The following discussion is qualified in its entirety by, and should be read in conjunction with, our Consolidated Financial Statements including the Notes thereto, included elsewhere in this Annual Report on Form 10-K. Note 18 to the Financial Statements contain segment information.

Overview

Results of Operations

While ENGlobal continues to face a number of challenges, we are cautiously optimistic about the prospects for 2012. Despite recognizing losses in 2011, we have experienced a significant improvement in our financial results, as compared to 2010, reducing losses by 40%. In this regard, we have successfully reduced our expenses by reducing employee headcount, closing offices, as appropriate, discontinuing underperforming divisions, and creating an enhanced

operational focus on cost controls. Cross-selling efforts through our "One ENGlobal" program are beginning to come to fruition with several large projects now underway and products such as the ENGlobal Power Island appear to create significant potential for growth. In addition, we are seeing an increase in capital project spending in the downstream refining, chemicals and petrochemicals sectors. Our Wells Fargo Credit Facility expires on May 31, 2012. However, we have competitive proposals from two major financial institutions and we are working toward entering into a new credit facility prior to that date or in obtaining an alternative source of financing. While there can be no assurances that these challenges will be resolved, we believe that 2012 may be the year we will return to profitability and growth.

Despite the relative increase in capital project spending in certain limited markets, we believe that overall, client spending continues to be limited, which we believe may be due to the uncertainty experienced by businesses in a presidential election year and the possible impact of proposed regulation of the oil and gas industry, such as the proposed fracking legislation.

In addition, pricing continues to be very competitive. However, we have an ongoing, extremely focused marketing effort and we have seen an increase in proposal activity, as well as an increase in backlog. In particular, we are focused on international expansion as we believe that the many significant projects will be located outside of the United States. Our "One ENGlobal" philosophy is resulting in cross-selling on large projects, and we expect to see this type of activity continue. Despite these efforts, we have not seen a significant increase in awards, and revenues increased only minimally from 2010 to 2011, a situation which is receiving considerable management attention.

Employee recruitment and retention continues to be an issue we are addressing. To this end, we have improved employee benefits (although not to 2009 levels) and we believe employee morale has improved. Nevertheless, the market for qualified employees has become very active and, even after employees are hired, retention in a tight labor market has been challenging. We continue our efforts to improve on timely collection of accounts receivable, and to focus on improving our internal systems, such as accounting and human resources. We have encountered issues with collection of accounts receivable on a large international project due to administrative matters and this has had a negative impact on our cash flow but we believe that the issues surrounding this payment will be resolved in the short term.

We continue our efforts to improve on timely collection of accounts receivable, and to focus on improving our internal systems, such as accounting and human resources.

For several years, ENGlobal has worked through certain litigation matters that have been the cause of a material portion of our losses. While additional issues will undoubtedly arise in the future, we have resolved or established reserves which we believe to be adequate for material outstanding litigation issues.

With the exception of reclassifications related to our discontinued operations (see below), total amounts reported for prior periods will remain the same, but amounts reported on a segment basis are reported in the three segments that the Company now operates in, rather than the four segments in which the Company previously operated and reported.

During the third quarter of 2011, as part of its strategic evaluation of operations, the Company determined that the anticipated future performance of the Electrical Services group did not warrant maintaining it as a part of the ENGlobal suite of services. As a result, effective July 1, 2011, the Company initiated a plan to sell or, if necessary, ultimately terminate the operations of its Electrical Services group. These assets and their related operations have been classified as discontinued operations and are presented as such in the Company's re-casted consolidated financial statements. The net assets and liabilities related to the discontinued operations are shown on the Consolidated Balance Sheet as Assets held for sale and Liabilities held for sale, respectively. The results of the discontinued operations are shown on the Consolidated Statements of Operations as a loss from discontinued operations, net of taxes. Pending the sale or termination of the Electrical Services Group, we continue to abide by our contractual details to complete the projects to the client's satisfaction.

The Engineering and Construction segment provides services relating to the development, management and execution of projects requiring professional engineering and related project services primarily to the midstream and downstream

sectors throughout the United States. Services provided by the Engineering and Construction segment include feasibility studies, engineering, design, procurement and construction management. The Automation segment provides services related to the design, fabrication and implementation of process distributed control and analyzer systems, advanced automation, information technology, electrical and heat tracing projects primarily to the upstream and downstream sectors throughout the United States as well as specific projects in the Middle East and Central Asia. The Field Solutions segment provides inspection, land management, right-of-way, environmental compliance, legislative affairs support and governmental regulatory compliance services primarily to the midstream sector, including pipeline, utility and telecommunications companies and other owner/operators of infrastructure facilities throughout the United States.

