those clients, but are also able to develop expertise in those markets that we can leverage to additional customers. We believe that following this strategy provides us with opportunities to gain access to international markets with established client relationships in those markets.

Continue our disciplined acquisition strategy.  We plan to continue to focus on evaluating compelling strategic acquisition targets to enhance our service offerings and delivery capabilities and to expand our geographic footprint.  We have followed a disciplined approach to target selection and have been able to acquire complementary businesses at what we believe are attractive valuations.  Since 2006, we have acquired seven businesses with annualized revenues totaling over $85 million, expanding our e-Learning capability and adding complementary services such as product sales training.  Four of these businesses are in the United Kingdom, and have strengthened our international platform, enabling us to meet the needs of our global clients while providing additional client opportunities. We also believe that our current operating structure, which utilizes a centralized infrastructure of corporate services to support our various platforms, enhances our ability to quickly and cost-effectively integrate acquisitions.  We look to identify acquisitions to augment our capabilities when we believe acquisitions are the quickest and most efficient way of expanding our platform and service offerings.

Significant Events

Acquisitions

Below is a summary of the acquisitions we have completed since 2006. See Note 2 to the accompanying Consolidated Financial Statements for further details, including the purchase price allocations.

Performance Consulting Services, Inc. (PCS)

On March 1, 2008, General Physics completed the acquisition of PCS, a company specializing in performance engineering support, training, combustion optimization, the implementation of smart equipment condition monitoring systems and testing services for power plants. The purchase price at closing consisted of $1.0 million in cash paid to the sellers and $1.0 million of guaranteed future payments to be paid in two equal installments on January 31, 2009 and January 31, 2010. In addition, the purchase agreement requires up to an additional $2.3 million to be paid to the sellers, contingent upon the achievement of certain revenue targets, as defined in the purchase agreement, during the

26

Table of Contents

two twelve-month periods following the completion of the acquisition. PCS is included in our Energy segment and the results of its operations have been included in the consolidated financial statements for the period beginning March 1, 2008. The pro-forma impact of the PCS acquisition is not material to our results of operations for the year ended December 31, 2008.

Other 2008 Acquisitions

During the fourth quarter of 2008, General Physics, through its wholly owned GPUK subsidiary, completed two separate acquisitions of training and consulting companies in the United Kingdom. The total purchase price for these businesses was approximately $0.9 million in cash. In addition, the purchase agreements require up to an additional $1.6 million to be paid to the sellers, contingent upon the achievement of certain earnings targets, as defined in the purchase agreements, over a four-year period subsequent to the acquisitions. The pro-forma impact of these acquisitions is not material to our results of operations for the year ended December 31, 2008.

Via Training, LLC (Via)

On October 1, 2007, General Physics acquired Via, a U.S. custom e-Learning sales training company, for a purchase price of $1.8 million in cash paid at closing. In addition, the purchase agreement requires up to an additional $3.3 million to be paid to the seller, contingent upon Via achieving certain earnings targets, as defined in the purchase agreement, during the two twelve-month periods following the completion of the acquisition. No contingent consideration was payable with respect to the first twelve-month period following completion of the acquisition as the earnings target was not achieved. As of December 31, 2008, the maximum contingent consideration General Physics may be required to pay is $1.7 million. Via is included in our Manufacturing & BPO segment and its results of operations are included in our consolidated financial statements for the period beginning October 1, 2007. The pro-forma impact of the Via acquisition is not material to our results of operations for the year ended December 31, 2007.

Smallpeice Enterprises Limited (SEL)

On June 1, 2007, General Physics, through its wholly owned GPUK subsidiary, completed the acquisition of SEL, a provider of business improvement and technical and management training services in the United Kingdom. GPUK acquired 100% ownership of SEL for a purchase price of approximately $3.3 million in cash. In addition, the purchase agreement requires up to an additional $1.8 million to be paid to the seller, contingent upon SEL achieving certain earnings targets, as defined in the purchase agreement, during the one-year period following completion of the acquisition. During 2008, General Physics paid $0.2 million of contingent consideration based on the earnings targets achieved during the one-year period following completion of the acquisition and was accounted for as goodwill. SEL is included in our Manufacturing & BPO segment and its results of operations are included in our consolidated financial statements for the period beginning June 1, 2007. The pro-forma impact of the SEL acquisition is not material to our results of operations for the year ended December 31, 2007.

