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, 2005 OR [ ] 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

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

For the quarterly period ended June 30, 2006

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~~STRATEGIES CORPORATION
(Exact name of ~~registrant~~Registrant as specified in its charter)

Delaware		13-1926739 ~~(State or other jurisdiction~~
(State of ~~(I.R.S.~~Incorporation)		(I.R.S. Employer Identification No.) ~~incorporation or organization)~~

~~777 Westchester Avenue, White Plains, New York 10604 (Address~~


6095 Marshalee Drive, Suite 300, Elkridge, MD		21075
(Address of principal executive offices) ~~(Zip~~		(Zip Code)

~~(914)-249-9700 (Registrant's~~

(410) 379-3600
Registrant’s telephone number, including area ~~code)~~ 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~~Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Xx No ~~----- -----~~ o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, ~~(as defined~~or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule ~~12(b)-2~~12b-2 of the Exchange ~~Act). Yes X No ----- -----~~ Act. (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes oNo ~~X ----- -----~~ x

~~Indicate the number of shares outstanding of each of ~~issuer's~~issuer’s classes of common stock as of ~~October~~July 31, ~~2005:~~ 2006:~~

Class		Outstanding
Common Stock, ~~17,081,674~~par value $.01 per share		15,627,221 shares
Class B Capital ~~1,200,000 shares~~ Stock, par value $.01 per share		—

~~GP STRATEGIES CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS~~

~~PAGE ----~~ ~~PART~~
Page
Part I. ~~FINANCIAL INFORMATION~~
Financial Information
Item 1. ~~Consolidated~~
Financial Statements ~~(Unaudited)~~
Condensed Consolidated Balance Sheets ~~- September~~—
June 30, ~~2005~~2006 and December 31, ~~2004~~ 2005
1
Condensed Consolidated Statements of ~~Operations-~~ Operations —
Three Months and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2005~~2006 and ~~2004~~ 2005
2
Condensed Consolidated Statement of Stockholders’ Equity —
Six Months Ended June 30, 2006
3
Condensed Consolidated Statements of Cash Flows ~~- Nine~~—
Six Months Ended ~~September~~June 30, ~~2005~~2006 and ~~2004 3~~ 2005
4
Notes to Condensed Consolidated Financial Statements 4
5
Item 2. ~~Management's~~
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Item 3.
Quantitative and Qualitative Disclosure About Market Risk 26
27
Item 4.
Controls and Procedures ~~26 PART~~
27
Part II. ~~OTHER INFORMATION~~
Other Information
Item 1.
Legal Proceedings
28
Item 1A.
Risk Factors
28
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
28
Item 3.
Defaults Upon Senior Securities
28
Item 4.
Submission of Matters to a Vote of Security Holders
28
Item 5.
Other Information
28
Item 6.
Exhibits
28
Signatures 29
30

Part I. Financial Information
Item 1. Financial Statements
GP STRATEGIES CORPORATION AND SUBSIDIARIES ~~CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)~~
SEPTEMBER 30, 2005 DECEMBER 31, (UNAUDITED) 2004 ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 10,507 $ 2,417 Cash held in escrow from arbitration settlement -- 13,798 Accounts and other receivables, less allowance for doubtful accounts of $883 in 2005 and $917 in 2004 24,264 31,114 Costs and estimated earnings in excess of billings on uncompleted contracts 12,143 16,834 Prepaid expenses and other current assets 7,363 5,828 -------- -------- Total current assets 54,277 69,991 -------- -------- Property, plant and equipment 6,020 13,078 Accumulated depreciation (4,007) (10,405) -------- -------- Property, plant and equipment, net 2,013 2,673 Intangible assets: Goodwill 57,507 63,867 Patents, licenses and contract rights 1,340 1,821 Accumulated amortization of patents, licenses and contract rights (653) (797) -------- -------- Intangible assets, net 58,194 64,891 Deferred tax assets 13,796 15,164 Other assets 1,245 3,316 -------- -------- Total assets $129,525 $156,035 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 87 $ 100 Short-term borrowings -- 6,068 Accounts payable and accrued expenses 19,947 33,219 Billings in excess of costs and estimated earnings on uncompleted contracts 7,168 10,003 -------- -------- Total current liabilities 27,202 49,390 Long-term debt less current maturities 11,207 10,951 Other non-current liabilities 1,138 1,739 -------- -------- Total liabilities 39,547 62,080 -------- -------- Minority interest -- 2,335 Stockholders' equity: Common stock, par value $0.01 per share 171 167 Class B capital stock, par value $0.01 per share 12 12 Additional paid-in capital 168,929 171,852 Accumulated deficit (76,193) (78,923) Unearned compensation (1,210) -- Accumulated other comprehensive loss (1,068) (761) Note receivable from stockholder (619) (619) Treasury stock, at cost (44) (108) -------- -------- Total stockholders' equity 89,978 91,620 -------- -------- Total liabilities and stockholders' equity $129,525 $156,035 ======== ========
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)

June 30,

2006

December 31,

(Unaudited)

2005

Assets

Current assets:

Cash and cash equivalents

$
2,164

$
18,118

Accounts and other receivables, less allowance for doubtful accounts of $632 in 2006 and $1,166 in 2005

23,703

27,079

Costs and estimated earnings in excess of billings on uncompleted contracts

13,109

11,487

Prepaid expenses and other current assets

5,719

5,936

Total current assets

44,695

62,620

Property, plant and equipment

6,864

6,619

Accumulated depreciation

(5,007
)
(4,762
)
Property, plant and equipment, net

1,857

1,857

Goodwill

58,435

57,483

Other intangible assets, net

746

647

Deferred tax assets

7,874

10,391

Other assets

1,613

1,643

$
115,220

$
134,641

Liabilities and Stockholders’ Equity

Current liabilities:

Current maturities of long-term debt

$
58

$
71

Accounts payable and accrued expenses

19,188

20,315

Billings in excess of costs and estimated earnings on uncompleted contracts

6,438

7,430

Total current liabilities

25,684

27,816

Long-term debt less current maturities

11,558

11,309

Other noncurrent liabilities

1,193

1,174

Total liabilities

38,435

40,299

Stockholders’ equity:

Common stock, par value $0.01 per share

178

171

Class B capital stock, par value $0.01 per share

—

12

Additional paid-in capital

161,835

168,737

Accumulated deficit

(68,596
)
(71,710
)
Unearned compensation

—

(1,133
)
Accumulated other comprehensive loss

(954
)
(1,087
)
Note receivable from stockholder

(124
)
(619
)
Treasury stock at cost

(15,554
)
(29
)
Total stockholders’ equity

76,785

94,342

$
115,220

$
134,641

See accompanying notes to ~~the~~ condensed consolidated financial statements. 1

GP STRATEGIES CORPORATION AND SUBSIDIARIES ~~CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)~~
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------- 2005 2004 2005 2004 ------- -------- -------- -------- Revenue $44,059 $44,178 $131,278 $118,814 Cost of revenue 37,371 38,855 112,678 104,786 ------- ------- -------- -------- Gross profit 6,688 5,323 18,600 14,028 Selling, general and administrative expenses (4,060) (3,791) (10,996) (11,261) ------- ------- -------- -------- Operating income 2,628 1,532 7,604 2,767 Interest expense (387) (490) (1,129) (1,470) Other income 87 104 141 321 ------- ------- -------- -------- Income from continuing operations before income tax expense 2,328 1,146 6,616 1,618 Income tax expense (869) (546) (2,874) (1,002) ------- ------- -------- -------- Income from continuing operations 1,459 600 3,742 616 Income (loss) from discontinued operations, net of income taxes (417) (171) (1,012) 337 ------- ------- -------- -------- Net income $ 1,042 $ 429 $ 2,730 $ 953 ======= ======= ======== ======== Per common share data: Basic Income from continuing operations $ 0.08 $ 0.03 $ 0.21 $ 0.03 Income (loss) from discontinued operations (0.02) (0.01) (0.06) 0.02 ------- ------- -------- -------- Net income $ 0.06 $ 0.02 $ 0.15 $ 0.05 ======= ======= ======== ======== Diluted Income from continuing operations $ 0.07 $ 0.03 $ 0.20 $ 0.03 Income (loss) from discontinued operations (0.02) (0.01) (0.06) 0.02 ------- ------- -------- -------- Net income $ 0.05 $ 0.02 $ 0.14 $ 0.05 ======= ======= ======== ========
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)

Three Months Ended

Six Months Ended

June 30,

June 30,

2006

2005

2006

2005

Revenue

$
45,779

$
43,659

$
89,307

$
87,219

Cost of revenue

38,822

37,291

76,588

75,307

Gross profit

6,957

6,368

12,719

11,912

Selling, general and administrative expenses

3,632

3,398

7,004

6,936

Operating income

3,325

2,970

5,715

4,976

Interest expense

443

379

857

742

Other income

180

12

584

54

Income from continuing operations before income tax expense

3,062

2,603

5,442

4,288

Income tax expense

1,317

1,162

2,328

2,005

Income from continuing operations

1,745

1,441

3,114

2,283

Loss from discontinued operations, net of income taxes

—

(221
)
—

(595
)
Net income

$
1,745

$
1,220

$
3,114

$
1,688

Basic weighted average shares outstanding

15,550

18,141

15,889

18,029

Diluted weighted average shares outstanding

16,461

18,761

16,795

18,879

Per common share data:

Basic

Income from continuing operations

$
0.11

$
0.08

$
0.20

$
0.12

Loss from discontinued operations

—

(0.01
)
—

(0.03
)
Net income

$
0.11

$
0.07

$
0.20

$
0.09

Diluted

Income from continuing operations

$
0.11

$
0.08

$
0.19

$
0.12

Loss from discontinued operations

—

(0.01
)
—

(0.03
)
Net income

$
0.11

$
0.07

$
0.19

$
0.09

See accompanying notes to ~~the~~ condensed consolidated financial statements.
2

GP STRATEGIES CORPORATION AND SUBSIDIARIES ~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER~~
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
Six months ended June 30, ~~2005 AND 2004 (UNAUDITED) (DOLLARS IN THOUSANDS)~~
~~2005 2004 ------- ------~~ Cash flows from operating activities: Income from continuing operations $ 3,742 $ 616 Income (loss) from discontinued operations, net of income taxes (1,012) 337 ------- ------- Net income 2,730 953 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 2,506 2,746 Collection of deposit in escrow 13,798 -- Issuance of stock for retirement savings plan and non-cash compensation expense 900 100 Gain on sales of marketable securities -- (381) Changes in other operating items (8,163) (4,211) ------- ------- Net cash provided (used) by operations 11,771 (793) ------- ------- Cash flows from investing activities: Additions to property, plant and equipment (818) (1,281) Proceeds from sales of marketable securities -- 1,012 Proceeds from sales of property, plant and equipment 21 -- ------- ------- Net cash used by investing activities (797) (269) ------- ------- Cash flows from financing activities: Proceeds from (repayment of) short-term borrowings, net (4,886) 1,056 Issuance of subordinated convertible note by GSE 2,000 -- Repayment of long-term debt -- (723) Proceeds from exercised stock options 1,238 404 Distribution of cash in the net assets of GSE in spin-off (804) -- Other financing activities (287) -- Payments of obligations under capital leases (70) (270) ------- ------- Net cash provided (used) by financing activities (2,809) 467 ------- ------- Effect of exchange rate changes on cash and cash equivalents (75) (3) ------- ------- Net increase (decrease) in cash and cash equivalents 8,090 (598) Cash and cash equivalents at the beginning of the period 2,417 4,416 ------- ------- Cash and cash equivalents at the end of the period $10,507 $ 3,818 ======= ======= Non-cash investing activity: Distribution of non-cash net assets of GSE in spin-off (see note 4) $ 5,978 $ --
2006
(In thousands, except for par value per share)

Class B

Accumulated

Note

Common

capital

Additional

other

receivable

Total

stock

stock

paid-in

Accumulated

Unearned

comprehensive

from

Treasury

stockholders’

($0.01 par)

($0.01 par)

capital

deficit

compensation

loss

stockholder

stock at cost

equity

Balance at December 31, 2005

$
171

$
12

$
168,737

$
(71,710
)
$
(1,133
)
$
(1,087
)
$
(619
)
$
(29
)
$
94,342

Net income

—

—

—

3,114

—

—

—

—

3,114

Repurchase and exchange of common stock and Class B stock in capital stock restructuring

6

(12
)
(6,062
)
—

—

—

—

(14,758
)
(20,826
)
Repayment of note receivable from stockholder

—

—

—

—

—

—

495

—

495

Repurchases of common stock in the open market

—

—

—

—

—

—

—

(1,662
)
(1,662
)
Elimination of unearned compensation upon adoption of SFAS No. 123R

—

—

(1,133
)
—

1,133

—

—

—

—

Stock-based compensation expense

—

—

298

—

—

—

—

—

298

Other comprehensive income

—

—

—

—

—

133

—

—

133

Net issuances of stock primarily for stock option exercises and retirement savings plan

1

—

(5
)
—

—

—

—

895

891

Balance at June 30, 2006

$
178

$
—

$
161,835

$
(68,596
)
$
—

$
(954
)
$
(124
)
$
(15,554
)
$
76,785

See accompanying notes to ~~the~~ condensed consolidated financial statements.
3

GP STRATEGIES CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2006 and 2005
(Unaudited)
(In thousands)

2006

2005

Cash flows from operating activities:

Net income

$
3,114

$
1,688

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

1,293

1,499

Collection of deposit in escrow, including interest

—

13,798

Deferred income taxes

1,889

1,524

Issuance of stock for retirement savings plan and non-cash compensation expense

870

517

Minority interest

—

(622
)
Changes in other operating items, net of effect of acquisition:

Accounts and other receivables

4,138

(6
)
Costs and estimated earnings in excess of billings on uncompleted contracts

(1,622
)
(663
)
Prepaid and other current assets

470

(890
)
Accounts payable and accrued expenses

(1,837
)
(8,529
)
Billings in excess of costs and estimated earnings on uncompleted contracts

(1,646
)
(197
)
Other

—

35

Net cash provided by operating activities

6,669

8,154

Cash flows from investing activities:

Additions to property, plant and equipment

(447
)
(431
)
Acquisition, net of cash acquired

(619
)
—

Other investing activities

71

14

Net cash used in investing activities

(995
)
(417
)
Cash flows from financing activities:

Repayment of short-term borrowings

—

(5,393
)
Repurchase and exchange of common stock and Class B stock in capital stock restructuring

(20,826
)
—

Proceeds from issuance of subordinated convertible note by GSE

—

1,500

Repayment of note receivable from stockholder

495

—

Repurchases of common stock in the open market

(1,662
)
—

Proceeds from stock option exercises

423

931

Deferred financing costs

—

(182
)
Payments on obligations under capital leases

(53
)
(47
)
Net cash used in financing activities

(21,623
)
(3,191
)

Effect of exchange rate changes on cash and cash equivalents

(5
)
(62
)
Net increase (decrease) in cash and cash equivalents

(15,954
)
4,484

Cash and cash equivalents at beginning of period

18,118

2,417

Cash and cash equivalents at end of period

$
2,164

$
6,901

See accompanying notes to condensed consolidated financial statements.
4

GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements ~~Three and nine months ended September~~
June 30, ~~2005 and 2004~~ 2006
(Unaudited)
(1)       ~~BASIS OF PRESENTATION~~ Basis of Presentation
GP Strategies Corporation ~~("the Company"~~(the “Company”) was incorporated in Delaware in 1959. ~~As of September 30, 2005, the Company's~~The Company’s business consists of its training, engineering, and ~~workforce development~~consulting business operated by General Physics Corporation ("(“General ~~Physics"~~Physics” or ~~"GP"~~“GP”). General Physics is a workforce development company that seeks to improve the effectiveness of organizations by providing training and e-Learning solutions, management consulting, ~~e-Learning solutions~~ and engineering services that are customized to meet the specific needs of clients.
On September 30, 2005, the Company completed a taxable spin-off of its 57% interest in GSE Systems, Inc. ~~("GSE"~~(“GSE”) through a dividend to the ~~Company's~~Company’s stockholders. GSE is a stand alone public company which provides simulation solutions and services to energy, process and manufacturing industries worldwide. On September 30, 2005, stockholders received in the spin-off 0.283075 shares of GSE common stock for each share of the ~~Company's common stock~~Company’s Common Stock or Class B ~~stock~~Capital Stock (“Class B Stock”) held on the record date of September 19, 2005. Following the spin-off, the Company ceased to have any ownership interest in GSE and the operations of GSE have been reclassified as discontinued in the ~~Company's~~Company’s condensed consolidated statements of operations for ~~all~~the prior periods ~~presented (see note 4).~~presented. The Company ~~will continue~~continues to provide corporate support services to GSE ~~including accounting, finance, human resources, legal, network support and tax,~~ pursuant to a management services agreement which ~~has been extended~~extends through December 31, ~~2005~~2006 (see ~~notes 4 and~~Note 10). On November 24, 2004, the Company completed the tax-free spin-off of National Patent Development Corporation ("NPDC"). Subsequent to the spin-off, the results of operations of NPDC are presented as discontinued in the Company's condensed consolidated statements of operations for the three and nine months ended September 30, 2004. The condensed consolidated financial statements include the operations of the Company and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
The accompanying condensed consolidated balance sheet as of ~~September~~June 30, ~~2005,~~2006, the condensed consolidated statements of operations for the three and ~~nine~~six months ended ~~September~~June 30, 2006 and 2005, and the condensed consolidated ~~statement~~statements of cash flows for the ~~nine~~six months ended ~~September~~June 30, 2006 and 2005 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 audited consolidated financial statements for the year ended December 31, ~~2004~~2005, as presented in our Annual Report on Form ~~10-K/A~~10-K dated ~~May~~March 16, ~~2005.~~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 ~~2005~~2006 interim ~~periods~~period are not necessarily indicative of results to be expected for the entire year. During 2006, the Company reflected $0.3 million of equity in earnings of a joint venture within other income. Previously, this amount was presented in revenue. During 2005, $0.1 million was reflected in revenue related to this joint venture. Certain other amounts ~~for 2004~~in 2005 have been reclassified to conform with the presentation for 2005. In September 2005 in conjunction with the spin-off of GSE, the Company identified an amount in its deferred tax assets that related to the excess tax basis over book basis of its investment in GSE. This deferred tax asset should have been eliminated in purchase accounting when the Company increased its ownership interest in GSE to 57% in October 2003. 2006.
The ~~Company has reclassified $1.5 million from noncurrent deferred tax assets to goodwill in its December 31, 2004~~ condensed consolidated balance sheet herein. The Company determined the reclassification had a deminimus impact on the results of the Company's operations for all periods subsequent to October 2003 and was not material quantitatively or qualitatively to the consolidated financial statements ~~taken as a whole. 4~~ ~~GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three~~include the operations of the Company and ~~nine months ended September 30, 2005~~its subsidiaries. All significant intercompany balances and ~~2004 (Unaudited)~~ transactions have been eliminated.