The Company's revenue is composed of engineering, procurement and construction management (EPCM) services revenue and the sale of fabricated engineered automation systems. The Company recognizes service revenue as soon as the services are performed. The majority of the Company's engineering services have historically been provided through time-and-material contracts whereas a majority of the Company's engineered automation system sales are earned on fixed-price contracts.

In the course of providing our services, we routinely provide materials and equipment and may provide construction or construction management services on a subcontractor basis. Generally, these materials, equipment and subcontractor costs are passed through to our clients and reimbursed, along with handling fees, which in total are at margins lower than those of our normal core business. In accordance with industry practice and generally accepted accounting principles, all such costs and fees are included in revenue. The use of subcontractor services can change significantly from project to project; therefore, changes in revenue and gross profit, SG&A expense and operating income as a percent of revenue may not be indicative of the Company's core business trends.

Operating SG&A expense includes management and staff compensation, office costs such as rents and utilities, depreciation, amortization, travel, bad debt and other expenses generally unrelated to specific client contracts, but directly related to the support of a segment's operations.

All other SG&A expense is comprised primarily of business development costs, as well as costs related to executive, investor relations/governance, finance, accounting, health/safety/environmental, human resources, legal and information technology departments and other costs generally unrelated to specific projects but which are incurred to support corporate activities and initiatives.

The following tables set forth, for the periods indicated, certain financial data derived from our consolidated statements of operations.

            Consolidated Results of Operations for the Twelve Months
                        Ended December 31, 2011 and 2010

                                       31
--------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

  For the twelve months
 ended December 31, 2011    Engineering and
 (dollars in thousands)       Construction        Automation      Field Solutions       All Other       Consolidated

Revenue before
eliminations              $       175,387        $    62,216     $        75,144     $         -       $     312,747
Inter-segment
eliminations                            -                  -                   -               -                   -
Revenue                           175,387             62,216              75,144               -             312,747   100.0  %
Gross profit                       15,354              6,084               5,841               -              27,279     8.7  %
SG&A                                7,519              4,047               5,681          14,016              31,263    10.0  %
Operating income (loss)             7,835              2,037                 160         (14,016 )            (3,984 )  (1.3 )%
Other income (expense)                                                                                           (61 )     -  %
Interest income (expense)                                                                                     (1,028 )  (0.3 )%
Tax provision                                                                                                    831     0.3  %
Net loss from continuing
operations                                                                                             $      (4,242 )  (1.4 )%
Diluted earnings per
share from continuing
operations                                                                                             $       (0.16 )

  For the twelve months
 ended December 31, 2010    Engineering and
 (dollars in thousands)       Construction        Automation      Field Solutions       All Other       Consolidated

Revenue before
eliminations              $       161,149        $    51,020     $        95,481     $         -       $     307,650
Inter-segment
eliminations                          (48 )           (1,363 )                 -               -              (1,411 )
Revenue                           161,101             49,657              95,481               -             306,239   100.0  %
Gross profit                       12,253              2,551               7,153               -              21,957     7.2  %
SG&A                               17,925              4,476               3,480          14,094              39,975    13.1  %
Operating income (loss)            (5,672 )           (1,925 )             3,673         (14,094 )           (18,018 )  (5.9 )%
Other income (expense)                                                                                          (319 )  (0.1 )%
Interest income (expense)                                                                                       (442 )  (0.1 )%
Tax provision                                                                                                  6,553     2.1  %
Net loss from continuing
operations                                                                                             $     (12,226 )  (4.0 )%
Diluted earnings per
share from continuing
operations                                                                                             $       (0.45 )

 Increase/(Decrease) in
         2011 to
 2010 Operating Results     Engineering and
 (dollars in thousands)       Construction        Automation      Field Solutions       All Other       Consolidated

Revenue before
eliminations              $        14,238        $    11,196     $       (20,337 )   $         -       $       5,097
Inter-segment
eliminations                           48              1,363                   -               -               1,411
Revenue                            14,286             12,559             (20,337 )             -               6,508     2.1  %
Gross profit                        3,101              3,533              (1,312 )             -               5,322    24.2  %
SG&A                              (10,406 )             (429 )             2,201             (78 )            (8,712 ) (21.8 )%
Operating income (loss)            13,507              3,962              (3,513 )            78              14,034   (77.9 )%
Other income (expense)                                                                                           258   (80.9 )%
Interest income (expense)                                                                                       (586 ) 132.6  %
Tax provision                                                                                                 (5,722 ) (87.3 )%
Net loss from continuing
operations                                                                                             $       7,984   (65.3 )%
Diluted earnings per
share from continuing
operations                                                                                             $        0.29