Sandy Corporation

On January 23, 2007, General Physics completed the acquisition of Sandy, a leader in custom product sales training and part of the ADP Dealer Services division of ADP. Sandy, which is run as an unincorporated division of General Physics, offers custom sales training and print-based and electronic publications primarily to the U.S. automotive industry. General Physics acquired certain assets and the business of Sandy for a purchase price of approximately $4.4 million cash paid to ADP from cash on hand and the assumption of certain liabilities to complete contracts. In addition, the purchase agreement requires up to an additional $8.0 million to be paid to ADP, contingent upon Sandy achieving certain revenue targets during the two twelve-month periods following the completion of the acquisition. During 2008, General Physics paid $2.5 million of contingent consideration with respect to the first twelve-month period subsequent to the acquisition and was accounted for as goodwill. SFAS No. 141, Business Combinations (“SFAS No. 141”), requires that earned but unpaid contingent consideration be accrued to the extent that the amount earned is determinable beyond a reasonable doubt as of the balance sheet date. As of December 31, 2008, we accrued $2.5 million of contingent consideration with respect to the second twelve-month period following the completion of the Sandy acquisition based on the revenue targets achieved for the eleven-month period ended December 31, 2008.  Sandy is included in our Sandy Training and Marketing segment and the results of its operations have been included in our consolidated financial statements for the period beginning January 23, 2007. The following unaudited pro forma

27

Table of Contents

consolidated results of operations of the Company assume that the acquisition of Sandy was completed as of January 1 for each of the years shown below:

The pro forma data above may not be indicative of the results that would have been obtained had the acquisition actually been completed at the beginning of the periods presented, nor is it intended to be a projection of future results.

Peters Management Consultancy Ltd. (PMC)

On February 3, 2006, General Physics, through its wholly owned GPUK subsidiary completed the acquisition of PMC, a performance improvement and sales training company in the United Kingdom.  GPUK acquired 100% ownership of PMC for a purchase price of $1.3 million in cash. PMC is included in our Manufacturing & BPO segment and its results of operations are included in our consolidated financial statements since the date of acquisition.

Share Repurchase Program

Since January 2006, our Board of Directors has authorized a total of $23 million of repurchases of our common stock from time to time in the open market, subject to prevailing business and market conditions and other factors.  During the years ended December 31, 2008, 2007 and 2006, we repurchased approximately 1,091,000, 678,500 and 420,000 shares, respectively, of our common stock in the open market for a total cost of approximately $8.8 million, $6.5 million and $3.1 million, respectively. As of December 31, 2008, there was approximately $4.6 million available for future repurchases under the buyback program. There is no expiration date for the repurchase program.

Results of Operations

Operating Highlights

Year ended December 31, 2008 compared to the year ended December 31, 2007

For the year ended December 31, 2008, we had income before income taxes of $14.2 million compared to $16.9 million for the year ended December 31, 2007.  We incurred a goodwill impairment loss of $5.5 million during 2008 which is discussed in more detail below. Excluding the goodwill impairment loss, we had an increase in operating income of $2.0 million, the components of which are discussed below, a decrease in interest expense of $0.5 million and an increase in other income of $0.2 million. Net income was $7.8 million, or $0.47 per diluted share, for the year ended December 31, 2008 compared to net income of $9.7 million, or $0.56 per diluted share, for 2007.

Diluted weighted average shares outstanding were 16.6 million for the year ended December 31, 2008 compared to 17.2 million for the same period in 2007. The decrease in shares outstanding is primarily due to repurchases of our common stock in the open market in connection with our share repurchase program discussed above.

28

Table of Contents

Revenue

Manufacturing & BPO revenue increased $12.5 million or 11.8% during the year ended December 31, 2008 compared to 2007. The increase in revenue is due to the following:

·      $4.4 million increase in revenue from our operations in the UK, which consists of a $2.4 million increase attributable to acquisitions completed in 2007 and 2008 and a $3.7 million increase in revenue primarily due to expansion of government funded training programs in the UK and increased volume with BPO customers, offset by a $1.7 million decrease in revenue due to unfavorable currency exchange rates;

·      $4.7 million increase in revenue attributable to the acquisition of Via in October 2007;

·      $3.5 million net increase in BPO and e-Learning services with new and existing U.S. customers;

·      $1.0 million increase in process and maintenance reliability training services provided to a steel client; and

·      $1.6 million of other net increases largely due to increased services for BPO customers provided by our subsidiaries in the Asia Pacific region.

The above increases were offset by the following:

·        $1.7 million reduction in services for a pharmaceutical client; and

·        $1.0 million reduction in services for a lean consulting client during 2008 compared to 2007.

As noted above, the changes in foreign currency exchange rates negatively impacted our revenue and profit during 2008 and we expect the changes in rates which occurred primarily in the second half of 2008 to continue to negatively impact our 2009 revenue and profit when compared to prior periods. In addition, while we experienced increases in e-Learning and BPO services during 2008, we began to see a slow down in customer spending beginning in the fourth quarter of 2008 for these services, particularly in the electronics and semiconductors sector, and we anticipate that this trend could negatively impact our revenue and profit in 2009.

Process & Government revenue decreased $0.5 million or 1.0% during the year ended December 31, 2008 compared to 2007. The decrease in revenue is primarily due to the following:

·      $1.7 million net increase in technical services primarily for aerospace customers; and

·      $0.8 million net increase relating to construction projects for liquefied natural gas (“LNG”) and hydrogen fueling station facilities.

