UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2007

or

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:

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate the number of shares outstanding of each of issuer’s classes of common stock as of October 31, 2007:

GP STRATEGIES CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

Part I. Financial Information

Item 1. Financial Statements

GP STRATEGIES CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

See accompanying notes to condensed consolidated financial statements.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

See accompanying notes to condensed consolidated financial statements.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

Nine months ended September 30, 2007 and 2006

(Unaudited, in thousands)

See accompanying notes to condensed consolidated financial statements.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2007

(Unaudited)

(1)                     Basis of Presentation

GP Strategies Corporation (the “Company”) was incorporated in Delaware in 1959. The Company’s business consists of its training, engineering, and consulting business operated by its wholly owned subsidiary, General Physics Corporation (“General Physics” or “GP”). General Physics is a workforce development company that seeks to improve the effectiveness of organizations by providing training, management consulting, e-learning solutions and engineering services that are customized to meet the specific needs of clients.

On January 23, 2007, General Physics completed the acquisition of certain operating assets and the business of Sandy Corporation (“Sandy”), a leader in custom product sales training and part of the ADP Dealer Services division of ADP, Inc. (“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 automotive industry. See notes 3, 4 and 11 for further details.

On June 1, 2007, General Physics, through its wholly owned subsidiary, General Physics (UK) Ltd. (“GPUK”), completed the acquisition of Smallpeice Enterprises Ltd. (“SEL”), a provider of business improvement and technical and management training services in the United Kingdom. See note 3 for further details. The results of SEL’s operations are included in the condensed consolidated financial statements for the period beginning June 1, 2007.

Effective October 1, 2007, General Physics acquired Via Training, LLC (Via), a custom e-learning sales training company, for a purchase price of $1,800,000 in cash paid at closing. See note 3 for further details.

The accompanying condensed consolidated balance sheet of the Company as of September 30, 2007, the condensed consolidated statements of operations for the three and  nine months ended September 30, 2007 and 2006, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2007 and 2006 have not been audited, but have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2006, as presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. In the opinion of management, this interim information includes all material adjustments, which are of a normal and recurring nature, necessary for a fair presentation. The results for the 2007 interim period are not necessarily indicative of results to be expected for the entire year. Certain amounts in 2006 have been reclassified to conform with the presentation for 2007.

The condensed consolidated financial statements include the operations of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

(2)                     Earnings Per Share

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the periods. Diluted EPS reflects the potential dilution of common stock equivalent shares that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

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The Company’s dilutive common stock equivalent shares consist of stock options, restricted stock units, and warrants to purchase shares of common stock computed under the treasury stock method, using the average market price during the period. The following table presents instruments which were not dilutive and were excluded from the computation of diluted EPS in each period, as well as the dilutive common stock equivalent shares which were included in the computation of diluted EPS:

(3)                     Acquisitions

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 automotive industry. General Physics acquired certain assets and the business of Sandy for a purchase price of $4,393,000 cash paid to ADP from cash on hand and the assumption of certain liabilities to complete contracts. In addition, General Physics may be required to make payments of up to an additional $8,000,000, contingent upon Sandy achieving certain revenue targets, as defined in the purchase agreement, during the two twelve-month periods following completion of the acquisition. In connection with the acquisition and in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, the Company recorded $679,000 of goodwill, representing the excess of the purchase price over the net tangible and intangible assets. Sandy is reported as a separate business segment and the results of its operations have been included in the condensed consolidated financial statements since the date of acquisition.

The purchase price consisted of the following (in thousands):

The Company’s preliminary purchase price allocation for the net assets acquired is as follows (in thousands):

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The Company recorded customer-related intangible assets as a result of the acquisition, which included $4,701,000 relating to customer lists and relationships acquired with an estimated useful life of 12 years, and $1,305,000 relating to contract backlog for future services under firm contracts to be amortized over 14 months subsequent to the acquisition in proportion to the amount of related backlog to be recognized in revenue. During the three and nine months ended September 30, 2007, the Company recognized $375,000 and $1,301,000 of amortization expense for these intangible assets, respectively. The amortization related to the contract backlog intangible asset totaled $277,000 and $1,040,000 for the three and nine months ended September 30, 2007, respectively, and the amortization related to the customer lists and relationships intangible asset totaled $98,000 and $261,000 for the three and nine months ended September 30, 2007, respectively.

