Results of Operations

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.

As of March 31, 2009, we operated through four reportable business segments:
(i) Manufacturing & BPO, (ii) Process & Government, (iii) Energy, and (iv) Sandy Training & Marketing. 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, 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 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. In addition, Sandy produces brand specific portfolios that are installed in the gloveboxes of new cars and trucks at the time of vehicle assembly. This segment also provides technical training services to automotive customers.

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. During the three months ended March 31, 2009, we repurchased approximately 296,320 shares of our common stock in the open market for a total cost of approximately $0.9 million. As of March 31, 2009, there was approximately $3.7 million available for future repurchases under the buyback program. There is no expiration date for the repurchase program.

Operating Highlights

Three Months ended March 31, 2009 compared to the Three Months ended March 31, 2008

For the three months ended March 31, 2009, we had income before income tax expense of $2.6 million compared to $4.9 million for the three months ended March 31, 2008. The decrease was primarily due to a decrease in operating income of $2.5 million, the components of which are discussed below. Net income was $1.5 million, or $0.09 per diluted share, for the three months ended March 31, 2009, compared to net income of $2.8 million, or $0.17 per diluted share, for the three months ended March 31, 2008.

Revenue



                               Three months ended
                                   March 31,
(Dollars in thousands)          2009         2008

Manufacturing & BPO          $    21,947   $ 29,121
Process & Government              13,057     14,920
Energy                             5,749      4,510
Sandy Training & Marketing        12,838     18,368
                             $    53,591   $ 66,919

Manufacturing & BPO revenue decreased $7.2 million or 24.6% during the first quarter of 2009 compared to the first quarter of 2008. The decrease in revenue is due to the following:

† $2.6 million net decrease in revenue from BPO customers primarily due to a slowdown in spending by several customers resulting in an overall decline in the number of courses run and some courses running below full capacity;

† $2.4 million decrease in U.S. dollar revenue recognized from our operations in the United Kingdom, which consists of a $1.5 million decrease in revenue due to the unfavorable effect of currency exchange rates and a net revenue decrease of $1.7 million primarily due to a decrease in volume with BPO customers, offset by an increase in revenue of $0.8 million due to expansion of government funded training programs in the UK;

† $1.2 million reduction in services for a pharmaceutical industry client; and

† $1.0 million reduction in process and maintenance reliability training services provided primarily to a steel industry client.

As noted above, the changes in foreign currency exchange rates negatively impacted our U.S. dollar revenue recognized during the first quarter of 2009 when compared with the first quarter of 2008, and we expect that the significant changes in rates which occurred primarily during the second half of 2008 could continue to negatively impact our 2009 quarterly revenue when compared to 2008. In addition, we anticipate that the slow down in customer spending in this segment which resulted in reduced revenue discussed above could continue to negatively impact our 2009 revenue in future quarters when compared to 2008 results. If we continue to experience declines in revenue and gross profit, we could incur goodwill and other intangible asset impairment charges in the future.

Process & Government revenue decreased $1.9 million or 12.5% during the first quarter of 2009 compared to the first quarter of 2008. The decrease in revenue is due to the following:

† $1.2 million reduction in process, maintenance and reliability training services provided primarily to a petrochemical industry client; and

† $1.4 million net decrease in revenue primarily related to certain homeland security / first responder training contracts and chemical demilitarization training services; offset by

† $0.7 million net increase relating to construction projects for liquefied natural gas (LNG) fueling station facilities related to recent new contract awards.

Energy group revenue increased $1.2 million or 27.5% during the first quarter of 2009 compared to the first quarter of 2008. The increase consisted of a $0.7 million revenue increase due to PCS being included for a full quarter in 2009 as the acquisition was completed on March 1, 2008, and a $0.5 million net increase primarily due to new workforce development training contracts for power generation customers and increased web-based training course sales.

Sandy Training & Marketing revenue decreased $5.5 million or 30.1% during the first quarter of 2009 compared to the first quarter of 2008 due to reduction in spending by automotive customers. The $5.5 million revenue decrease consisted of the following:

† $2.0 million net decrease in revenue from product sales trainer programs for various automotive customers primarily due to a reduction in the number of trainers required, and a reduction in related in-dealership training programs;

† $1.4 million net decrease in revenue related to new vehicle launch programs and related training services provided in 2008 which did not recur in 2009;

† $1.0 million decrease in publications revenue due to a reduction in the volume of publications (we experience 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 $3.0 million during the first quarter of 2009 compared to $4.0 million during the first quarter of 2008);

† $0.8 million decrease in glovebox portfolios sales due to decreased vehicle production volumes; and

† $0.3 million decrease in technical training services provided to automotive customers due to a reduction in plant spending.

As noted above, revenue in the Sandy segment declined during the first quarter of 2009 compared to the first quarter of 2008, primarily as a result of the weakened condition of the automotive industry and reduced spending by these customers. We expect this trend will continue to negatively impact our 2009 quarterly revenue when compared to 2008 results. As previously disclosed, we implemented a cost reduction strategy to align costs with anticipated reductions in revenue streams.