These increases in revenue in the Process & Government segment were offset by the following:

·      $1.8 million net decrease in revenue primarily due to the completion of certain homeland security and first responder training contracts during 2008 compared to 2007; and

·      $1.2 million reduction in the volume of services provided to a large petrochemical client during 2008.

29

Table of Contents

Energy group revenue increased $5.1 million or 29.8% during the year ended December 31, 2008 compared to 2007 due to the following:

·      $2.8 million net increase in training and related products and services to energy customers, due to an increase in contracts to provide training services for new and existing power generation customers and expanded sales of training courses through our GPiLearnTM web-based training portal; and

·      $2.3 million of revenue contributed by the PCS acquisition which was completed in March 2008.

Sandy Training & Marketing revenue increased $2.4 million or 3.4% during the year ended December 31, 2008 compared to 2007 due to the following:

·      $3.9 million increase due to Sandy’s results being included for a full one-year period in 2008 compared to a partial period in 2007, as the acquisition of Sandy was completed on January 23, 2007; and

·      $1.4 million net revenue increase during 2008 primarily due to an increase in sales training services provided to various automotive customers for new vehicle launch events and programs and expansion of publications for an automotive customer during 2008 compared to 2007.

The increases in revenue in this segment were offset by the following:

·      $1.4 million decrease in technical training services provided to automotive customers due to a reduction in plant spending (as mentioned above, we transferred management responsibility for our automotive technical training business unit from the Manufacturing & BPO segment to the Sandy segment during the first quarter of 2008); and

·      $1.5 million decrease in glovebox portfolio sales due to lower vehicle sales.

While the Sandy segment experienced an overall increase in revenue during 2008 compared to 2007, we anticipate that there will be a reduction in revenue in 2009 due to the current condition of the automotive industry. However, as discussed in the Business Strategy section above, we have implemented cost-cutting initiatives to proactively align costs with anticipated reductions in revenue streams.

We may experience significant quarterly fluctuations in revenue and income related to Sandy’s publications business, since revenue and cost on publication contracts are recognized in the period in which the publications ship, based on the output method of performance. Shipments occur at various times throughout the year and the volume of publications shipped could fluctuate from quarter to quarter. Publications revenue in the Sandy Training & Marketing segment totaled $4.4 million during the fourth quarter of 2008, compared to $1.3 million during the third quarter of 2008, $3.6 million during the second quarter of 2008 and $4.0 million during the first quarter of 2008.

In addition, we have a concentration of revenue from General Motors as well as a market concentration in the automotive sector. Revenue from General Motors accounted for approximately 20% of our consolidated revenue for the year ended December 31, 2008, and revenue from the automotive industry accounted for approximately 28% of our consolidated revenue for the year ended December 31, 2008.

30

Table of Contents

Gross profit

Manufacturing & BPO gross profit of $16.7 million or 14.0% of revenue for the year ended December 31, 2008 increased by $2.3 million or 16.1% when compared to gross profit of approximately $14.4 million or 13.5% of revenue for the year ended December 31, 2007. The increase in gross profit is primarily attributable to increases in revenue and gross profit for e-Learning and BPO services provided during 2008, as well as the increase in revenue and gross profit from our UK operations. Gross profit as a percentage of revenue increased in this segment during 2008 compared to 2007, primarily due to improved labor utilization in our e-Learning and BPO organizations and improved margins in the acquired Via business.

Process & Government gross profit of $8.7 million or 16.0% of revenue for the year ended December 31, 2008 decreased by $2.2 million or 20.2% when compared to gross profit of approximately $10.9 million or 19.9% of revenue for the year ended December 31, 2007. The decrease in gross profit is primarily attributable to a reduction in high margin services provided to a petrochemical customer during 2008 compared to 2007. In addition, gross profit decreased in this segment due to a decrease in margin on certain LNG construction projects during 2008 compared to 2007.

Energy gross profit of $5.9 million or 26.7% of revenue for the year ended December 31, 2008 increased by $1.8 million or 44.5% when compared to gross profit of approximately $4.1 million or 24.0% of revenue for the year ended December 31, 2007. This increase in gross profit is primarily due to the revenue increases discussed above.

Sandy Training and Marketing gross profit of $7.5 million or 10.4% of revenue for the year ended December 31, 2008 increased by $0.1 million or 1.0% when compared to gross profit of $7.5 million or 10.7% for the year ended December 31, 2007.

Selling, general and administrative expenses

SG&A expenses were $19.6 million for both the years ended December 31, 2008 and 2007. While SG&A expenses were flat year over year, there was a net increase in labor and benefits expense during 2008 due to an increase in personnel, offset by a decrease in amortization expense associated with the backlog intangible we acquired in connection with the Sandy acquisition which became fully amortized in the first quarter of 2008.

Goodwill impairment loss

We incurred a goodwill impairment loss of $5.5 million for the year ended December 31, 2008 related to our Sandy segment.  See the Management Discussion of Critical Accounting Policies section below for further discussion regarding the factors leading to the goodwill impairment and the valuation methodologies and assumptions used in the goodwill impairment test.