The following unaudited pro forma condensed consolidated results of operations assume that the acquisition of Sandy was completed as of January 1 for each of the interim periods 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.

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Smallpeice Enterprises Ltd. (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, after a post-closing adjustment based on actual net assets, and incurred approximately $0.2 million of acquisition costs. In addition, General Physics may be required to pay the seller up to an additional $1.8 million, contingent upon SEL achieving certain earnings targets, as defined in the purchase agreement, during the one-year period following completion of the acquisition. SEL is included in the Company’s Manufacturing & BPO segment and its results of operations are included in the condensed consolidated financial statements since the date of the acquisition. The pro-forma impact of the SEL acquisition is not material to the Company’s results of operations for the three and nine months ended September 30, 2007.

The Company’s preliminary purchase price allocation for the net assets acquired is as follows (in thousands):

Via Training, LLC

Effective October 1, 2007, General Physics acquired Via, a custom e-learning sales training company, for a purchase price of $1,800,000 in cash paid at closing. In addition, General Physics may be required to pay up to an additional $3,250,000, contingent upon Via achieving certain earnings targets during the two twelve-month periods following the completion of the acquisition. Via will be included in the Company’s Manufacturing & BPO segment and its results of operations will be included in its consolidated financial statements effective October 1, 2007.

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(4)                     Inventory

Sandy produces brand specific glovebox portfolios, brochures and accessory kits for its customers, which are installed in new cars and trucks at the time of vehicle assembly. Sandy designs these items and outsources their manufacture to suppliers that provide the raw materials, bind and/or sew the portfolio, assemble its contents, and ship the finished product to its customers’ assembly plants. Although the inventory is kept at third party suppliers, the Company has title to the inventory and bears the risk of loss. As of September 30, 2007, the Company had inventory of $737,000, which primarily consisted of raw materials for the glovebox portfolios, brochures and accessory kits.

(5)                     Stock-Based Compensation

The Company accounts for its stock-based compensation awards under SFAS No. 123R, Share-Based Payment (SFAS No. 123R) which requires companies to recognize compensation expense for all equity-based compensation awards issued to employees that are expected to vest. Compensation cost is based on the fair value of awards as of the grant date.

The following table summarizes the pre-tax stock-based compensation expense included in reported net income (in thousands):

Pursuant to the Company’s 1973 Non-Qualified Stock Option Plan, as amended (the “Non-Qualified Plan”), and 2003 Incentive Stock Plan (the “2003 Plan”), the Company may grant awards of non-qualified stock options, incentive stock options, restricted stock, stock units, performance shares, performance units and other incentives payable in cash and/or in shares of the Company’s common stock to officers, employees or members of the Board of Directors. As of September 30, 2007, the Company had non-qualified stock options, restricted stock, and restricted stock units outstanding under these plans as discussed below.

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Non-Qualified Stock Options

Summarized information for the Company’s non-qualified stock options is as follows:

During the second quarter of 2007, the Company granted 880,000 non-qualified stock options to certain key management personnel. The options have an exercise price of $11.08, vest over five years on a graded vesting schedule, and have a contractual term of six years. The per share fair value of the Company’s stock options granted during the second quarter of 2007 was $3.14 on the date of grant using the Black-Scholes Merton option pricing model with the following assumptions:

As of September 30, 2007, the Company had approximately $2,223,000 of unrecognized compensation cost related to the unvested portion of outstanding stock options to be recognized on a straight-line basis over the remaining service period of approximately 4.7 years.

During the second quarter of 2007, the Company’s President exercised 47,887 outstanding and exercisable stock options and paid the exercise price of the options by having the Company withhold shares of common stock (valued based upon the market value of the Company’s stock on the exercise date) that would otherwise be issued to him upon exercise of the stock options.