Gross Profit



                                         Three months ended
                                             March 31,
(Dollars in thousands)              2009                   2008
                                       % Revenue              % Revenue
Manufacturing & BPO          $ 2,658        12.1 % $  3,953        13.6 %
Process & Government           1,749        13.4 %    2,862        19.2 %
Energy                         1,309        22.8 %    1,235        27.4 %
Sandy Training & Marketing     1,773        13.8 %    2,227        12.1 %
                             $ 7,489        14.0 % $ 10,277        15.4 %

Manufacturing & BPO gross profit of $2.7 million or 12.1% of revenue for the first quarter of 2009 decreased by $1.3 million or 32.8% when compared to gross profit of $4.0 million or 13.6% of revenue for the first quarter of 2008. The decrease in gross profit dollars is primarily attributable to the revenue decreases discussed above. Gross profit as a percentage of revenue decreased in this segment during the first quarter of 2009 compared to the first quarter of 2008, primarily due to a reduction in services for a pharmaceutical industry client during 2009 which had higher margins in 2008, as well as an overall decline in the number of courses run and some courses running below full capacity for certain of our BPO clients.

Process & Government gross profit of $1.7 million or 13.4% of revenue for the first quarter of 2009 decreased by $1.1 million or 38.9% when compared to gross profit of $2.9 million or 19.2% of revenue for the first quarter of 2008. The decrease in gross profit is primarily due to a reduction in services provided to a petrochemical industry client during 2009 which had higher margins in 2008.

Energy group gross profit of $1.3 million or 22.8% of revenue for the first quarter of 2009 increased by $0.1 million or 6% when compared to gross profit of $1.2 million or 27.4% of revenue for the first quarter of 2008. The slight increase is due to the revenue increases discussed above, offset by a decrease in margin during the first quarter of 2009 compared to the first quarter of 2008 primarily due to the hiring of additional business development personnel in this segment's workforce development training practice.

Sandy Training and Marketing gross profit of $1.8 million or 13.8% of revenue for the first quarter of 2009 decreased by $0.5 million or 20.4% when compared to gross profit of $2.2 million or 12.1% of revenue for the first quarter of 2008. The decrease in gross profit dollars is primarily due to the revenue decreases discussed above. Gross profit as a percentage of revenue increased in this segment during the first quarter of 2009 compared to the first quarter of 2008, primarily due to a reduction in personnel in connection with cost reduction initiatives.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $0.3 million or 5.5% from $5.3 million for the first quarter of 2008 to $5.0 million for the first quarter of 2009. The decrease is primarily due to decreases in various corporate expenses due to reduced overall spending in the first quarter of 2009 compared to the first quarter of 2008.

Interest Expense

Interest expense decreased from $0.2 million for the first quarter of 2008 to $0.1 million for the first quarter of 2009. The decrease is primarily due to a decrease in interest expense related to long-term debt obligations which were repaid in the second and third quarters of 2008.

Other Income

Other income was $0.2 million for both the first quarters of 2009 and 2008 and primarily consisted of income from a joint venture and interest income.

Income Tax Expense

Income tax expense was $1.1 million for the first quarter of 2009 compared to $2.0 million for the first quarter of 2008. The decrease is due to a decrease in income before income tax expense for the first quarter of 2009 compared to the first quarter of 2008. The effective income tax rate was 42.9% and 41.5% for the three months ended March 31, 2009 and 2008, 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 the first quarter of 2009 compared to the first quarter of 2008. Income tax expense for the quarterly periods is based on an estimated annual effective tax rate which includes the federal and state statutory rates, permanent differences, and other items that may have an impact on income tax expense.

Liquidity and Capital Resources

Working Capital

For the quarter ended March 31, 2009, our working capital increased $1.1 million from $22.8 million at December 31, 2008 to $24.0 million at March 31, 2009. We believe that cash generated from operations and borrowings available under the General Physics Credit Agreement ($23.0 million of available borrowings as of March 31, 2009), will be sufficient to fund our working capital and other requirements for at least the next twelve months.

As of March 31, 2009 and December 31, 2008, we had $2.5 million of accrued contingent consideration with respect to the Sandy acquisition based on the revenue targets achieved for the twelve month period ended January 31, 2009. On April 1, 2009, we paid the seller $2.5 million of contingent consideration. There are no further contingent consideration payments relating to the Sandy acquisition.

In connection with the acquisition of Performance Consulting Services, Inc. ("PCS") 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. We paid the first installment of $0.5 million on January 31, 2009. In addition, as of March 31, 2009, we accrued $0.3 million of contingent consideration with respect to the first twelve-month period following the completion of the acquisition of PCS based on the revenue targets achieved for the twelve months ended February 28, 2009. The accrued contingent consideration of $0.3 million was applied to goodwill as of March 31, 2009 and was paid in April 2009.