Interest expense

Interest expense decreased $0.5 million or 42.6% from $1.2 million for the year ended December 31, 2007 to $0.7 million for the year ended December 31, 2008. The decrease is primarily due to a decrease in interest expense related

31

Table of Contents

to a reduction in long-term debt obligations which matured in 2008, as well as a decrease in interest expense related to our credit facility primarily due to lower interest rates during 2008 compared to 2007.

Other income

Other income increased $0.2 million or 26.0% from $0.9 million for the year ended December 31, 2007 to $1.1 million for the year ended December 31, 2008.  The increase is primarily due to a $0.3 million gain, net of legal fees and expenses, on a litigation settlement during 2008 (see Note 17 to the Consolidated Financial Statements), offset by a decrease in interest income due to lower cash balances and interest rates during 2008 compared to 2007.

Income taxes

Income tax expense was $6.3 million for the year ended December 31, 2008 compared to $7.2 million for the year ended December 31, 2007. The decrease in income tax expense is primarily due to a decrease in income before income taxes in 2008 compared to 2007, largely attributable to the $5.5 million goodwill impairment loss we recognized during 2008 which provided a $2.2 million income tax benefit. The effective income tax rate was 44.6% and 42.7% for the years ended December 31, 2008 and 2007, respectively. The increase in the effective income tax rate is primarily due to the decrease in income before income taxes and an increase in foreign taxes in 2008 compared to 2007 (see Note 10 to the accompanying Consolidated Financial Statements).

Year ended December 31, 2007 compared to the year ended December 31, 2006

For the year ended December 31, 2007, we had income before income taxes of $16.9 million compared to $11.7 million for the year ended December 31, 2006.  The improved results are primarily due to an increase in operating income of $5.0 million, the components of which are discussed below, and is attributable to increases in operating income across all of our business segments as well as the Sandy and SEL acquisitions which were accretive to earnings in 2007. Net income was $9.7 million, or $0.56 per diluted share, for the year ended December 31, 2007 compared to net income of $6.6 million, or $0.40 per diluted share, for 2006.

Diluted weighted average shares outstanding were 17.2 million for the year ended December 31, 2007 compared to 16.7 million for the same period in 2006. The increase in shares outstanding is due to the issuance of more shares in 2007 compared to 2006 for exercises of warrants and stock options. This was offset by repurchases of our common stock in the open market. In connection with our share repurchase program, we repurchased 678,500 shares of common stock in the open market during the year ended December 31, 2007 for approximately $6.5 million in cash.

Revenue

Manufacturing & BPO revenue increased $9.1 million or 9.3% during the year ended December 31, 2007 compared to 2006. The increase in revenue is due to the following:

·      $5.9 million increase in revenue from our operations in the United Kingdom, which consists of a $3.4 million increase due to the acquisition of SEL during 2007, a $1.4 million increase attributable to the favorable impact of foreign currency exchange rates in 2007 compared to 2006, and a net increase of $1.1 million in training services provided to new and existing customers;

32

Table of Contents

·      $1.5 million increase in revenue resulting from our acquisition of Via in October 2007;

·      $1.6 million increase in training and consulting services provided to steel customers;

·      $1.0 million increase in training and technical services primarily to new customers; and

·      $1.0 million of net increases in training services provided to BPO and e-Learning customers ($1.0 net increase was comprised of $5.8 million of increases with new and existing customers, offset by a $4.8 million decrease due to a reduction in scope with a BPO customer in 2007 compared to 2006).

These increases in revenue in the Manufacturing & BPO segment were offset by a $1.8 million decrease in revenue on a lean manufacturing contract which had a reduction in scope in 2007 compared to 2006.

Process & Government revenue decreased $8.0 million or 12.7% during the year ended December 31, 2007 compared to 2006. The decrease in revenue is primarily due to the following:

·      $5.3 million decrease in revenue due to the completion of chemical demilitarization and environmental projects with government clients;

·      $4.8 million decrease in hurricane recovery services in 2007 compared to 2006 due to the work concluding in 2006; and

·      $1.0 million decline in domestic preparedness and emergency awareness training services provided to government clients.

These decreases in revenue in the Process & Government segment were offset by a $2.0 million revenue increase from engineering and training services for petroleum and refining customers and a $2.0 million revenue increase from technical services primarily for aerospace customers.

Energy group revenue increased $2.4 million or 16.5% during the year ended December 31, 2007 compared to 2006. The increase in revenue is due to a $1.8 million increase in EtaProTM software sales and implementation services and a $0.8 million increase primarily due to increased course sales through our GPiLearnTM web-based training portal and other training services to energy customers.