(2) ~~INCOME PER SHARE~~ Earnings Per Share
Basic ~~income~~earnings per common share (EPS) is based upon the weighted average number of common shares outstanding, including Class B stock, during the periods. Class B stockholders have the same rights to share in profits and losses and liquidation values as common stockholders. Diluted income per share is based uponcomputed by dividing earnings by the weighted average number of common shares outstanding during the ~~period assuming~~periods. Diluted EPS reflects the ~~issuance~~potential dilution of common stock ~~for all potential~~equivalent shares that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
The Company’s dilutive common stock ~~equivalents outstanding. Income per share for the three and nine months ended September 30, 2005 and 2004 is as follows (in thousands, except per share data):~~
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2005 2004 2005 2004 ------- -------- ------- ------ INCOME (LOSS) USED IN COMPUTATION: Income from continuing operations $ 1,459 $ 600 $ 3,742 $ 616 Income (loss) from discontinued operations (417) (171) (1,012) 337 ------- ------- ------- ------- Net income $ 1,042 $ 429 $ 2,730 $ 953 ======= ======= ======= ======= SHARES USED IN COMPUTATION: Basic weighted average shares outstanding 18,260 17,694 18,105 17,628 Dilutive impactequivalent shares consist of stock options, warrants and non-vested restricted stock units 731 511 811 530 ------- ------- ------- ------- Diluted weighted average shares outstanding 18,991 18,205 18,916 18,158 ======= ======= ======= ======= INCOME (LOSS) PER COMMON SHARE: Basic Income from continuing operations $ 0.08 $ 0.03 $ 0.21 $ 0.03 Income (loss) from discontinued operations (0.02) (0.01) (0.06) 0.02 ------- ------- ------- ------- Net income $ 0.06 $ 0.02 $ 0.15 $ 0.05 ======= ======= ======= ======= Diluted Income from continuing operations $ 0.07 $ 0.03 $ 0.20 $ 0.03 Income (loss) from discontinued operations (0.02) (0.01) (0.06) 0.02 ------- ------- ------- ------- Net income $ 0.05 $ 0.02 $ 0.14 $ 0.05 ======= ======= ======= =======
5 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three and nine months ended September 30, 2005 and 2004 (Unaudited) For the three and nine months ended September 30, 2005, stock options, warrants, and convertible notes totaling 574,000 shares for both periods were not dilutive and were excluded from the computation of diluted income per share. For the three and nine months ended September 30, 2004,non-vested stock options, warrants, and convertible notes totaling 3,042,000 shares and 3,023,000 shares, respectively, were not dilutive and were excluded from the computation of diluted income per share. The difference between the basic and diluted number of weighted average shares outstanding for the three and nine months ended September 30, 2005 and 2004 represents dilutive stock optionsunits, and warrants to purchase shares of common stock computed under the treasury stock method, using the average market price during the period. The ~~difference between~~following table presents instruments which were not dilutive and were excluded from the ~~basic~~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:

Three Months Ended

Six Months Ended

June 30,

June 30,

2006

2005

2006

2005

(In thousands)

Non-dilutive instruments

574

574

579

574

Dilutive common stock equivalents

911

620

906

850

(3)Stock-Based Compensation
Accounting Standard Adopted
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123R, Share-Based Payment (SFAS No. 123R), which revises SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), and diluted number of weighted average shares outstanding for the three and nine months ended September 30, 2005 also includes dilutive non-vested restricted stock awards granted during 2005, computed under the treasury stock method using average market price. (3) STOCK BASED COMPENSATION The Company applies the intrinsic-value-based method of accounting prescribed bysupersedes Accounting Principles Board ~~("APB")~~ Opinion No. 25, Accounting for Stock Issued to ~~Employees,~~Employees (APB No. 25), and ~~related interpretations including Financial Accounting Standards Board ("FASB") Interpretation~~requires companies to recognize compensation expense for all equity-based compensation awards issued to employees that are expected to vest. The Company adopted SFAS No. ~~44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation~~123R on January 1, 2006, using the Modified Prospective Application method without restatement of ~~APB Opinion No. 25, to account for its fixed-plan stock options.~~prior periods. Under this method, the Company began to amortize compensation cost for the remaining portion of its outstanding awards for which the requisite service was not yet rendered as of January 1, 2006. Compensation cost is based on the fair value of those awards as previously disclosed on a pro forma basis under SFAS No. 123. The Company determines the fair value of and accounts for awards that are granted, modified, or settled after January 1, 2006 in accordance with SFAS No. 123R.
Stock-Based Compensation Plans
Pursuant to the Company’s 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 or in shares of the Company’s Common Stock to officers, employees or members of the Board of Directors. The Company is authorized to grant an aggregate of

4,237,515 shares under the Non-Qualified Plan and an aggregate of 2,000,000 shares under the 2003 Plan. The Company may issue new shares or use shares held in treasury to deliver shares to employees for its equity grants or upon exercise of non-qualified stock options.
Under SFAS No. 123R, the Company recognizes compensation expense ~~is recorded~~ on a straight-line basis over the requisite service period for stock-based compensation awards with both graded and cliff vesting terms. The Company applies a forfeiture estimate to compensation expense recognized for awards that are expected to vest during the requisite service period, and revises that estimate if subsequent information indicates that the actual forfeitures will differ from the estimate. The Company recognizes the cumulative effect of a change in the number of awards expected to vest in compensation expense in the period of change. The Company does not capitalize any portion of its stock-based compensation.
The following table summarizes the stock-based compensation expense included in reported net income under the fair value method in accordance with SFAS No. 123R (in thousands):

Three months

Six months

ended June 30,

ended June 30,

2006

2006

Cost of revenue

$
106

$
211

Selling, general and administrative expenses

42

87

Total stock-based compensation expense (pre-tax)

$
148

$
298

Total compensation expense was comprised of $64,000 for stock options and $84,000 for non-vested stock units for the three months ended June 30, 2006, and $139,000 for stock options and $159,000 for non-vested stock units for the six months ended June 30, 2006. During the three and six months ended June 30, 2006, the Company recognized a deferred income tax benefit of $59,000 and $119,000, respectively, associated with the compensation expense recognized for these awards. As of June 30, 2006, the Company had non-qualified stock options, restricted stock, and non-vested stock units outstanding under these plans as discussed below.
Non-Qualified Stock Options
Non-qualified stock options are granted with an exercise price not less than the fair market value of the Company’s Common Stock at the date of grant, ~~only if~~vest over a period up to ten years, and expire at various terms up to ten years from the ~~current market price~~date of grant.

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

Weighted

average

Weighted

remaining

Aggregate

Number of

average

contractual

intrinsic

Stock Options

options

exercise price

term

value

Outstanding at December 31, 2005

1,411,345

$
4.83

Granted

—

Exercised

(88,016
)
4.73

Forfeited/expired

(23,973
)
5.47

Outstanding and expected to
vest at June 30, 2006

1,299,356

$
4.83

1.50

$
3,880,000

Exercisable at June 30, 2006

1,252,575

$
4.78

1.50

$
3,798,000

The total intrinsic value realized by participants on stock options exercised was $244,000 and $501,000 during the three months ended June 30, 2006 and 2005, respectively, and $249,000 and $762,000 for the six months ended June 30, 2006 and 2005, respectively. The Company did not realize a tax benefit related to these stock option exercises due to the existence of net operating loss carryforwards in these periods. In addition, the Company received cash for the exercise price associated with stock options exercised of $409,000 and $552,000 during the three months ended June 30, 2006 and 2005, respectively, and $417,000 and $844,000 during the six months ended June 30, 2006 and 2005, respectively. As of June 30, 2006, the Company had $48,000 of unrecognized compensation related to the unvested portion of outstanding stock options expected to be recognized through July 2007 (a weighted average remaining vesting period of less than one year).
Restricted Stock and Stock Unit Awards
The Company granted 268,000 restricted stock and non-vested stock units to certain Company officers and employees during 2005 with a weighted-average grant date fair value of $7.40 per share. Of the total stock awards granted, 76,000 represented shares of restricted stock which were fully vested upon grant because they were attributed to 2004 service, but have a restriction on sale until December 31, 2007. The remainder of the ~~options. Statement~~awards granted during 2005 represented 192,000 non-vested stock units which vest to the recipients at various dates, up to five years, based on fulfilling service requirements. Upon vesting, the stock units are settled in shares of ~~Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended, established accounting~~the Company’s Common Stock. As of both December 31, 2005 and ~~disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123,~~June 30, 2006, the Company ~~has elected~~had 182,000 non-vested stock units outstanding with a weighted average grant date fair value of $7.54. No shares of restricted stock or stock units were granted or vested during the six months ended June 30, 2006. As of June 30, 2006, the Company had unrecognized compensation cost of $974,000 related to ~~continue~~the unvested portion of its outstanding stock units expected to ~~apply the intrinsic-value-based method~~be recognized over a weighted average remaining service period of ~~accounting described above, and has adopted only the disclosure requirements of SFAS No. 123.~~ 3.6 years.

Pro-Forma Information
The following table ~~illustrates~~presents the pro-forma effect on net income ~~if the fair-value-based method had been applied to~~and earnings per share for all outstanding ~~and unvested~~stock-based compensation awards for the three and ~~nine~~six months ended ~~September~~June 30, 2005 ~~and 2004 (in~~in which the fair value provisions of SFAS No. 123R were not in effect (dollars in thousands, except per share data): 6 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three and nine months ended September 30, 2005 and 2004 (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2005 2004 2005 2004 ------ ----- ------ ----- Net income - as reported $1,042 $ 429 $2,730 $ 953 Add: stock-based compensation expense determined under intrinsic value method and included in reported net income, net of tax 90 6 125 18 Deduct: stock-based compensation expense determined under the fair value based method for all awards, net of tax (140) (37) (310) (212) ------ ----- ------ ----- Pro forma net income $ 992 $ 398 $2,545 $ 759 ====== ===== ====== ===== Net income per share: Basic - as reported $ 0.06 $0.02 $ 0.15 $0.05 Basic - pro forma $ 0.05 $0.02 $ 0.14 $0.04 Diluted - as reported $ 0.05 $0.02 $ 0.14 $0.05 Diluted - pro forma $ 0.05 $0.02 $ 0.13 $0.04
~~The Company granted 1,000 options during the first quarter of 2005 and no options during the second and third quarters of 2005.~~

Three months

Six months

ended June 30,

ended June 30,

2005

2005

Net income — as reported

$
1,220

$
1,688

Add: stock-based compensation expense determined under intrinsic value method and included in reported net income, net of tax

35

35

Deduct: stock-based compensation expense determined under the fair-value-based method for all awards, net of tax

(96
)
(170
)
Pro forma net income

$
1,159

$
1,553

Net income per share:

Basic — as reported

$
0.07

$
0.09

Basic — pro forma

$
0.06

$
0.09

Diluted — as reported

$
0.07

$
0.09

Diluted — pro forma

$
0.06

$
0.08

The per share ~~weighted-average~~weighted average fair value of the ~~Company's~~Company’s stock options granted during the ~~nine~~six months ended ~~September~~June 30, 2005 ~~and 2004 were~~was $3.35 ~~and $1.46, respectively,~~ on the date of grant using the ~~modified~~ Black-Scholes ~~option-pricing~~option pricing model with the following ~~weighted-average~~weighted average assumptions:
~~NINE MONTHS ENDED SEPTEMBER~~
Three and
Six months
ended
June 30, ~~---------------------~~ 2005 ~~2004 --------- ---------~~
Expected dividend yield ~~0% 0%~~
—
%
Risk-free interest rate ~~3.56% 1.69%~~
3.56
%
Expected volatility ~~53.51% 34.08%~~
53.51
%
Expected ~~life~~ term
4.0 years ~~2.0 years~~
~~In December 2004,~~
The Company estimates the ~~FASB issued SFAS No. 123 - Revised, Share-Based Payment, which changed the accounting for stock-based compensation to require companies to expense~~fair value of its stock options ~~and other equity awards~~on the date of grant using the Black-Scholes option pricing model. The Company estimates the expected term of stock options granted taking into consideration historical data related to stock option exercises. The Company also uses historical data in order to estimate the volatility factor for a period equal to the duration of the expected life of stock options granted. The Company believes that the use of historical data to estimate these factors provides a reasonable basis for these assumptions. The risk-free interest rate for the periods within the expected life

of the option is based on ~~their grant-date fair values. SFAS No. 123R is discussed~~the U.S. Treasury yield curve in ~~more detail in Note 12, Accounting Standard Issued. 7~~ ~~GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three and nine~~effect at the time of grant. No stock options were granted during the six months ended ~~September~~June 30, ~~2005~~2006.
(4)Short-Term Borrowings
General Physics has a $25 million Financing and ~~2004 (Unaudited) (4) DISCONTINUED OPERATIONS In accordance~~Security Agreement (the “Credit Agreement”), as amended, with ~~SFAS No. 144, Accounting~~a bank that expires on August 12, 2007 with annual renewal options. The Credit Agreement is secured by certain assets of General Physics and provides for ~~the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), discontinued businesses are removed~~an unsecured guaranty from the ~~results of continuing operations and are classified as discontinued operations in~~Company. The Company continued to guarantee GSE’s borrowings under the consolidated statements of operations through the effective date of disposal. The following table sets forth the components of income (loss) from discontinued operations for the three and nine months ended September 30, 2005 and 2004 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 2005 2004 2005 2004 ------- ------- ------- -------- Revenue $ 4,607 $36,079 $17,617 $109,962 Operating income (loss) (1,232) 3 (2,392) 1,881 Interest expense 180 308 251 1,080 Income tax benefit (expense) (30) 56 (63) (466) Income (loss) from discontinued operations, net of income taxes (417) (171) (1,012) 337
Discontinued operations for the three and nine months ended September 30, 2005 include the results of GSE, which was distributed to the Company's shareholders in connection with the spin-off effective September 30, 2005. Discontinued operations for the three and nine months ended September 30, 2004 include the results of GSE as well as the results of MXL Industries, Inc., Five Star Products, Inc., and certain other non-core assets, which were distributed to NPDC in connection with the spin-off effective November 24, 2004. In accordance with SFAS No. 144, only those costs that are solely attributable to the discontinued business segments have been allocated to discontinued operations. Accordingly, the results for the three and nine months ended September 30, 2005 and 2004 include overhead expenses that were incurred for the benefit of the Company's continuing and discontinued operations, which are included in continuing operations. The Company will continue to provide corporate support services to GSE, including accounting, finance, human resources, legal, network support and tax, pursuant to a management services agreement which was extended through December 31, 2005 (see note 10). For the three and nine months ended September 30, 2005, the Company recorded revenues for these services of $196,000 and $525,000, respectively. For the three and nine months ended September 30, 2004, the Company recorded revenues for these services of $144,000 and $450,000, respectively. The revenues and expenses related to these services which were intercompany transactions prior to the spin-off were eliminated in the Company's consolidated financial statements. 8 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three and nine months ended September 30, 2005 and 2004 (Unaudited) The following table summarizes the carrying amount of the assets and liabilities of GSE as of September 30, 2005, which are no longer consolidated with the Company effective with the spin-off (in thousands): Assets: Cash and cash equivalents $ 804 Accounts and other receivables 2,487 Costs and estimated earnings in excess of billings on uncompleted contracts 5,428 Prepaid expenses and other current assets 983 Property, plant and equipment, net 314 Goodwill and other assets 7,487 ------- Total assets 17,503 ------- Liabilities: Accounts payable and accrued expenses 5,224 Short-term borrowings 1,182 Billings in excess of costs and estimated earnings on uncompleted contracts 848 Long-term debt 782 Minority interest and other liabilities 2,685 ------- Total liabilities 10,721 ------- Net assets of GSE distributed in spin-off $ 6,782 =======
~~As of September 30, 2005, GSE had borrowings of $1,182,000 and a letter of credit for $10,000 under General Physics'~~ Credit Agreement ~~(see note 6), under~~(for which $1,500,000 was allocated for use by ~~GSE.~~ GSE) subsequent to the spin-off on September 30, 2005. In March 2006, GSE repaid its borrowings in full and ceased to be a borrower under the Credit Agreement. As a result, the Company’s guarantee of GSE’s borrowings was terminated.
The interest rate on the Credit Agreement is at the daily LIBOR market index rate plus 3.0%. Based upon the financial performance of General Physics, the interest rate can be reduced. As of June 30, 2006, the rate was reduced to LIBOR plus 2.5%, which resulted in a rate of approximately 7.8%. The Credit Agreement contains covenants with respect to General Physics’ minimum tangible net worth, leverage ratio, interest coverage ratio and its ability to make capital expenditures. General Physics was in compliance with all loan covenants under the Credit Agreement as of June 30, 2006. The Credit Agreement also contains certain restrictive covenants regarding future acquisitions, incurrence of debt and the payment of dividends. General Physics is currently restricted from paying dividends or management fees to the Company ~~guarantees GSE's~~in excess of $1,000,000 in any year, with the exception of a waiver by the lender which permits General Physics to provide cash to the Company to repurchase up to $5 million of additional shares of its outstanding Common Stock (see Note 7).
As of June 30, 2006, General Physics had no outstanding borrowings under the Credit Agreement ~~through August 13, 2006. 9~~ ~~GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three~~ and ~~nine months ended September 30, 2005~~there was approximately $19,012,000 of available borrowings based upon 80% of eligible accounts receivable and ~~2004 (Unaudited)~~ 80% of eligible unbilled receivables.
10

(5)       ~~LONG-TERM DEBT~~ Long-Term Debt
Long-term debt consists of the following (in thousands):
~~SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------~~ 6% conditional subordinated notes due 2008 (a) $ 7,500 $ 7,500 ManTech Note (b) 5,251 5,251 Other 117 190 ------- ------- 12,868 12,941 Less warrant related discount, net of accretion (1,574) (1,890) ------- ------- 11,294 11,051 Less current maturities (87) (100) ------- ------- $11,207 $10,951 ======= =======

June 30,

December 31,

2006

2005

6% conditional subordinated notes due 2008 (a)

$
7,500

$
7,500

ManTech Note (b)

5,251

5,251

Capital lease obligations

91

93

12,842

12,844

Less warrant related discount, net of accretion

(1,226
)
(1,464
)

11,616

11,380

Less current maturities

(58
)
(71
)

$
11,558

$
11,309

(a) ~~Pursuant to a Note and Warrant Purchase Agreement dated~~In August 8, 2003, the Company issued and sold to four Gabelli Funds $7,500,000 aggregate principal amount of 6% Conditional Subordinated Notes due ~~August~~ 2008 (the ~~"Gabelli Notes")~~Gabelli Notes) and 937,500 warrants ~~("GP Warrants")~~(GP Warrants), each entitling the holder thereof to purchase (subject to adjustment) one share of the ~~Company's common stock.~~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 and mature in August 2008. The Gabelli Notes are secured by a mortgage on the ~~Company's~~Company’s former property located in Pawling, New York which was distributed to ~~NPDC.~~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 ~~are~~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. ~~The GP Warrants have an exercise price of $5.85 per share, as amended following~~
Subsequent to the ~~spin-offs~~spin-off of NPDC and GSE 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. The ~~GP Warrants contain anti-dilution provisions for stock splits, reorganizations, mergers and similar transactions. 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. This amount~~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 ~~$110,000~~$119,000 and ~~$95,000~~$103,000 for the three months ended ~~September 10~~ ~~GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three~~June 30, 2006 and ~~nine months ended September 30,~~ 2005, ~~and 2004 (Unaudited) 30, 2005 and 2004,~~ respectively, and approximately ~~$316,000~~$238,000 and ~~$279,000~~$205,000 for the ~~nine~~six months ended ~~September~~June 30, 2006 and 2005, ~~and 2004,~~ respectively.
(b) ~~The~~In October 2003, the Company ~~has~~issued a five-year 5% note due in full onin October ~~21,~~ 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~~Common Stock of the Company at the then market price of the ~~Company's common stock,~~Company’s Common Stock, but only in the event that the ~~Company's common stock~~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 not 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.
(6) SHORT-TERM BORROWINGS General Physics has a three-year $25 million Financing and Security Agreement (the "Credit Agreement") for which $1,500,000 is allocated for use by GSE, with a bank that expires on August 13, 2006 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 interest rate on the Credit Agreement is at the daily LIBOR market index rate plus 3%, which as of September 30, 2005 was approximately 6.84%. Based upon the financial performance of General Physics, the interest rate can be reduced. The Credit Agreement contains covenants with respect to General Physics' minimum tangible net worth, leverage ratio, interest coverage ratio and its ability to make capital expenditures. General Physics was in compliance with all loan covenants under the Credit Agreement as of September 30, 2005. The Credit Agreement also contains certain restrictive covenants including a prohibition on future acquisitions, incurrence of debt and the payment of dividends. General Physics is currently restricted from paying dividends or management fees to the Company in excess of $1,000,000 in any fiscal year. The Company repaid in full the $6,068,000 outstanding under the Credit Agreement as of December 31, 2004 in the first quarter of 2005, using the proceeds received from the arbitration settlement as discussed in more detail in Note 9, Litigation. As of September 30, 2005, the Company had no borrowings outstanding under the Credit Agreement and there was approximately $19,313,000 of available borrowings based upon 80% of eligible accounts receivable and 80% of eligible unbilled receivables. 11 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three and nine months ended September 30, 2005 and 2004 (Unaudited) (7) COMPREHENSIVE INCOME Comprehensive Income
The following are the components of comprehensive income ~~(loss)~~ (in thousands):
~~THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ -----------------~~