Restricted Stock Units

In addition to stock options, the Company issues restricted stock units to key employees and members of the Board of Directors based on meeting certain service goals. The stock units vest to the recipients at various dates, up to five years, based on fulfilling service requirements. In accordance with SFAS No. 123R, the Company recognizes the value of the underlying stock on the date of grant to compensation expense over the requisite service period. Upon vesting, the stock units are settled in shares of the

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Company’s common stock. Summarized share information for the Company’s restricted stock units is as follows:

During the first quarter of 2007, the Company granted 74,000 restricted stock units to key employees in connection with the acquisition of Sandy. The awards had a grant date fair value of $8.96, and vest over a weighted average period of 4.4 years from the date of grant.

(6)                     Short-Term Borrowings

General Physics has a $25 million Financing and Security Agreement, as amended on August 6, 2007 (the ”Credit Agreement”), with a bank that expires on August 31, 2009 with annual renewal options. The Credit Agreement is secured by certain assets of General Physics and provides for an unsecured guaranty from the Company.

The maximum interest rate on the Credit Agreement is the daily LIBOR market index rate plus 2.75%. Based upon the financial performance of General Physics, the interest rate can be reduced. As of September 30, 2007, the rate was daily LIBOR plus 2.50%, which resulted in a rate of approximately 7.9%. 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. The Credit Agreement also contains certain restrictive covenants regarding future acquisitions, incurrence of debt and the payment of dividends. General Physics was in compliance with all loan covenants under the amended Credit Agreement as of September 30, 2007. In addition, General Physics is currently restricted from paying dividends or management fees to the Company in excess of $1,000,000 in any year, with the exception that the amended Credit Agreement permits General Physics to provide up to $10 million of cash to the Company to repurchase shares of its outstanding common stock in the open market.

As of September 30, 2007, General Physics had $3,330,000 of outstanding borrowings under the Credit Agreement and there was approximately $21,500,000 of additional borrowings available based upon 80% of eligible accounts receivable and 80% of eligible unbilled receivables. As of December 31, 2006, General Physics had no borrowings outstanding under the Credit Agreement.

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(7)                     Long-Term Debt

Long-term debt consists of the following (in thousands):

(a)                      In August 2003, the Company issued and sold to four Gabelli Funds $7,500,000 aggregate principal amount of 6% Conditional Subordinated Notes due 2008 (the Gabelli Notes) and 937,500 warrants (GP Warrants), each entitling the holder thereof to purchase (subject to adjustment) one share of the Company’s Common Stock at an exercise price of $8.00. The aggregate purchase price for the Gabelli Notes and GP Warrants was $7,500,000.

The Gabelli Notes bear interest at 6% per annum payable semi-annually commencing on December 31, 2003 and mature in August 2008. The Gabelli Notes are secured by a mortgage on the Company’s former property located in Pawling, New York which was distributed to National Patent Development Corporation (NPDC) in connection with its spin-off by the Company on November 24, 2004. In addition, at any time that less than $1,875,000 of the principal amount of the Gabelli Notes is outstanding, the Company may defease the obligations secured by the mortgage and obtain a release of the mortgage by depositing with an agent for the Noteholders bonds or government securities with an investment grade rating by a nationally recognized rating agency which, without reinvestment, will provide cash on the maturity date of the Gabelli Notes in an amount not less than the outstanding principal amount of the Gabelli Notes.

Subsequent to the spin-off of NPDC in 2004 and GSE Systems, Inc. (GSE) in 2005, and in accordance with the anti-dilution provisions of the warrant agreement for stock splits, reorganizations, mergers and similar transactions, the number of GP Warrants was adjusted to 984,116 and the exercise price was adjusted to $5.85 per share. The GP warrants are exercisable at any time until August 2008. The exercise price may be paid in cash, by delivery of the Gabelli Notes, or a combination of the two. During the year ended December 31, 2006, Gabelli exercised 197,823 GP Warrants for a total exercise price of $1,157,000 which was paid in the form of $140,000 cash and delivery of $1,017,000 of the Gabelli Notes and accrued interest thereon. During the nine months ended September 30, 2007, Gabelli exercised 624,862 GP Warrants for a total exercise price of $3,655,000, which was paid in the form of delivery of the Gabelli Notes and

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accrued interest thereon. As of September 30, 2007, there were 161,431 GP Warrants with an exercise price of $5.85 per share outstanding and exercisable.