In addition to the payments discussed above, we may be required to pay the following additional contingent consideration in connection with the acquisitions we completed during 2007 and 2008:

† up to $1.7 million to the seller of Via, contingent upon Via achieving certain earnings targets during the twelve-month period ending September 30, 2009, which would be payable in the fourth quarter of 2009;

† up to $1.3 million to the sellers of PCS, contingent upon the achievement of certain revenue targets during the twelve-month period ending February 28, 2010, which would be payable in the second quarter of 2010; and

† up to $1.6 million of total contingent consideration payable to the sellers of two businesses acquired in the UK during the fourth quarter of 2008, which would be payable as follows: up to $0.3 million in 2009, $0.4 million in 2010, $0.5 million in 2011 and $0.4 million in 2012.

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 three months ended March 31, 2009 and 2008, revenue from General Motors accounted for approximately 20% and 22%, respectively, of our consolidated revenue, and revenue from the automotive industry accounted for approximately 25% and 29%, respectively, of our consolidated revenue. As of March 31, 2009, accounts receivable from General Motors totaled $11.1 million. As of April 30, 2009, approximately $5.4 million of the accounts receivable balance had been collected and $5.6 million remained outstanding. As previously disclosed in more detail in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2008, General Motors' has reported a variety of challenges it is facing, including severe liquidity issues. In the event General Motors files for bankruptcy protection or otherwise defaults on amounts due to us, the outstanding accounts receivable may not be realizable and could result in substantial write-offs and adversely impact our liquidity. No material reserves against possible uncollectible accounts receivable from General Motors have been provided as General Motors has

consistently made all scheduled payments to date. No other customer accounted for more than 10% of our revenue in the first quarter of 2009 or accounts receivable as of March 31, 2009.

We also have a concentration of revenue from the United States government. For the three months ended March 31, 2009 and 2008, sales to the United States government and its agencies represented approximately 21% and 18%, respectively, of our consolidated revenue. Revenue was derived from many separate contracts with a variety of government agencies that are regarded by us as separate customers.

Cash Flows

Three months ended March 31, 2009 compared to the Three Months ended March 31, 2008

The Company's cash balance increased $1.0 million from $4.0 million as of December 31, 2008 to $5.0 million as of March 31, 2009. The increase in cash and cash equivalents during the first quarter of 2009 resulted from cash provided by operating activities of $6.7 million, cash used in investing activities of $0.7 million, cash used in financing activities of $4.8 million and a $0.1 million negative effect due to exchange rate changes on cash and cash equivalents.

Cash provided by operating activities was $6.7 million for the first quarter of 2009 compared to $4.2 million for the first quarter of 2008. 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 the first quarter of 2009 compared to the first quarter of 2008, offset by a decrease in net income and non-cash add-backs to net income compared to the prior year period.

Cash used in investing activities was $0.7 million for the first quarter of 2009 compared to $4.1 million for the first quarter of 2008. The decrease in cash used in investing activities is primarily due to a decrease in cash used for acquisitions during the first quarter of 2009 compared to the first quarter of 2008. We used $0.5 million of cash in the first quarter of 2009 for a deferred acquisition payment to the sellers of PCS, compared to $3.7 million of cash in the first quarter of 2008 for acquisitions, which included $1.2 million for the PCS acquisition and $2.5 million of contingent consideration paid for the Sandy acquisition. As of March 31, 2009, we had $2.5 million of accrued contingent consideration with respect to the Sandy acquisition which was paid on April 1, 2009.

Cash used in financing activities was $4.8 million for the first quarter of 2009 compared to $0.3 million for the first quarter of 2008. The increase in cash used in financing activities is primarily due to the repayment of short-term borrowings of $3.2 million during the first quarter of 2009 compared to proceeds from short-term borrowings of $1.8 million in the first quarter of 2008. This was offset by a decrease of $0.5 million in cash used for repurchases of our common stock in the open market during the first quarter of 2009 compared to the first quarter of 2008.

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 March 31, 2009, the rate was LIBOR plus 1.25%. The Credit Agreement contains covenants with respect to General Physics' 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 March 31, 2009. 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 $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 and the funding of stock repurchases discussed above. As of March 31, 2009, there were no borrowings outstanding and $23.0 million of available borrowings under the Credit Agreement, based upon 80% of eligible accounts receivable and 80% of eligible unbilled receivables.

Off-Balance Sheet Commitments

Subsequent to the spin-off of National Patent Development Corporation ("NPDC") in 2004, we continued to guarantee certain operating leases for the Connecticut and New Jersey warehouses of Five Star Products, Inc. ("Five Star"). The leases expire on March 31, 2010. 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 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. In March 2009, we received confirmation from the landlord that we were released from the guarantee on the Connecticut warehouse lease. We have not received confirmation that we have been released from the guarantee of the New Jersey warehouse. The annual rent obligation for the New Jersey warehouse is currently approximately $1.6 million. 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.

Accounting Standards Adopted

SFAS No. 141R

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations("SFAS No. 141R"). SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141R is effective for acquisitions in fiscal years beginning after December 15, 2008, and was . . .