            Consolidated Results of Operations for the Twelve Months

                                       32
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

                        Ended December 31, 2010 and 2009
  For the twelve months
 ended December 31, 2010    Engineering and
 (dollars in thousands)       Construction        Automation      Field Solutions       All Other       Consolidated

Revenue before
eliminations              $       161,149        $    51,020     $        95,481     $         -       $     307,650
Inter-segment
eliminations                          (48 )           (1,363 )                 -               -              (1,411 )
Revenue                           161,101             49,657              95,481               -             306,239      100.0  %
Gross profit                       12,253              2,551               7,153               -              21,957        7.3  %
SG&A                               17,925              4,476               3,480          14,094              39,975       13.1  %
Operating income (loss)            (5,672 )           (1,925 )             3,673         (14,094 )           (18,018 )     (5.9 )%
Other income (expense)                                                                                          (319 )     (0.1 )%
Interest income (expense)                                                                                       (442 )     (0.1 )%
Tax provision                                                                                                  6,553        2.1  %
Net loss from continuing
operations                                                                                             $     (12,226 )     (4.0 )%
Diluted earnings per
share from continuing
operations                                                                                             $       (0.45 )

  For the twelve months
 ended December 31, 2009    Engineering and
 (dollars in thousands)       Construction        Automation      Field Solutions       All Other       Consolidated

Revenue before
eliminations              $       154,807        $    72,418     $       118,330     $         -       $     345,555
Inter-segment
eliminations                       (1,132 )              (96 )              (865 )             -              (2,093 )
Revenue                           153,675             72,322             117,465               -             343,462      100.0  %
Gross profit                       11,403              8,703              10,947               -              31,053        9.0  %
SG&A                                6,806              4,135               3,472          13,614              28,027        8.2  %
Operating income (loss)             4,597              4,568               7,475         (13,614 )             3,026        0.9  %
Other income (expense)                                                                                           174        0.1  %
Interest income (expense)                                                                                       (573 )     (0.2 )%
Tax provision                                                                                                 (1,394 )     (0.4 )%
Net income from
continuing operations                                                                                  $       1,233        0.4  %
Diluted earnings per
share from continuing
operations                                                                                             $        0.04

 Increase/(Decrease) in
         2010 to
 2009 Operating Results     Engineering and
 (dollars in thousands)       Construction        Automation      Field Solutions       All Other       Consolidated

Revenue before
eliminations              $         6,342        $   (21,398 )   $       (22,849 )   $         -       $     (37,905 )
Inter-segment
eliminations                        1,084             (1,267 )               865               -                 682
Revenue                             7,426            (22,665 )           (21,984 )             -             (37,223 )    (10.8 )%
Gross profit                          850             (6,152 )            (3,794 )             -              (9,096 )    (29.3 )%
SG&A                               11,119                341                   8             480              11,948       42.6  %
Operating income (loss)           (10,269 )           (6,493 )            (3,802 )          (480 )           (21,044 )   (695.4 )%
Other income (expense)                                                                                          (493 )   (283.3 )%
Interest income (expense)                                                                                        131      (22.9 )%
Tax provision                                                                                                  7,947     (570.1 )%
Net loss from continuing
operations                                                                                             $     (13,459 ) (1,091.6 )%
Diluted earnings per
share from continuing
operations                                                                                             $       (0.49 )

OVERALL COMPARISONS

Revenue

The $6.5 million overall increase in revenue for the twelve months ended December 31, 2011, as compared to the comparable 2010 period, resulted from an increase of $12.5 million in our Automation segment and $14.3 million to our Engineering and Construction segment, offset by a decrease of $20.3 million in our Field Solutions segment. Overall revenue increased in 2011 as a result of project work from new clients. However, the majority of the increase was due to $21.9 million of additional work from existing clients. In addition, 2011 revenues were impacted by existing projects that were either finished or saw significantly diminished activity during the 12-month period. Our clients are continuing to perform "run and maintain" type smaller projects which focus on work for required maintenance to keep the plant up and running but not on new capital expansions. Competition for the project work on the market continues to be intense.

Our revenue decrease from 2009 to 2010 was a result of our clients' continued cancellation or delay of scheduled capital projects due to the economy in general, lower energy commodity prices and lower energy processing margins. Our clients were continuing to perform "run and maintain" type smaller projects which focus on work for required maintenance to keep the plant up and running but not on new capital expansions. Competition had also increased greatly for the amount of project work on the market. In addition, 2010 revenues were impacted by the completion of several larger projects which were not replaced with new project work.