The fair value of the GP Warrants at the date of issuance was $2,389,000, which reduced long-term debt in the accompanying condensed consolidated balance sheets and is being accreted as additional interest expense using the effective interest rate over the term of the Gabelli Notes. The Gabelli Notes have a yield to maturity of 15.436% based on the discounted value. Accretion charged as interest expense was approximately $57,000 and $119,000 for the three months ended September 30, 2007 and 2006, respectively, and approximately $200,000 and $357,000 for the nine months ended September 30, 2007 and 2006, respectively. The exercises of the GP Warrants during the nine months ended September 30, 2007 resulted in a decrease of $3,225,000 in the carrying value of the Gabelli Notes, which was reclassified to equity to reflect the issuance of shares of common stock upon exercise.

(b)                     In October 2003, the Company issued a five-year 5% note due in full in October 2008 in the principal amount of $5,250,955 to ManTech International. Interest is payable quarterly. Each year during the term of the note, the holder of the note has the option to convert up to 20% of the original principal amount of the note into common stock of the Company at the then market price of the Company’s common stock, but only in the event that the Company’s common stock is trading at $10 per share or more. In the event that less than 20% of the principal amount of the note is converted in any year, such amount not converted will be eligible for conversion in each subsequent year until converted or until the note is repaid in cash.

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(8)                     Stockholders’ Equity

Changes in stockholders’ equity during the nine months ended September 30, 2007 were as follows (in thousands):

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(9)                     Comprehensive Income

The following are the components of comprehensive income (in thousands):

As of September 30, 2007 and December 31, 2006, accumulated other comprehensive loss was $381,000 and $640,000, respectively, which consisted of foreign currency translation adjustments.

(10)              Income Taxes

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (FIN No. 48). FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken on a tax return. Under FIN No. 48, a tax benefit from an uncertain tax position may be recognized only if it is “more likely than not” that the position is sustainable upon examination, based on its technical merits. The tax benefit of a qualifying position under FIN No. 48 would equal the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. FIN No. 48 was effective as of January 1, 2007 for calendar-year companies. In applying the new accounting model prescribed by FIN No. 48, the Company was required to determine and assess all material positions existing as of the adoption date, including all significant uncertain positions, in all tax years, that were still subject to assessment or challenge under relevant tax statutes.

Upon adoption on January 1, 2007, the Company recorded a net decrease of $98,000 to accumulated deficit to reflect the cumulative effect adjustment for FIN No. 48. As of January 1, 2007, the Company had $2,218,000 of unrecognized tax benefits, all of which would impact the effective tax rate if recognized. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of January 1, 2007, the Company had no accrued interest or penalties. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examination by tax authorities for years prior to 2002.

(11)              Business Segments

Prior to the acquisition of Sandy on January 23, 2007, the Company had two reportable business segments. Subsequent to the acquisition, Sandy is being run as an unincorporated operating group of General Physics. The Company determined that the operations of Sandy constitute a separate reportable business segment and its results of operations are included in the Sandy Sales Training & Marketing segment since

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the effective date of the acquisition. As of September 30, 2007, the Company’s three reportable business segments are: 1) Process, Energy & Government; 2) Manufacturing & Business Process Outsourcing (BPO); and 3) Sandy Sales Training & Marketing. The Company is organized by operating group primarily based upon the markets served by each group and the services performed. The Process, Energy & Government and Manufacturing & BPO segments represent an aggregation of the Company’s operating segments in accordance with the aggregation criteria in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131), and the Sandy Sales Training & Marketing segment represents one operating segment as defined in SFAS No. 131. Below is a description of each of the Company’s reportable business segments.

•                  Process, Energy & Government  — this segment primarily serves federal and state governmental agencies, large government contractors, petroleum and chemical refining companies, and electric power utilities and provides engineering consulting, design and evaluation services regarding facilities, the environment, processes and systems, and staff augmentation, curriculum design and development, and training and technical services.

•                  Manufacturing & BPO – this segment primarily serves large companies in the automotive, steel, pharmaceutical, electronics, and other industries as well as certain governmental clients and provides training, curriculum design and development, staff augmentation, e-learning services, system hosting, integration and help desk support, business process and training outsourcing, and consulting and technical services.