Three months ended

Six months ended

June 30,

June 30,

2006

2005

2006

2005

Net income

$
1,745

$
1,220

$
3,114

$
1,688

Other comprehensive income (loss), net of income taxes:

Net unrealized (gain) loss on available-for-sale securities

(2
)
(120
)
1

(4
)
Foreign currency translation adjustment

168

(240
)
132

(91
)

166

(360
)
133

(95
)
Comprehensive income, net of tax

$
1,911

$
860

$
3,247

$
1,593

As of June 30, 2006 and December 31, 2005, ~~2004 2005 2004 ------ ----- ------ -------~~ Net income $1,042 $ 429 $2,730 $ 953 Other comprehensive income (loss) before income tax expense: Net unrealized gain (loss) on available-for-sale securities 7 (877) 1 (1,703) Net unrealized loss on interest rate swap -- (165) -- (116) Foreign currency translation adjustment (309) 53 (400) (59) ------ ----- ------ ------- 740 (560) 2,331 (925) Income tax benefit (expense) relating to items of other comprehensive income (loss) (2) 406 -- 709 ------ ----- ------ ------- Comprehensive income (loss), net of tax $ 738 $(154) $2,331 $ (216) ====== ===== ====== =======
~~The components of~~ accumulated other comprehensive loss, ~~are as follows (in thousands):~~
SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------ Net unrealized gain on available-for-sale securities $ 21 20 Foreign currency translation adjustment (1,081) (773) ------- ---- Accumulated other comprehensive loss before tax (1,060) (753) Accumulated income tax expense related to unrealized gain on available-for-sale securities (8) (8) ------- ---- Accumulated other comprehensive loss, net of tax $(1,068) (761) ======= ====
12 ~~GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three~~net of tax, was $954,000 and ~~nine months ended September 30, 2005~~$1,087,000, respectively, and ~~2004 (Unaudited) (8) BUSINESS SEGMENTS During the second quarter~~consisted primarily of ~~2005,~~foreign currency translation adjustments.
(7)Capital Stock Restructuring
On January 19, 2006, the Company ~~re-evaluated~~completed a restructuring of its ~~reportable business segments under SFAS No. 131, Disclosures about Segments~~capital stock, which included the repurchase of 2,121,500 shares of its Common Stock at a price of $6.80 per share, the repurchase of 600,000 shares of its Class B Stock at a price of $8.30 per share, and the exchange of 600,000 shares of its Class B Stock for 600,000 shares of Common Stock and payment of a cash premium of $1.50 per exchanged share. The repurchase prices and exchange premium were based on a fairness opinion rendered by an ~~Enterprise~~independent third party valuation firm. The repurchase and ~~Related Information, due~~exchange transactions were negotiated and approved by a Special Committee of the Board of Directors and had the effect of eliminating all

outstanding shares of the Company’s Class B Stock. The repurchase and exchange was financed with approximately $20.3 million of cash on hand.
Prior to the ~~appointment~~restructuring, the 1,200,000 outstanding shares of ~~Scott N. Greenberg as CEO~~Class B Stock collectively represented approximately 41% of the aggregate voting power of the Company ~~on April 26, 2005. Based on~~since the ~~information which Mr. Greenberg reviews in order to assess~~Class B Stock had ten votes per share. The repurchase of a total of 2,721,500 shares represented approximately 15% of the ~~performance~~total outstanding shares of capital stock of the Company. Of the 600,000 Class B shares exchanged for common shares, 568,750 shares were owned by the Chairman of the Executive Committee of the Company.
In connection with the repurchase and exchange transactions, the Board of Directors of the Company authorized the repurchase of up to $5 million of additional common shares from time to time in the open market, subject to prevailing business and ~~make decisions regarding~~market conditions and other factors. General Physics’ lender has permitted General Physics to utilize funds borrowed under the ~~allocation of resources,~~Credit Agreement to provide cash to the Company ~~determined that General Physics consists~~to repurchase up to $5 million of additional shares of the Company’s outstanding Common Stock (see Note 4). During the six months ended June 30, 2006, the Company repurchased 238,000 shares of its Common Stock in the open market for a total cost of approximately $1,662,000.
(8)Business Segments
The Company has two reportable business ~~segments effective with Mr. Greenberg's appointment as CEO:~~segments: 1) Process, Energy & Government; and 2) Manufacturing & Business Process Outsourcing (BPO). ~~GSE ceases to be a reportable business segment effective with~~The Company is organized by operating group primarily based upon the ~~spin-off on September 30, 2005~~services performed and ~~is reported in discontinued operations in the accompanying condensed consolidated statements of operations. As a result of the change in its~~markets served by each group. The reportable business segments represent an aggregation of the ~~Company has restated~~Company’s operating segments in accordance with the ~~segment information below for all prior periods presented to conform to the current period's presentation.~~ aggregation criteria in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.
The Process, Energy & Government segment 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 primarily to federal and state governmental agencies, large government contractors, petroleum and chemical refining companies, and electric power utilities.
The Manufacturing & BPO segment provides training, curriculum design and development, staff augmentation, e-Learning services, system hosting, integration and help desk support, training and business process outsourcing, and consulting and technical services to large companies in the automotive, pharmaceutical, electronics, and other industries as well as to governmental clients.
GSE ceased to be a reportable business segment effective with the spin-off on September 30, 2005 and its results are reported in discontinued operations in the condensed consolidated statements of operations through the effective date of the spin-off. The Company recorded revenues for services provided to GSE pursuant to a management services agreement (see Note 10) of $151,000 and $162,000 for the three months ended June 30, 2006 and 2005, respectively, and $301,000 and $329,000 for the six months ended June 30, 2006 and 2005, respectively. The revenues and expenses related to these services, which were intercompany transactions prior to the spin-off of GSE have been eliminated in the condensed

consolidated statements of operations for the three and six months ended June 30, 2005.
For the six months ended June 30, 2006 and 2005, sales to the United States government and its agencies represented approximately 32% and 39%, 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 14% and 21% of the Company’s revenue for the six months ended June 30, 2006 and 2005, respectively. No other customer accounted for greater than 10% of the Company’s revenue for the six months ended June 30, 2006.
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. 13 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three and nine months ended September 30, 2005 and 2004 (Unaudited)
The following ~~tables set~~table sets forth the revenue and operating income of each of the ~~Company's~~Company’s operating segments and includes a reconciliation of segment revenue to consolidated revenue and operating income to consolidated income from continuing operations before income ~~taxes~~tax expense (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------- 2005 2004 2005 2004 ------- -------- -------- -------- REVENUE: Process, Energy & Government $21,924 $21,086 $ 65,025 $ 59,329 Manufacturing & BPO 22,331 23,236 66,778 59,935 Elimination of intercompany revenue (196) (144) (525) (450) ------- ------- -------- -------- $44,059 $44,178 $131,278 $118,814 ======= ======= ======== ======== OPERATING INCOME: Process, Energy & Government $ 2,762 $ 2,756 $ 7,841 $ 6,832 Manufacturing & BPO 982 191 2,375 (192) Elimination of intercompany revenue (196) (144) (525) (450) Corporate and other general and administrative expenses (920) (1,271) (2,087) (3,423) ------- ------- -------- -------- 2,628 1,532 7,604 2,767 ------- ------- -------- -------- Interest expense (387) (490) (1,129) (1,470) Other income 87 104 141 321 ------- ------- -------- -------- Income from continuing operations before income tax expense $ 2,328 $ 1,146 $ 6,616 $ 1,618 ======= ======= ======== ========

Three months ended

Six months ended

June 30,

June 30,

2006

2005

2006

2005

Revenue:

Process, Energy & Government

$
19,238

$
20,597

$
38,911

$
42,120

Manufacturing & BPO

26,541

23,062

50,396

45,099

$
45,779

$
43,659

$
89,307

$
87,219

Operating income:

Process, Energy & Government

$
1,907

$
2,605

$
3,395

$
4,981

Manufacturing & BPO

1,858

730

3,490

1,162

Corporate and other general and administrative expenses

(440
)
(365
)
(1,170
)
(1,167
)

3,325

2,970

5,715

4,976

Interest expense

(443
)
(379
)
(857
)
(742
)
Other income

180

12

584

54

Income from continuing operations before income tax expense

$
3,062

$
2,603

$
5,442

$
4,288

(9) ~~LITIGATION~~ Acquisition
On ~~January~~February 3, ~~2001,~~2006, the Company ~~commenced an action alleging that MCI Communications Corporation ("MCI")~~completed the acquisition of Peters Management Consultancy Ltd. (PMC), ~~MCI's Systemhouse subsidiaries ("Systemhouse"),~~a performance improvement and ~~Electronic Data Systems Corporation, as successor~~training company in the United Kingdom. The Company acquired 100% ownership of PMC for a purchase price of $1,331,000 in cash, subject to ~~Systemhouse ("EDS"), committed fraud in~~a post-closing adjustment based on actual net equity, plus contingent payments of up to $923,000 based upon the achievement of certain performance targets during the first year following completion of the acquisition. In connection with the ~~Company's 1998~~ acquisition and in accordance with SFAS No. 141, Business Combinations, the Company recorded $868,000 of ~~Learning Technologies~~goodwill, representing the excess of the purchase price over the net assets acquired and $133,000 of third party acquisition costs, and $200,000 of customer-related intangible assets. PMC is included in the Company’s Manufacturing & BPO segment and its results are included in the condensed consolidated financial statements since the date of acquisition. The pro-forma impact of the PMC acquisition is not material to the Company’s results of operations for the three and six months ended June 30, 2006 and 2005.
The Company’s purchase price allocation for the net assets acquired is as follows:
Cash