Gross Profit

The increase in gross profit as a percentage of revenue in 2011 relative to 2010 was caused by several factors including lower travel expenses as part of an operational focus on cost control, lower material costs as a function of current project requirements and lower variable labor costs due to an operational focus on utilization, resulting in higher margins.

The decrease in gross profit as a percentage of revenue in 2010 relative to 2009. was caused by several factors including lower utilization of our billable resources, resulting in increased overhead costs to retain employees, increased overhead costs to expand our marketing to new sectors and new clients, increased per-employee costs of benefits and market pressure to renegotiate some of our existing contracts, resulting in lower margins. Also, we had significant increases in procurement activities which are generally performed at lower margins than labor.

Selling, General and Administrative ("SG&A") Expenses

The decrease in operating SG&A expense for the twelve months ended December 31, 2011, as compared to the comparable 2010 period, primarily consisted of decreases in bad debt expense of $9.7 million mainly attributable to the SLE receivable write off in 2010. Also, the Electrical Services group in our Automation segment moved to a smaller facility, reducing facilities expense by $0.3 million. We are now in the process of selling certain Electrical assets and terminating the operations of that division which should further decrease our SG&A.

The increase in operating SG&A expense for the twelve months ended December 31, 2010, as compared to the comparable 2009 period, primarily consisted of increases in bad debt expense of $9.7 million mainly attributable to the SLE write off, net of allowance adjustments, $1.0 million in professional services expenses, $0.4 million in salaries and employee related expenses, $0.2 million in depreciation and amortization expenses and $0.1 million in taxes, offset by decreases of $0.1 million in stock compensation expense.

The decrease in all other SG&A expense for the twelve months ended December 31, 2011, as compared to the comparable 2010 period, was primarily the result of decreases of $1.1 million in salaries and employee related expenses, offset by an increase of $0.1 million in professional services expenses. As a percentage of revenue, all other SG&A expense decreased to 4.5% for the twelve months ended December 31, 2011, from 4.6% for the comparable prior year period.

The increase in all other SG&A expense for the twelve months ended December 31, 2010, as compared to the comparable 2009 period, was primarily the result of increases of $1.1 million in salaries and employee related expenses, offset by decreases of $0.3 million in depreciation and amortization expense, $0.1 million in stock compensation expense, $0.1 million in professional services expenses and $0.1 million in office expenses. As a percentage of revenue, all other SG&A expense increased to 4.6% for the twelve months ended December 31, 2010, from 4.0% for the comparable prior year period.

Operating Profit

The increase in operating income for the twelve months ended December 31, 2011, as compared to the comparable 2010 period, was attributable to higher revenue levels as well as decreased costs for both travel expenses and variable labor, due to increased focus on cost controls and improved utilization. These decreased costs contributed to higher operating income as a percentage of revenue.

The decrease in operating income for the twelve months ended December 31, 2010, as compared to the comparable 2009 period, was attributable to lower revenue levels as well as increased costs for both new sales efforts, maintaining core employees at a time when the Company had fewer projects and the SLE and Bigler write offs. These increased costs contributed to lower operating income as a percentage of revenue as well as decreased contract margins in response to market pressures.

Other Income (Expense)

Other expense decreased in 2011 compared to the same period in 2010 due mainly to a decrease in investments written off in 2010 of approximately $413,000 compared to other expenses in 2011 of approximately $61,000. Other expense in 2011 consisted primarily of approximately $57,000 paid in government penalties. Other expense for the same period in 2010 mainly consisted of $413,000 to write off an investment with a developer that was unable to obtain project financing and $56,000 in taxes, offset by income of $150,000 for a legal settlement. Other income in 2009 mainly consisted of $315,000 from insurance proceeds related to Hurricane Ike, offset by expense of $145,000 in losses from an investment in a Costa Rican company.

Interest Income (Expense)

Interest expense increased between 2011 and 2010 due to the increase in our credit facility as well as increasing interest rates in 2011, as compared to 2010. Interest expense decreased between 2010 and 2009 due to the lower balances on our line of credit throughout most of the year.

Net Income (Loss)

As a result of changes detailed above, Net Income increased $4.7 million to a loss of $7.1 million in 2011 from a loss of $11.8 million in 2010, increasing as a percentage of total revenue from (4.0)% in 2010 to (1.4)% in 2011. Net Income decreased $13.0 million to a loss of $11.8 million in 2010 from net income of $1.2 million in 2009, decreasing as a percentage of total revenue from 0.4% in 2009 to (4.0)% in 2010.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

2011 Compared to 2010 and 2010 Compared to 2009

Engineering and Construction Segment:
                                                     Twelve Months Ended December 31,
                                         2011                    2010              Increase/(Decrease)
                                                          (dollars in thousands)

. . .