•                  Sandy Sales Training & Marketing – this segment provides custom sales training and print-based and electronic publications primarily to the automotive industry.

For the nine months ended September 30, 2007 and 2006, sales to the United States government and its agencies represented approximately 18% and 30%, respectively, of the Company’s revenue. Revenue from the Department of the Army, which is included in the Process, Energy & Government segment, accounted for approximately 9% and 13% of the Company’s revenue for the nine months ended September 30, 2007 and 2006, respectively.

As a result of the acquisition of Sandy, the Company has 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 21% of the Company’s revenue for the nine months ended September 30, 2007, and revenue from the automotive industry accounted for approximately 30% of the Company’s revenue for the nine months ended September 30, 2007.

The Company does not allocate the following corporate items to the segments: other income and interest expense; selling, general and administrative expense; and income tax expense. Inter-segment revenue is eliminated in consolidation and is not significant.

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The following tables set forth the revenue and operating income of each of the Company’s operating segments and includes a reconciliation of segment revenue to consolidated revenue and operating income to consolidated income before income tax expense (in thousands):

* Operating income for the Sandy Sales Training & Marketing segment includes expense for the amortization of intangible assets totaling $375,000 and $1,301,000 for the three and nine months ended September 30, 2007, respectively.

(12)              Related Party Transactions

Loans

On April 1, 2002, Jerome I. Feldman, the Company’s then Chief Executive Officer (CEO), entered into an incentive compensation agreement with the Company pursuant to which he was eligible to receive from the Company up to five payments of $1,000,000 each, based on the closing price of the Company’s Common Stock sustaining or averaging increasing specified levels over periods of at least 10 consecutive trading days. On June 11, 2003, July 23, 2003, December 22, 2003, November 3, 2004 and December 10, 2004, he earned an incentive payment of $1,000,000 each. The Company recorded compensation expense of $2,000,000 and $3,000,000 for the years ended December 31, 2004 and 2003, respectively, for this incentive compensation. Under the terms of the incentive compensation agreement, Mr. Feldman deferred payment of the incentive payments until May 31, 2007.

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To the extent there were any outstanding loans from the Company to the CEO at the time an incentive payment was payable, the Company had the right to off-set the payment of such incentive payment first against the outstanding accrued interest under such loans and next against any outstanding principal. On May 31, 2007, the Company applied the entire deferred incentive compensation earned by the CEO during 2004 and 2003 against the unpaid accrued interest and principal on his outstanding loans which had been issued to him previously to exercise stock options to purchase Class B Common Stock of the Company.

The notes bore interest at the prime rate and were secured by certain assets owned by him. All unpaid principal and accrued interest on the loans were due on May 31, 2007. As of May 31, 2007, the Company had notes receivable and accrued interest from Mr. Feldman of approximately $207,000 after offsetting the $5 million deferred incentive compensation earned in 2004 and 2003, as discussed above. Mr. Feldman repaid the outstanding note receivable balance and accrued interest owed by him to the Company in cash during the second quarter of 2007.

Management Services Agreement Between NPDC and the Company

Prior to the spin-off of NPDC in 2004, NPDC was a wholly owned subsidiary of the Company. In connection with the spin-off, NPDC entered into a separate management agreement with the Company pursuant to which the Company has provided certain general corporate services to NPDC and has been reimbursed for such services. The term of the agreement extends for three years from the date of the spin-off, or through November 24, 2007, and may be terminated by either NPDC or the Company on or after July 30, 2006 with 180 days prior written notice. The Company charged NPDC approximately $0 and $234,000 for the three months ended September 30, 2007 and 2006, respectively, and $352,000 and $692,000 for the nine months ended September 30, 2007 and 2006, respectively, for services under the management agreement, which are reflected as reductions of selling, general and administrative expense in the accompanying condensed consolidated statements of operations.

(13)              Commitments & Guarantees

Commitments

During 2007, General Physics entered into new and/or amendments to employment agreements with certain of its senior and executive officers. The agreements have initial employment terms which extend through at least February 2009 (with certain extension clauses), and contain non-compete covenants and change of control and termination provisions.