$
845

Accounts receivable and other current assets

840

Property, plant and equipment, net

88

Goodwill

868

Intangible assets

200

Total assets

2,841

Accounts payable, accrued expenses and other liabilities

723

Billings in excess of costs and estimated earnings on uncompleted contracts

654

Total liabilities assumed

1,377

Net assets acquired

$
1,464

(10)Related Party Transactions
Loans
As of June 30, 2006 and December 31, 2005, the Company had a note receivable from the defendants for $24,300,000 in cash. The Company seeks actual damages in the amount of $74,067,044 plus interest, punitive damages in an amount to be determined at trial, and costs, subject to reduction as set forth below. The complaint, which was filed in the New York State Supreme Court, alleges that the defendants fraudulently induced the Company to acquire Learning Technologies by concealing the poor performance of Learning Technologies' United Kingdom operation. The complaint also alleges that the defendants represented that Learning Technologies would continue to receive new business from Systemhouse even though the defendants knew that the sale of Systemhouse to EDS was imminent and that such new business would cease after such sale. In February 2001, the defendants filed answers denying liability. No counterclaims against the plaintiffs have been asserted. Although discovery had not yet been completed, defendants made a motion for summary judgment, which was submitted in April 2002. The 14 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three and nine months ended September 30, 2005 and 2004 (Unaudited) motion was denied by the court due to the MCI bankruptcy, but with leave to the other defendants to renew. The defendants other than MCI then made an application to the court to stay the fraud action until the Company and EDS completed a later-commenced arbitration, in which the Company alleged breachCompany’s Chairman of the ~~acquisition agreement~~Executive Committee and former Chief Executive Officer of ~~a separate agreement to refer business to General Physics on a preferred provider basis~~approximately $124,000 and ~~seeking actual damages in the amount of $17,600,000 plus interest. In a decision dated May 9, 2003, the court granted the motion and stayed the fraud action pending the outcome~~$619,000, respectively. The proceeds of the ~~arbitration.~~original note were used primarily to exercise options to purchase Class B Stock. The ~~arbitration hearings began~~note bears interest at the prime rate and is secured by certain assets owned by him. All unpaid principal and accrued interest on the note is due on May 17, 2004 and concluded on May 24, 2004 before JAMS, a private dispute resolution firm. On September 10, 2004, the arbitrator issued an interim award in which she found that the sellers of Learning Technologies breached certain representations and warranties contained in the acquisition agreement.31, 2007. In a final award dated November 29, 2004, the arbitrator awarded General Physics $12,273,575 in damages and $6,016,109 in pre-award interest. (The damages sought in the litigation are subject to reduction by the $12,273,575 in damages awarded in the arbitration.) On December 30, 2004, EDS made a payment of $18,428,486, which included $138,802 of post-award interest, to General Physics to satisfy its obligation under the arbitration award, which cash was held in escrowaddition, as of December 31, 2004. EDS subsequently agreed that the arbitration award was final and binding and that it would take no steps of any kind to vacate or otherwise challenge the award. As a result of the foregoing, the Company recognized a gain on the arbitration award, net of legal fees and expenses, of $13,660,000 in 2004. As a result of the conclusion of the arbitration, the state court lifted the stay of the fraud claim against the defendants other than MCI. On February 14, 2005, such defendants filed a new motion for summary judgment dismissing the Company's fraud claim against them. The Company opposed the motion, which was argued on April 4, 2005. On June 6, 2005, the court issued a decision on the motion for summary judgment refusing to dismiss the Company's claims against EDS and Systemhouse relating to false representations concerning the financial condition of Learning Technologies' United Kingdom operation and held that the Company had ~~presented evidence sufficient to raise triable issues~~other employee advances, unsecured loans and accrued interest receivable from him, totaling $353,000. On January 19, 2006, he repaid approximately $853,000 of ~~fact as to whether defendants provided the Company with financial projections which they knew to be false or unreasonable,~~$972,000 of total indebtedness (including principal and made representations or omissions indicating that Learning Technologies' United Kingdom operation was on track to achieve revenue targets which they knew it would be unable to achieve. However, the court dismissed the Company's claim that it had been fraudulently induced to acquire Learning Technologies based on false representations that Systemhouse was not for sale. The Company requested a jury trial. Jury selection has commenced, and the trial is expected to begin the week of November 14, 2005. The fraud action against MCI had been stayed as a result of the bankruptcy of MCI. In February 2004, the Bankruptcy Court lifted the stay so that the state court could rule on the merits of MCI's summary judgment motion. MCI has asked the Bankruptcy Court to reinstate the stay and to rule on its summary judgment motion. The Company has argued that it would be more efficient if the state court ruled on both summary judgment motions. The Bankruptcy Court has not yet decided whether it or the state court should determine MCI's summary judgment motion. In connection with the spin-off of NPDCinterest) owed by ~~the Company, the Company agreed to make an additional capital contribution to NPDC in an amount equal~~him to the ~~first $5,000,000 of any proceeds (net of litigation 15~~ GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three and nine months ended September 30, 2005 and 2004 (Unaudited) expenses and taxes incurred, if any), and 50% of any proceeds (net of litigation expenses and taxes incurred, if any) in excess of $15,000,000, received with respect to the foregoing arbitration and litigation claims. Pursuant to such agreement, in January 2005, the Company ~~made a $5,000,000 distribution to NPDC out of~~

using the proceeds he received from the Class B exchange transaction (see Note 7). As of June 30, 2006, the ~~arbitration award. The net cash proceeds to~~aggregate amount of indebtedness (including principal and accrued interest) outstanding under the ~~Company were approximately $8,500,000 after legal fees and the distribution to NPDC. A portion of such net proceeds~~note was used to reduce to zero the outstanding balance of General Physics' revolving credit facility, which as of December 31, 2004 was $6.1 million. 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. (10) RELATED PARTY TRANSACTIONS $150,000.
Management Services ~~Agreements~~Agreement Between NPDC and the Company
Prior to the spin-off, 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 provides certain general corporate services to NPDC. ~~Corporate Tax, Legal Support, and Executive Management Consulting Services~~
The Company has ~~four associates,~~three employees, including the Chief Executive Officer and Chief Legal Officer, who ~~also~~ provide services to NPDC under athe management services agreement, for which the Company is reimbursed for such services. Services under the agreement relate to ~~corporate federal and state income taxes,~~executive financial services, corporate legal services, corporate secretarial administrative support, and executive management consulting. 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. Pursuant to an amendment to~~notice, with the exception of the portion of the management ~~services agreement effective July 1, 2005,~~fee relating to compensation for NPDC’s Chief Executive Officer for which NPDC ~~will pay~~is liable through May 31, 2007 pursuant to his employment agreement. NPDC pays the Company an annual fee of ~~not less than $969,500~~$934,000 as compensation for these services, payable in equal monthly installments. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2005,~~2006, the Company charged NPDC ~~$242,000~~approximately $230,000 and ~~$899,000,~~$458,000, respectively, for services under the management agreement, which is included as a reduction of selling, general and administrative expenses ~~for services under this management agreement. In connection with~~in the ~~spin-off~~condensed consolidated statements of NPDC, the Company also entered into a separate management agreement with NPDC pursuant to which it was anticipated that the Company would receive certain general corporate services from NPDC. No such services have been required or provided, so the Company and NPDC entered into a termination agreement effective as of July 1, 2005 terminating the management agreement. Corporate Office Lease operations.
NPDC continues to occupy a portion of corporate office space leased by the Company. Pursuant to the management services agreement, NPDC compensates the Company ~~approximately $205,000 annually~~ for use of this space. The ~~Company's~~Company’s lease extends through December 31, 2006. 16 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three and nine months ended September 30, 2005 and 2004 (Unaudited)
Management Services Agreement Between GSE and the Company
Pursuant to a management services agreement, the Company provides corporate support services to ~~GSE, including accounting, finance, human resources, legal, network support and tax.~~GSE. GSE pays the Company an annual fee of $685,000 for these ~~services.~~services and can terminate the agreement by providing sixty days written notice. The management services agreement can be renewed by GSE upon mutual agreement for successive one-year terms and was renewed through December 31, ~~2005.~~ 2006.
(11)     Guarantees
Subsequent to the spin-off of ~~GSE effective September~~NPDC, the Company continues to guarantee certain obligations of NPDC’s subsidiaries, Five Star Products, Inc. (“Five Star”) and MXL Industries, Inc. (“MXL”). The Company guarantees certain operating leases for Five Star’s New Jersey and Connecticut warehouses, totaling approximately $1,589,000 per year through the first quarter of 2007. The Company also guarantees the repayment of two debt obligations of MXL, which are secured by property and certain equipment of MXL. The aggregate outstanding balance of these debt obligations as of June 30, 2006 was $1,218,000. The Company’s guarantees expire upon the maturity of the debt obligations which are October 1, 2006 and