Sandy Training & Marketing revenue increased $66.1 million during the year ended December 31, 2007. The acquisition of Sandy resulted in an increase in revenue of $65.5 million during the year ended December 31, 2007. The results of Sandy’s operations have been included in our consolidated statement of operations since the completion of the acquisition on January 23, 2007. As noted above, during the first quarter of 2008 we transferred management responsibility for our automotive technical training business unit to the Sandy segment and the results of operations for that business unit have been reclassified to the Sandy segment for all periods presented.

We may experience significant quarterly fluctuations in revenue and income related to Sandy’s publications business, since revenue and cost on publication contracts are recognized in the period in which the publications ship, based on the output method of performance. Shipments occur at various times throughout the year and the volume of publications shipped could fluctuate from quarter to quarter. Publications revenue in the Sandy Training & Marketing segment totaled $4.5 million during the fourth quarter of 2007, compared to $1.4 million during the third quarter of 2007, $4.1 million during the second quarter of 2007 and $2.6 million during the first quarter of 2007.

In addition, as a result of the acquisition of Sandy, we have a concentration of revenue from General Motors as well as a market concentration in the automotive sector. Revenue from General Motors accounted for approximately 21% of our consolidated revenue for the year ended December 31, 2007, and revenue from the automotive industry accounted for approximately 30% of our consolidated revenue for the year ended December 31, 2007.

33

Table of Contents

Gross profit

Manufacturing & BPO gross profit of $14.4 million or 13.5% of revenue for the year ended December 31, 2007 increased by $0.9 million or 6.3% when compared to gross profit of approximately $13.5 million or 13.9% of revenue for the year ended December 31, 2006. This increase in gross profit is primarily attributable to the overall revenue growth in this segment, as discussed above, as well as increased gross profit from our operations in the United Kingdom, primarily due to the acquisition of SEL in June 2007.

Process & Government gross profit of $10.9 million or 19.9% of revenue for the year ended December 31, 2007 increased by $0.3 million or 3.1% when compared to gross profit of approximately $10.6 million or 16.8% of revenue for the year ended December 31, 2006. This increase in gross profit is primarily attributable to revenue and margin increases related to contracts with petroleum and refining and aerospace customers due to both direct costs and indirect overhead costs increasing at a lower rate than the revenue growth on these projects during 2007 compared to 2006. Costs were also reduced to re-align with the declining revenue streams experienced by the other areas within this segment as discussed above. The gross profit increase on the petroleum and refining projects combined with these cost reductions more than offset the revenue decreases in this segment.

Energy group gross profit of $4.1 million or 24.0% of revenue for the year ended December 31, 2007 increased by $1.5 million or 56.9% when compared to gross profit of approximately $2.6 million or 17.8% for the year ended December 31, 2006. The increase in gross profit is primarily due to an increase in EtaProTM software sales during 2007 compared to 2006 as well increased profitability on certain training projects during 2007 compared to 2006.

Sandy Training and Marketing gross profit of $7.5 million or 10.7% of revenue for the year ended December 31, 2007 increased $7.6 million when compared to negative gross profit of $0.1 million or -3.4% for the year ended December 31, 2006. The increase in gross profit is due to the acquisition of Sandy which contributed $7.4 million of gross profit in 2007.  As noted above, during the first quarter of 2008 we transferred management responsibility for our automotive technical training business unit to the Sandy segment and the results of operations for that business unit have been reclassified to the Sandy segment for all periods presented. Our automotive technical training business unit had gross profit of $0.1 million for the year ended December 31, 2007 compared to negative gross profit of $0.1 million for the year ended December 31, 2006.

Selling, general and administrative expenses

SG&A expenses increased $5.3 million or 37.3% from $14.3 million for the year ended December 31, 2006 to $19.6 million for the year ended December 31, 2007.  The increase is primarily due to the following: an increase in amortization expense of $1.8 million for intangible assets recorded in connection with our three acquisitions in 2007, an increase in labor, benefits and facilities expense of $1.6 million primarily due to our acquisitions in 2007, a net increase in a restructuring accrual of $0.6 million during 2007 compared to 2006 due to a restructuring charge of $0.3 million in 2007 compared to a reversal of a restructuring accrual of $0.3 million in 2006 relating to a facility lease for our United Kingdom operations, an increase in accounting fees of $0.4 million primarily due to increased tax consulting and compliance services, and an increase in general corporate overhead costs totaling $0.5 million.

34

Table of Contents

Interest expense

Interest expense decreased $0.3 million or 21.8% from $1.6 million for the year ended December 31, 2006 to $1.2 million for the year ended December 31, 2007. The decrease is primarily due to a $0.4 million decrease in interest expense related to the Gabelli Notes as a result of warrant exercises by Gabelli during 2007 and the second half of 2006 which resulted in a decrease in the principal balance of the debt (see Note 8 to the accompanying Consolidated Financial Statements), as well as a decrease in amortization of deferred financing costs during 2007 compared to 2006. The decrease in interest expense on the Gabelli Notes was slightly offset by an increase in interest expense due to an increase in short-term borrowings under our credit facility during 2007 compared to 2006.