Guarantees

Subsequent to the spin-off of NPDC, the Company continued to guarantee certain obligations of NPDC’s subsidiaries, Five Star Products, Inc. (“Five Star”) and MXL Industries, Inc. (“MXL”). The Company guaranteed certain operating leases for Five Star’s New Jersey and Connecticut warehouses, totaling approximately $1,589,000 per year through March 31, 2007. The leases have been extended and now expire in the first quarter of 2009. The annual rent obligations are currently approximately $1,600,000. In connection with the spin-off of NPDC by the Company, NPDC agreed to assume the Company’s obligation under such guarantees, to use commercially reasonable efforts to cause the Company to be

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released from each such guaranty, and to hold the Company harmless from all claims, expenses and liabilities connected with the leases or NPDC’s breach of any agreements effecting the spin-off. The Company has not received confirmation that it has been released from these guarantees. The Company does not expect to incur any material payments associated with these guarantees, and as such, no liability is reflected in the condensed consolidated balance sheet.

The Company also guarantees the repayment of a debt obligation of MXL, which is secured by property and certain equipment of MXL. The aggregate outstanding balance of MXL’s debt obligation as of September 30, 2007 was $1,030,000. The Company’s guarantee expires upon the maturity of the debt obligation in March 2011. The Company does not expect to incur any material payments associated with this guarantee, and as such, no liability is reflected in the condensed consolidated balance sheet.

(14)              Litigation

In November 2004, an arbitrator awarded the Company $12,274,000 in damages and $6,016,000 in interest in connection with the Company’s 1998 acquisition of Learning Technologies from various subsidiaries (“Systemhouse”) of MCI Communications Corporation (“MCI”) which were subsequently acquired by Electronic Data Systems Corporation (“EDS”). EDS made a payment of $18,428,000 which included post-award interest of $139,000 to satisfy its obligation under the arbitration award. The Company recognized a gain on arbitration settlement, net of legal fees and expenses of $13,660,000 in 2004. In accordance with a spin-off agreement with NPDC, the Company made an additional capital contribution to NPDC of approximately $5,000,000 of the settlement proceeds.

In November 2005, the Company settled its remaining fraud claims against EDS and Systemhouse in connection with the acquisition of Learning Technologies. Pursuant to the settlement, EDS made a cash payment to the Company in the amount of $9,000,000 in December 2005. The Company recognized a gain on the litigation settlement, net of legal fees and expenses, of approximately $5,552,000 in the fourth quarter of 2005. In accordance with a spin-off agreement with NPDC, the Company made an additional capital contribution to NPDC of approximately $1,201,000 of the settlement proceeds.

The Company’s original fraud action included MCI as a defendant. The fraud action against MCI had been stayed as a result of MCI’s bankruptcy filing in 2002, and the Company’s claims against MCI were not tried or settled with the claims against EDS and Systemhouse. On December 13, 2005, the Bankruptcy Court heard arguments on a summary judgment motion that MCI had made before filing for bankruptcy. On September 12, 2006, the Bankruptcy Court asked the parties to submit further briefs concerning whether the summary judgment motion should be decided based on the standard applicable to such motions under state or federal law. On August 21, 2007, the Court granted the motion in part and denied the motion in part, letting the action proceed with respect to the Company’s allegation that MCI, through its employees acting on its behalf, made a false oral representation relating to the sale of Systemhouse to EDS. Pursuant to the spin-off agreement with NPDC, the Company will contribute to NPDC 50% of any proceeds received in the future, net of legal fees and taxes, with respect to the litigation claims.

The Company is not a party to any legal proceeding, the outcome of which is believed by management to have a reasonable likelihood of having a material adverse effect upon the financial condition and operating results of the Company.

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(15)     Subsequent Event

Effective October 1, 2007, General Physics acquired Via, a custom e-learning sales training company, for a purchase price of $1,800,000 in cash paid at closing. In addition, General Physics may be required to pay up to an additional $3,250,000, contingent upon Via achieving certain earnings targets during the two twelve-month periods following the completion of the acquisition (see note 3).

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

General Overview

The Company’s business consists of its principal operating subsidiary, General Physics, a global training, engineering, and consulting company that seeks to improve the effectiveness of organizations by providing training, management consulting, e-learning solutions and engineering 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. General Physics is a global leader in performance improvement, with over four decades of experience in providing solutions to optimize workforce performance.