March 31, 2011.
(12)Litigation
In November 2005, the Company ~~will continue~~settled its remaining fraud claims against Electronic Data Systems Corporation (EDS) and Systemhouse in connection with the Company’s 1998 acquisition of Learning Technologies. Pursuant to ~~provide GSE~~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 ~~these corporate support services through~~a spin-off agreement with NPDC, the ~~term~~Company made an additional capital contribution to NPDC for approximately $1,201,000 of the ~~agreement. (11) COMMITMENTS~~ settlement proceeds, which was accounted for as a component of the net assets distributed to NPDC in connection with the spin-off, through a reduction of additional paid-in capital in 2005. The Company did not transfer cash to NPDC for this additional capital contribution, but instead is offsetting the management fee charges receivable from NPDC against the payable to NPDC (see Note 10). As of June 30, 2006, the Company has a remaining payable to NPDC of $693,000 for this additional capital contribution, which is included in accounts payable and accrued expenses on the condensed consolidated balance sheet.
The Company’s original fraud action included MCI Communications Corporation (MCI) as a defendant. The fraud action against MCI had been stayed as a result of MCI’s bankruptcy filing 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 argument on a summary judgment motion that MCI had made before filing for bankruptcy. The motion has not yet been decided.
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.
(13)                    Accounting Standard Issued
In April 2005, General Physics entered into employment agreements with certain of its officers, resulting in committed compensation of approximately $2.0 million annually. These agreements have employment terms expiring in 2007, provide for grants of restricted stock units pursuant to the Company's 2003 Incentive Stock Plan, and contain non-compete covenants and change of control and termination provisions. (12) ACCOUNTING STANDARD ISSUED In December 2004,July 2006, the FASB issued ~~SFAS~~FASB Interpretation No. ~~123 - Revised, Share-Based Payment (SFAS No. 123R), which revises SFAS No. 123,~~ 48, Accounting for ~~Stock-Based Compensation,~~Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a recognition threshold and ~~supersedes APB No. 25, Accounting~~measurement attribute for ~~Stock Issued~~the financial statement recognition of a tax position taken or expected to ~~Employees. Currently,~~be taken on a tax return. Under FIN 48, a tax benefit from an uncertain tax position may be recognized only if it is “more likely than not” that the Company does not record compensation expense for certain stock-based compensation. Under SFAS No. 123R, the Company will measure the cost of employee services received in exchange for stock,position is sustainable upon examination, based on its technical merits. The tax benefit of a qualifying position under FIN 48 would equal the ~~grant-date fair value (with limited exceptions)~~largest amount of ~~the stock award. Such cost~~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 48 will be recognized over the period during which the employee is required to provide service in exchange for the stock award (usually the vesting period). The fair value of the stock award will be estimated using an option-pricing model, with excess tax benefits, as defined in SFAS No. 123R, being recognized as an addition to paid in capital. SFAS No. 123R was to be effective as of July 1, 2005. However, based on Final Rule 74 issued by the Securities and Exchange Commission in April 2005, which delayed the implementation of SFAS No. 123R, the Company plans to adopt SFAS No. 123R effective January 1, ~~2006. The Company expects~~2007 for calendar-year companies. In applying the new accounting model prescribed by FIN 48, companies will need to ~~adopt SFAS No. 123R using the Modified Prospective Application method without restatement~~determine and assess all material positions existing as of ~~prior periods. Under this method, the Company will begin to amortize compensation cost for the remaining portion of its outstanding awards on~~ the adoption date, for which the requisite service has not yet been rendered. Compensation cost for these awards will be based on the fair value of the awards as disclosed on a pro forma basis under SFAS 123including all significant uncertain positions, in ~~Note 3, Stock Based Compensation. The Company will account for awards~~all tax years, that are ~~granted, modified,~~still subject to assessment or ~~settled after the adoption date in accordance with SFAS No. 123R.~~challenge under relevant tax statutes. The Company is currently ~~in the process of~~ evaluating the impact of ~~SFAS No. 123R~~adopting this new accounting standard on its consolidated financial statements.
17 ~~ITEM~~

Item 2. ~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS~~ Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
General Overview ~~As of September 30, 2005, the Company's~~
The Company’s business consists of its ~~training and workforce development business operated by~~operating subsidiary, General Physics, ~~Corporation ("General Physics" or "GP"). General Physics is~~ a global ~~workforce development~~training, engineering, and consulting company that seeks to improve the effectiveness of organizations by providing training and e-Learning solutions, management consulting, ~~e-Learning solutions~~ and engineering services and products that are customized to meet the specific needs of clients. ~~On September 30, 2005, the Company completed a taxable spin-off of its 57% interest in GSE Systems Inc. ("GSE") through a dividend to the Company's stockholders. GSE~~Clients include Fortune 1000 companies and governmental customers. General Physics is a ~~stand alone public company which provides simulation~~global leader in performance improvement, with four decades of experience in providing solutions ~~and services~~ to energy, process and manufacturing industries worldwide. On September 30, 2005, stockholders received in the spin-off 0.283075 shares of GSE common stock for each share of the Company's common stock or Class B stock held on the record date of September 19, 2005. Following the spin-off, the Company ceased to have any ownership interest in GSE and the operations of GSE have been reclassified as discontinued in the Company's condensed consolidated statements of operations for all periods presented. optimize workforce performance.
The Company ~~currently provides corporate support services to GSE, including accounting, finance, human resources, legal, network support and tax, pursuant to a management services agreement which~~ has been extended through December 31, 2005. As of September 30, 2005, GSE had borrowings of $1,182,000 and a letter of credit for $10,000 under General Physics' Credit Agreement, under which $1,500,000 was allocated for use by GSE. The Company guarantees GSE's borrowings under the Credit Agreement through August 13, 2006. During the second quarter of 2005, the Company re-evaluated its reportable business segments under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, as a result of Scott N. Greenberg's appointment as CEO of the Company on April 26, 2005. Based on the information which Mr. Greenberg reviews in order to assess the performance of the Company and make decisions regarding the allocation of resources, the Company determined that General Physics consists of two reportable business ~~segments effective with Mr. Greenberg's appointment as CEO:~~segments: 1) Process, Energy & Government; and 2) Manufacturing & Business Process Outsourcing (BPO). GSE ceases to be a reportable business segment as a result of the spin-off effective September 30, 2005. As a result of the change in the Company's reportable business segments, all prior period information presented herein has been restated to conform to the current period's presentation. The:
·                  Process, Energy & Government — this segment 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 primarily to federal and state governmental agencies, large government contractors, petroleum and chemical refining companies, and electric power utilities. ~~The~~
·                  Manufacturing & BPO - this segment provides training, curriculum design and development, staff augmentation, e-Learning services, system hosting, integration and help desk support, training and business process outsourcing, and consulting and technical services to large companies in the automotive, steel, pharmaceutical, electronics, and other industries as well as to governmental clients.
Significant Events of 2006
Capital Stock Restructuring
On ~~November 24, 2004,~~January 19, 2006, the Company completed a restructuring of its capital stock, which included the repurchase of 2,121,500 shares of its Common Stock at a price of $6.80 per share, the repurchase of 600,000 shares of its Class B Stock at a price of $8.30 per share, and the exchange of 600,000 shares of its Class B Stock for 600,000 shares of Common Stock and payment of a cash premium of $1.50 per exchanged share. The repurchase prices and exchange premium were based on a fairness opinion rendered by an independent third party valuation firm. The repurchase and exchange transactions were negotiated and approved by a Special Committee of the Board of Directors and had the effect of eliminating all outstanding shares of the Company’s Class B Stock.
Prior to the restructuring, the 1,200,000 outstanding s hares of Class B Stock collectively represented approximately 41% of the aggregate voting power of the Company since the Class B Stock had ten votes per share. The repurchase of a total of 2,721,500 shares represented approximately 15% of the total outstanding shares of capital stock of the Company. Approximately $20.3 million was required for the repurchase and exchange and was financed with cash on hand. See Note 7 to the accompanying condensed consolidated financial statements for further details regarding the repurchase and exchange transaction.
Acquisition
On February 3, 2006, the Company completed the ~~tax-free spin-off~~acquisition of ~~National Patent Development Corporation ("NPDC"). Subsequent~~Peters Management Consultancy Ltd. (PMC), a performance improvement and training company in the United Kingdom. The Company acquired 100%

ownership of PMC for a purchase price of $1.3 million in cash, subject to a post-closing adjustment based on actual net equity, plus contingent payments of up to $0.9 million based upon the achievement of certain performance targets during the first year following completion of the acquisition. PMC is included in the Company’s Manufacturing & BPO segment and its results are included in the accompanying condensed consolidated financial statements since the date of acquisition.
Operating Highlights
Three months ended June 30, 2006 compared to the ~~spin-off, the results of operations of NPDC are presented as discontinued operations for the~~ three ~~and nine~~ months ended ~~September~~June 30, ~~2004. General Physics' backlog for services under signed contracts and subcontracts was approximately $89.0 million as of September 30, 2005. 18~~ ~~Operating Highlights THREE MONTHS ENDED SEPTEMBER 30,~~ 2005 ~~COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2004~~
For the ~~third~~ quarter ~~of 2005,~~ended June 30, 2006, the Company had net income ~~from continuing operations before income tax expense~~ of ~~$2,328,000~~$1.7 million, or $0.11 per diluted share, compared to ~~$1,146,000~~$1.2 million, or $0.07 per diluted share, for the ~~third~~ quarter ~~of 2004.~~ended June 30, 2005. The improved results were primarily due to ~~increased operating~~an increase in income from continuing operations, the components of ~~$797,000 for General Physics' two business segments,~~which are discussed in detail below. In addition, the $0.04 per share increase in diluted earnings per share is partially attributable to the decrease in common shares outstanding during the second quarter of 2006 compared to the second quarter of 2005 as ~~well as reduced general~~a result of the capital stock restructuring discussed above, and ~~administrative expenses at~~repurchases of 228,000 common shares in the ~~corporate level. Government revenue accounted for approximately 41% and 59%~~open market during the second quarter of ~~General Physics' revenue for the quarters ended September 30, 2005 and 2004, respectively.~~ 2006.
Revenue
THREE MONTHS ENDED SEPTEMBER 30, ------------------ 2005 2004 ------- ------- (Dollars in Thousands) Process, Energy & Government $21,924 $21,086 Manufacturing & BPO 22,331 23,236 Elimination of intercompany revenue with GSE (196) (144) ------- ------- $44,059 $44,178 ======= =======
(Dollars in thousands)