Other income

Other income decreased $0.1 million or 10.6% from $1.0 million for the year ended December 31, 2006 to $0.9 million for the year ended December 31, 2007.  The decrease is primarily due to a decrease in interest income due to lower cash balances during 2007 compared to 2006.

Income taxes

Income tax expense was $7.2 million for the year ended December 31, 2007 compared to $5.1 million for the year ended December 31, 2006. The increase in income tax expense is primarily due to an increase in income before income taxes in 2007 compared to 2006. As of December 31, 2007, we had federal net operating loss carryforwards of $5.0 million, which expire during 2022 and 2023. The effective income tax rate was 42.7% and 43.3% for the years ended December 31, 2007 and 2006, respectively (see Note 10 to the accompanying Consolidated Financial Statements).

Liquidity and Capital Resources

Working Capital

For the year ended December 31, 2008, our working capital increased $4.7 million from $18.1 million at December 31, 2007 to $22.8 million at December 31, 2008. We believe that cash generated from operations and borrowings available under the General Physics Credit Agreement ($19.5 million of available borrowings as of December 31, 2008), will be sufficient to fund our working capital and other requirements for at least the next twelve months.

During the year ended December 31, 2008, we used $5.1 million of cash to repay our long-term debt due to ManTech International and $2.0 million of cash to repay our long-term debt to Gabelli (see Note 8 to the accompanying Consolidated Financial Statements). During 2008, we also used $8.8 million of cash to repurchase approximately 1,091,000 shares of our common stock in the open market, $2.0 million of cash (including transaction costs) to complete acquisitions in 2008 and $1.0 million of cash to acquire ownership of certain intellectual property being used for web-based training materials in our Energy services course offering. In addition, we paid ADP, Inc. $2.5 million of contingent consideration during the first quarter of 2008 based upon the revenue targets achieved during the first twelve-month period following the completion of the Sandy acquisition. In August 2008, we paid $0.2 million of contingent consideration to the seller of SEL with respect to the twelve-month period subsequent to the acquisition on June 1, 2007, based on the earnings targets achieved during that period.

In connection with the PCS acquisition on March 1, 2008, a portion of the purchase price consists of $1.0 million of guaranteed future payments to be paid in two equal installments on January 31, 2009 and January 31, 2010. In addition, we may be required to pay the following additional contingent consideration in connection with the acquisitions we completed during 2007 and 2008:

35

Table of Contents

Significant Customers & Concentration of Credit Risk

We have a concentration of revenue from General Motors Corporation and its affiliates (“General Motors”) as well as a market concentration in the automotive sector. For the years ended December 31, 2008 and 2007, revenue from General Motors accounted for approximately 20% and 21%, respectively, of our consolidated revenue. Revenue from the automotive industry accounted for approximately 28% and 30% of our consolidated revenue for the years ended December 31, 2008 and 2007, respectively. Accounts receivable from General Motors totaled $14.4 million as of December 31, 2008 which is reflected in the consolidated balance sheet. As of February 28, 2009, approximately $11.5 million of this balance had been collected and $2.8 million remained outstanding. Our accounts receivable balance from General Motors is subject to fluctuation related to our publications business, since the volume and timing of publications shipped varies on a quarter to quarter basis. In October 2008, General Motors and another significant automotive customer extended their payment terms on our contracts to “net sixty”, meaning that payment to us should be expected to be sent within sixty days from the date these customers receive our invoice, as compared to prior payment terms which typically resulted in receipt of payment approximately thirty-five to forty-five days following the invoice date. We anticipate that this change in payment terms may result in an increase to our accounts receivable balance and a decrease in cash flow from operations as compared to prior reporting periods. To help offset the potential cash flow impact of the revised payment terms by these automotive customers we have changed our standard payment terms to our vendors from net thirty days to net forty-five days.

Cash Flows

Year ended December 31, 2008 compared to the year ended December 31, 2007

Our cash balance increased $0.1 million from $3.9 million as of December 31, 2007 to $4.0 million as of December 31, 2008. The increase in cash and cash equivalents during the year ended December 31, 2008 resulted from cash provided by operating activities of $24.0 million, cash used in investing activities of $7.6 million, cash used in financing activities of $15.5 million and a $0.8 million negative effect due to exchange rate changes on cash and cash equivalents.

Cash provided by operating activities was $24.0 million for the year ended December 31, 2008 compared to $8.1 million in 2007.  The increase in cash provided by operating activities compared to the prior year is primarily due to favorable changes in operating assets and liabilities during 2008 compared to 2007, primarily due to the initial working capital investment required in 2007 related to the Sandy acquisition which did not recur in 2008. The increase in cash provided by operating activities is also due to an increase in income after adding back non-cash items to net income for the year ended December 31, 2008 compared to 2007.