Prior to the acquisition of Sandy Corporation (“Sandy”) on January 23, 2007, the Company had two reportable business segments. Subsequent to the acquisition, Sandy is run as an unincorporated operating group of General Physics. The Company determined that the operations of Sandy constitute a separate reportable business segment and its results of operations are included in the Sandy Sales Training & Marketing segment since the effective date of the acquisition. As of September 30, 2007, the Company’s three reportable business segments are: 1) Process, Energy & Government; 2) Manufacturing & Business Process Outsourcing (BPO); and 3) Sandy Sales Training & Marketing. The Company is organized by operating group primarily based upon the markets served by each group and the services performed. The Process, Energy & Government and Manufacturing & BPO segments represent an aggregation of the Company’s operating segments in accordance with the aggregation criteria in Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131), and the Sandy Sales Training & Marketing segment represents one operating segment as defined in SFAS No. 131.

The following is a description of the Company’s three reportable business segments:

•                  Process, Energy & Government – this segment primarily serves federal and state governmental agencies, large government contractors, petroleum and chemical refining companies, and electric power utilities and provides engineering consulting, design and evaluation services regarding facilities, the environment, processes and systems, and staff augmentation, curriculum design and development, and training and technical services.

•                  Manufacturing & BPO - this segment primarily serves large companies in the automotive, steel, pharmaceutical, electronics, and other industries as well as certain governmental clients and provides training, curriculum design and development, staff augmentation, e-learning services, system hosting, integration and help desk support, business process and training outsourcing, and consulting and technical services.

•                  Sandy Sales Training & Marketing - this segment provides custom sales training and print-based and electronic publications primarily to the automotive industry.

Significant Events in 2007

Acquisitions

Sandy Corporation

On January 23, 2007, General Physics completed the acquisition of certain operating assets and the business of Sandy, a leader in custom product sales training and part of the ADP Dealer Services division of ADP. The Sandy business is run as an unincorporated division of General Physics. Sandy offers custom sales training and

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print-based and electronic publications primarily to the automotive industry. The purchase price consisted of approximately $4.4 million in cash paid to ADP from cash on hand and the assumption by General Physics of certain liabilities to complete contracts. In addition, General Physics may be required to pay ADP up to an additional $8.0 million, contingent upon Sandy achieving certain revenue targets, as defined in the purchase agreement, during the two twelve-month periods following the completion of the acquisition.

The purchase price consisted of the following (in thousands):

The Company’s preliminary purchase price allocation for the net assets acquired is as follows (in thousands):

The Company recorded customer-related intangible assets as a result of the acquisition, which included $4,701,000 relating to customer lists and relationships acquired with an estimated useful life of 12 years, and $1,305,000 relating to contract backlog for future services under firm contracts to be amortized over 14 months subsequent to the acquisition in proportion to the amount of related backlog to be recognized in revenue. During the three and nine months ended September 30, 2007, the Company recognized $375,000 and $1,301,000 of amortization expense for these intangible assets, respectively. The amortization related to the contract backlog intangible asset totaled $277,000 and $1,040,000 for the three and nine months ended September 30, 2007, respectively, and the amortization related to the customer lists and relationships intangible asset totaled $98,000 and $261,000 for the three and nine months ended September 30, 2007, respectively.

The following unaudited pro forma condensed consolidated results of operations assume that the acquisition of Sandy was completed as of January 1 for each of the interim periods shown below:

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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.

Smallpeice Enterprises Ltd. (SEL)

On June 1, 2007, General Physics, through its wholly owned GPUK subsidiary, completed the acquisition of Smallpeice Enterprises Ltd. (“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, subject to post-closing adjustment based on actual net assets, and incurred approximately $0.2 million of acquisition costs. In addition, General Physics may be required to pay the seller up to an additional $1.8 million, contingent upon SEL achieving certain earnings targets, as defined in the purchase agreement, during the one-year period following completion of the acquisition. SEL is included in the Company’s Manufacturing & BPO segment and its results of operations are included in the condensed consolidated financial statements since the date of the acquisition. The pro-forma impact of the SEL acquisition is not material to the Company’s results of operations for the three and nine months ended September 30, 2007.