Cash used in investing activities was $7.6 million for the year ended December 31, 2008 compared to $13.3 million in 2007.  The decrease in cash used in investing activities is primarily due to a decrease in cash used for acquisitions during 2008 compared to 2007. We used a total of $4.7 million of cash during the year ended December 31, 2008 for acquisitions ($1.1 million for the PCS acquisition, $0.9 million for two businesses we acquired in the UK, $2.5 million of contingent consideration paid for the Sandy acquisition and $0.2 million of contingent consideration paid for the

36

Table of Contents

SEL acquisition), compared to $10.6 million of cash during the same period in 2007 ($5.4 million for the Sandy acquisition, $3.4 million for the SEL acquisition and $1.8 million for the Via acquisition).  We also used $1.0 million of cash in 2008 to purchase intellectual property rights for certain web-based training materials used in our Energy services course offering.

Cash used in financing activities was $15.5 million for the year ended December 31, 2008 compared to cash provided by financing activities of $0.4 million in 2007.  The increase in cash used in financing activities is primarily due to the following: a $2.7 million decrease in net proceeds from short-term borrowings in 2008 compared to 2007; a $7.1 million use of cash for the repayment of long-term debt during 2008; a $2.3 million increase in cash used for repurchases of our common stock in the open market in 2008 compared to 2007; and a $1.6 million decrease in cash received from the exercise of stock options during 2008 compared to 2007. In addition, there was a $1.8 million decrease in the net change in our negative cash book balances during 2008 (the negative cash book balance results from outstanding checks which had not cleared the bank at the end of the period and are classified as accounts payable in the consolidated balance sheets and presented as a financing activity in the consolidated statements of cash flows). These cash uses in investing activities were offset by $2.0 million of income tax benefits realized during 2008 relating to 2008 and prior year stock option exercises and restricted stock vesting.

Year ended December 31, 2007 compared to the year ended December 31, 2006

Our cash balance decreased $4.8 million from $8.7 million as of December 31, 2006 to $3.9 million as of December 31, 2007. The decrease in cash and cash equivalents during the year ended December 31, 2007 resulted from cash provided by operating activities of $8.1 million, cash used in investing activities of $13.3 million and cash provided by financing activities of $0.4 million.

Cash provided by operating activities was $8.1 million for the year ended December 31, 2007 compared to $15.5 million in 2006.  The decrease in cash provided by operating activities compared to 2006 was primarily due to a significant increase in accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts primarily as a result of the Sandy acquisition in January 2007. This decrease was offset by higher net income of $3.0 million in 2007 compared to 2006.

Cash used in investing activities was $13.3 million for the year ended December 31, 2007 compared to $1.6 million in 2006.  The increase in cash used in investing activities is primarily due to $5.4 million of cash used for the acquisition of Sandy, $3.4 million of cash used for the acquisition of SEL and $1.8 million of cash used for the acquisition of Via, compared to $0.6 million of cash used in 2006 for the acquisition of PMC.  In addition, cash used for fixed asset additions increased $0.8 million during the year ended December 31, 2007 compared to the same period in 2006, and cash used for costs related to a new financial system implementation was $0.9 million during the year ended December 31, 2007.

Cash provided by financing activities was $0.4 million for the year ended December 31, 2007 compared to cash used in financing activities of $23.5 million in 2006.  The increase in cash provided is primarily due to $20.9 million of cash used in connection with the capital stock restructuring in 2006 which did not recur in 2007, an increase in short-term borrowings during the year ended December 31, 2007 of $2.9 million compared to no borrowings in 2006, and a negative cash book balance totaling $2.4 million as of December 31, 2007 resulting from outstanding checks which had not cleared the bank as of December 31, 2007 due to the timing of payments, and are classified as accounts payable in the consolidated balance sheet. In addition, there was an increase in cash received from the exercise of stock options of $0.6 million during the year ended December 31, 2007 compared to 2006. These increases in cash were offset by an increase of $3.4 million of cash used for share repurchases during 2007 compared to 2006.

Short-term Borrowings

General Physics has a $35 million Credit Agreement with a bank that expires on October 31, 2010, with annual renewal options, and is secured by certain assets of General Physics.  The maximum interest rate on borrowings under the Credit Agreement is at the daily LIBOR Market Index Rate plus 2.25%. Based upon the financial performance of General Physics, the interest rate can be reduced. As of December 31, 2008, the rate was LIBOR plus 1.25% which resulted in a rate of approximately 1.69%.  The Credit Agreement contains covenants with respect to General Physics’

37

Table of Contents

minimum tangible net worth, total liabilities ratio, leverage ratio, interest coverage ratio and its ability to make capital expenditures. General Physics was in compliance with all loan covenants under the amended Credit Agreement as of December 31, 2008. The Credit Agreement also contains certain restrictive covenants regarding future acquisitions, incurrence of debt and the payment of dividends. The Credit Agreement permits General Physics to provide GP Strategies up to an additional $10 million of cash to repurchase shares of its outstanding common stock in the open market beginning on August 14, 2008. General Physics is otherwise currently restricted from paying dividends or management fees to GP Strategies in excess of $1 million in any year, with the exception of a waiver which permitted General Physics to provide up to $8.1 million of cash to repay debt obligations which matured in 2008 in the event GP Strategies did not have available cash (see Note 8 to the accompanying Consolidated Financial Statements) and the funding of stock repurchases discussed above. As of December 31, 2008, there were $3.2 million of borrowings outstanding and $19.5 million of available borrowings under the Credit Agreement, based upon 80% of eligible accounts receivable and 80% of eligible unbilled receivables.

Long-term Debt

As of December 31, 2008, we had no outstanding long-term debt obligations except for some insignificant capital lease obligations. During 2008, we repaid two long-term debt obligations which were previously issued in 2003 and matured in 2008. In May 2008, we pre-paid a note obligation due to ManTech International for a total of $5.2 million, which consisted of the principal balance of the note plus accrued interest through the payment date, less a mutually agreed prepayment discount of $0.1 million. We recorded a gain on extinguishment of debt of $0.1 million in 2008 which is included in other income on the accompanying consolidated statement of operations. In August 2008, we repaid the remaining principal balances of notes due to Gabelli for $2.0 million in cash. See Note 8 to the accompanying Consolidated Financial Statements for further details.

Contractual Payment Obligations

We enter into various agreements that result in contractual obligations in connection with our business activities.  These obligations primarily relate to our financing arrangements, such as capital leases, as well operating leases and purchase commitments under non-cancelable contracts for certain products and services. The following table summarizes our total contractual payment obligations as of December 31, 2008 (in thousands):

The table above excludes contingent consideration in connection with acquisitions which may be payable to the sellers if the revenue and/or earnings targets set forth in the purchase agreements are achieved (see Note 2 to the Consolidated Financial Statements.)

Off-Balance Sheet Commitments

Subsequent to the spin-off of NPDC, we continued to guarantee certain obligations of NPDC’s subsidiaries, Five Star Products, Inc. (“Five Star”) and MXL Industries, Inc. (“MXL”).  We guaranteed certain operating leases for Five Star’s New Jersey and Connecticut warehouses, which totaled approximately $1.6 million per year through March 31, 2007.  The leases have been extended and now expire in the first quarter of 2010. The annual rent obligations are currently approximately $1.6 million. In connection with our spin-off of NPDC, NPDC agreed to assume our obligation under such guarantees, to use commercially reasonable efforts to cause us to be released from each such

38

Table of Contents

guaranty, and to hold us harmless from all claims, expenses and liabilities connected with the leases or NPDC’s breach of any agreements effecting the spin-off. We have not received confirmation from the lessors that we have been released from these guarantees. We do not expect to incur any material payments associated with these guarantees, and as such, no liability is reflected in the consolidated balance sheets.

We also guaranteed the repayment of a debt obligation of MXL until June 2008, at which time MXL paid the obligation in full and our guarantee expired.

As of December 31, 2008, we had six outstanding letters of credit totaling less than $0.4 million, which expire in 2009, and one outstanding performance bond for $10.3 million related to an LNG construction contract scheduled to be completed in 2010.

We do not have any off-balance sheet financing except for operating leases and letters of credit entered into in the normal course of business and the items disclosed above.

Management Discussion of Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

Certain of our accounting policies require higher degrees of judgment than others in their application. These include revenue recognition, valuation of accounts receivable, stock-based compensation, impairment of intangible assets, including goodwill, and income taxes, which are summarized below. In addition, Note 1 to the accompanying Consolidated Financial Statements includes further discussion of our significant accounting policies.

Revenue Recognition

We provide services under time-and-materials, cost-reimbursable, fixed price and fixed-fee per transaction contracts to both government and commercial customers. Each contract has different terms based on the scope, deliverables and complexity of the engagement, requiring us to make judgments and estimates about recognizing revenue. Revenue is recognized as services are performed.

Under time-and-materials contracts, as well as certain government cost-reimbursable and certain fixed price contracts, the contractual billing schedules are based on the specified level of resources we are obligated to provide. As a result, for these “level-of-effort” contracts, the contractual billing amount for the period is a measure of performance and, therefore, revenue is recognized in that amount.

Revenue under government fixed price and certain commercial fixed price contracts is recognized using the percentage-of- completion method in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.   Under the percentage-of-completion method, management estimates the percentage-of-completion based upon costs incurred as a percentage of the total estimated costs.

For other commercial fixed price contracts which typically involve a discrete project, such as development of training content and materials, design of training processes, software implementation, or engineering projects, the contractual billing schedules are not based on the specified level of resources we are obligated to provide. These discrete projects generally do not contain milestones or other reliable measures of performance. As a result, revenue on these arrangements is recognized using a percentage-of-completion method based on the relationship of costs incurred to total estimated costs expected to be incurred over the term of the contract. We believe this methodology is a reasonable measure of proportional performance since performance primarily involves personnel costs and services  provided to the customer throughout the course of the projects through regular communications of progress toward

39