The Company’s preliminary purchase price allocation for the net assets acquired is as follows (in thousands):

Via Training

Effective October 1, 2007, General Physics acquired Via, a custom e-learning sales training company, for a purchase price of $1.8 million in cash paid at closing. In addition, General Physics may be required to pay up to

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an additional $3.3 million, contingent upon Via achieving certain earnings targets during the two twelve-month periods following the completion of the acquisition. Via will be included in the Company’s Manufacturing & BPO segment and its results of operations will be included in its consolidated financial statements effective October 1, 2007.

Operating Highlights

Three Months ended September 30, 2007 Compared to the Three Months ended September 30, 2006

For the three months ended September 30, 2007, the Company had income before income tax expense of $4.2 million compared to $2.9 million for the three months ended September 30, 2006. The improved results are primarily due to an increase in operating income of $1.3 million, the components of which are discussed below, and largely a result of increased margins in the Process, Energy & Government segment and the Sandy and SEL acquisitions which were accretive to earnings for the third quarter of 2007. Net income was $2.5 million, or $0.15 per diluted share, for the third quarter of 2007 compared to net income of $1.7 million, or $0.11 per diluted share, for the third quarter of 2006.

Diluted weighted average shares outstanding were 17.3 million for the third quarter of 2007 compared to 16.6 million for the third quarter of 2006. The increase in shares outstanding is primarily due to the issuance of shares for warrant and stock option exercises, offset by shares repurchased in the open market in 2007. In connection with its share repurchase program, the Company repurchased 110,300 shares of common stock in the open market during the three months ended September 30, 2007 for approximately $1.2 million in cash. In August 2007, the Company’s Board of Directors authorized an additional $5 million of future share repurchases under the buyback program. As of September 30, 2007, there was approximately $4.4 million remaining to be used for repurchases under the additional $5 million buyback program authorized in August 2007.

Revenue

Process, Energy & Government revenue was $18.9 million during both the third quarter of 2007 and the third quarter of 2006. Despite revenue being flat quarter over quarter, the following offsetting fluctuations were experienced by this segment during the third quarter of 2007 compared to the same period in 2006: net increases of $0.8 million in engineering and training services for petroleum and refining customers, net increases of $0.6 million for construction jobs primarily for liquefied natural gas (LNG) and hydrogen fueling station facilities, offset by a $1.2 million decrease in revenue from hurricane recovery services, and net decreases of $0.2 million primarily due to the completion of chemical demilitarization projects.

Manufacturing & BPO revenue increased $1.9 million or 7.6% during the third quarter of 2007 compared to the third quarter of 2006. The increase in revenue is primarily due to a $1.8 increase in revenue from our operations in the United Kingdom due to the acquisition of SEL which contributed $1.3 million in revenue during the third

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quarter of 2007, as well as the impact of foreign currency exchange fluctuations in the third quarter of 2007 compared to the third quarter of 2006. Other revenue increases during the third quarter of 2007 compared to the third quarter of 2006 included an increase in training and consulting services with steel customers of $0.8 million and net increases of $0.2 million in the expansion of BPO services with new and existing customers. The $0.2 million net increase in BPO services was comprised of $1.1 million of net increases with new and existing customers, offset by a decrease in revenue of $0.9 million from a BPO client in 2007 due to a reduction in scope. These net increases in revenue were offset by a $0.6 million decrease in revenue due to reduced funding on a lean manufacturing contract as compared to the third quarter of 2006, and other net decreases in revenue of $0.3 million primarily due to fewer e-learning implementations and content development services taking place during the third quarter of 2007 compared to the third quarter of 2006.

The acquisition of Sandy resulted in an increase in revenue of $14.9 million during the third quarter of 2007. The results of Sandy’s operations have been included in the Company’s consolidated statements of operations since the completion of the acquisition on January 23, 2007. The Company 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 Sales Training & Marketing segment totaled $1.4 million during the third quarter of 2007, compared to $4.1 million during the second quarter of 2007 and $2.6 million during the first quarter of 2007.

Gross Profit