Three months ended

June 30,

2006

2005

Process, Energy & Government

$
19,238

$
20,597

Manufacturing & BPO

26,541

23,062

$
45,779

$
43,659

Process, Energy & Government ~~segment~~ revenue ~~increased $838,000~~decreased $1.4 million or ~~4.0%~~6.6% during the ~~third~~second quarter of ~~2005~~2006 compared to the ~~same period~~second quarter of ~~2004.~~2005. The ~~increase~~decrease in revenue is primarily due to a $10.0 million decline in government funding for the Domestic Preparedness Equipment Technical Assistance Program (DPETAP) which resulted in a decrease in revenue of $2.2 million during the second quarter of 2006 compared to the second quarter of 2005. In addition, a scheduling delay on an environmental engineering contract resulted in a decrease in revenue of $1.3 million during the second quarter of 2006 compared to the second quarter of 2005. These decreases in revenue were offset by an increase in hurricane recovery services revenue of $1.6 million and an increase in revenue of $0.5 million related to a liquefied natural gas (LNG) fueling station project during the second quarter of 2006 compared to the second quarter of 2005.
Manufacturing & BPO revenue increased ~~contract scopes~~$3.5 million or 15.1% during the second quarter of 2006 compared to the second quarter of 2005. The increase in revenue is due to the following: a $2.1 million increase due to the expansion of business process outsourcing services with new and existing customers, a $1.0 million increase from our ~~existing government~~international operations in the United Kingdom primarily resulting from the PMC acquisition in February 2006, a $0.9 million increase in lean manufacturing services, a $0.5 million increase for other technical services provided primarily to a pharmaceutical customer, and ~~energy customers to provide various training~~a $0.4 million increase for e-Learning, content development and ~~domestic preparedness~~system hosting services. ~~The~~This net increase in revenue was ~~partially~~ offset by ~~a decrease~~other decreases in revenue, from certain contracts, primarily for hurricane recovery services provided to the State of Florida totaling $2.2 million during the third quarter of 2004 which did not recur in 2005. Manufacturing & BPO segment revenue decreased $905,000 or 3.9% during the third quarter of 2005 compared to the same period of 2004. The decrease in revenue is primarily due to a change in contract scopes with a business process outsourcing customer during 2005 which resulted in a decrease in revenue of $1.4 million during the ~~third~~second quarter of 2005. This net decrease was partially offset by increases in business process outsourcing services provided to several existing customers, increased system implementation and hosting services primarily2006 compared to the ~~federal government, and increases~~second quarter of 2005.

Gross Profit
(Dollars in other professional development and training courses provided to customers in the manufacturing industry. The Company continues to expand the scope of services provided to business process and training outsource customers. Gross Profit
THREE MONTHS ENDED SEPTEMBER 30, --------------------------------------- 2005 2004 ------------------ ------------------ % Revenue % Revenue --------- --------- (Dollars in thousands) Process, Energy & Government $4,245 19.4% $3,879 18.4% Manufacturing & BPO 2,639 11.8% 1,588 6.8% Elimination of intercompany revenue with GSE (196) -- (144) -- ------ ---- ------ ---- $6,688 15.2% $5,323 12.0% ====== ==== ====== ====
19 thousands)

Three months ended

June 30,

2006

2005

% Revenue

% Revenue

Process, Energy & Government

$3,262

17.0
%
$3,978

19.3
%
Manufacturing & BPO

3,695

13.9
%
2,390

10.4
%

$6,957

15.2
%
$6,368

14.6
%
Process, Energy & Government gross profit of ~~$4.2~~$3.3 million or ~~19.4%~~17.0% of revenue for the ~~third~~second quarter of ~~2005 increased~~2006 decreased by ~~$366,000~~$0.7 million or ~~9.4%~~18.0% when compared to gross profit of ~~approximately $3.9~~$4.0 million or ~~18.4%~~19.3% of revenue for the ~~same period~~second quarter of ~~2004.~~2005. This decrease in gross profit is primarily attributable to a decline in government funding for the DPETAP contract and the environmental engineering project delay discussed above, offset by an increase in gross profit related to an increase in revenue from hurricane recovery services during the second quarter of 2006 compared to the second quarter of 2005.
Manufacturing & BPO gross profit of $3.7 million or 13.9% of revenue for the second quarter of 2006 increased by $1.3 million or 54.6% when compared to gross profit of $2.4 million or 10.4% of revenue for the second quarter of 2005. This increase in gross profit ~~was~~is primarily ~~driven by~~attributable to an increase in revenue ~~for training~~from business process outsourcing, e-Learning, lean manufacturing and other technical services, ~~provided~~as well as international growth during the second quarter of 2006 compared to ~~our government and energy customers. The increase in gross profit as a percentage~~the second quarter of ~~revenue is primarily due to a decrease in overhead expenses as a percentage of revenue as our~~2005. Additionally, infrastructure costs have not increased at the same rate as our ~~contract~~ revenue growth ~~excluding~~for this segment, resulting in increased profitability.
Selling, General and Administrative Expenses
SG&A increased $0.2 million or 6.9% from $3.4 million for the second quarter of 2005 to $3.6 million for the second quarter of 2006. The increase is primarily due to a non-cash compensation credit of $0.2 million during the second quarter of 2005 related to the GP Strategies Millennium Cell Stock Option Plan which did not recur in 2006.
Interest Expense
Interest expense was $0.4 million for both the second quarter of 2006 and 2005.
Other Income
Other income increased $0.2 million during the second quarter of 2006 compared to the second quarter of 2005 primarily due to increases in investment income. Other income for the second quarter of 2006 includes $0.1 million of equity in earnings of a joint venture, for which an immaterial amount was included in revenue during the second quarter of 2005.
Income Tax Expense
Income tax expense increased $0.1 million from $1.2 million for the second quarter of 2005 to $1.3 million for the second quarter of 2006. This increase is due to increased income from continuing operations before income tax expense for the second quarter of 2006 compared to the second quarter of 2005. Income tax expense for

interim 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.
Six months ended June 30, 2006 compared to the six months ended June 30, 2005
For the six months ended June 30, 2006, the Company had net income of $3.1 million, or $0.19 per diluted share, compared to $1.7 million, or $0.09 per diluted share, for the same period in 2005. The improved results were primarily due to an increase in income from continuing operations, the components of which are discussed in detail below. In addition, the $0.10 per share increase in diluted earnings per share is partially attributable to the decrease in common shares outstanding during the six months ended June 30, 2006 compared to the same period in 2005 as a result of the capital stock restructuring discussed above, and repurchases of 238,000 common shares in the open market during the six months ended June 30, 2006.
Revenue
(Dollars in thousands)

Six months ended

June 30,

2006

2005

Process, Energy & Government

$
38,911

$
42,120

Manufacturing & BPO

50,396

45,099

$
89,307

$
87,219

Process, Energy & Government revenue ~~from~~decreased $3.2 million or 7.6% during the ~~non-recurring~~six months ended June 30, 2006 compared to the same period in 2005. The decrease in revenue is primarily due to a $10.0 million decline in government funding for the DPETAP contract which resulted in a decrease in revenue of $5.4 million during the six months ended June 30, 2006 compared to the same period in 2005. In addition, a scheduling delay on an environmental engineering contract resulted in a decrease in revenue of $3.0 million during the six months ended June 30, 2006 compared to the same period in 2005. These decreases in revenue were offset by an increase in hurricane recovery services revenue of $2.9 million, an increase in ~~2004 as discussed above.~~ chemical demilitarization training support services of $1.0 million, an increase in revenue of $0.8 million related to a liquefied natural gas (LNG) fueling station project, and net increases in various energy and other government contracts of $0.5 million during the six months ended June 30, 2006 compared to the same period in 2005.
Manufacturing & BPO revenue increased $5.3 million or 11.7% during the six months ended June 30, 2006 compared to the same period in 2005. The increase in revenue is due to the following: a $2.7 million increase due to the expansion of business process outsourcing services with new and existing customers, a $1.6 million increase for e-Learning, content development and system hosting services, a $1.9 million increase from our international operations in the United Kingdom primarily resulting from the PMC acquisition in February 2006 as well as growth on existing international contracts, a $1.6 million increase in lean manufacturing services, and a $0.8 million increase for other technical services provided primarily to a pharmaceutical customer. These net increases in revenue were offset by other decreases in revenue, primarily due to a change in contract scopes with a business process outsourcing customer during 2005 which resulted in a decrease in revenue of $2.7 million, as well as net decreases of $0.6 million in revenue for other technical training services during the six months ended June 30, 2006 compared to the same period in 2005.

Gross Profit
(Dollars in thousands)

Six months ended

June 30,

2006

2005

% Revenue

% Revenue

Process, Energy & Government

$
5,970

15.3
%
$
7,668

18.2
%
Manufacturing & BPO

6,749

13.4
%
4,244

9.4
%

$
12,719

14.2
%
$
11,912

13.7
%
Process, Energy & Government gross profit of ~~$2.6~~$6.0 million or ~~11.8%~~15.3% of revenue for the ~~third quarter of 2005 increased~~six months ended June 30, 2006 decreased by ~~$1.1~~$1.7 million or ~~66.2%~~22.1% when compared to gross profit of approximately ~~$1.6~~$7.7 million or ~~6.8%~~18.2% of revenue for the six months ended June 30, 2005. This decrease in gross profit is primarily attributable to a decline in government funding for the DPETAP contract and the environmental engineering project delay discussed above, offset by an increase in gross profit related to an increase in revenue from hurricane recovery services during the six months ended June 30, 2006 compared to the same period in 2005.
Manufacturing & BPO gross profit of $6.7 million or 13.4% of revenue for the six months ended June 30, 2006 increased by $2.5 million or 59.0% when compared to gross profit of approximately $4.2 million or 9.4% of revenue for the same period of ~~2004. The~~2005. This increase in gross profit is primarily ~~due~~attributable to ~~decreased overhead expenses~~an increase in revenue from business process outsourcing, e-Learning, lean manufacturing and other technical services, as well as international growth during the six months ended June 30, 2006 compared to the same period of 2005. A decrease in lower margin subcontractor utilization and an increase in higher margin internal labor utilization on certain contracts also contributed to an increase in gross profit as a percentage of revenue ~~as our~~during the six months ended June 30, 2006 compared to the same period of 2005. Additionally, infrastructure costs have not increased at the same rate as our ~~contract~~ revenue growth for ~~business process outsourcing and training outsourcing services, excluding the decrease~~this segment, resulting in ~~revenue from the change in contract scopes with a business process outsourcing customer in the third quarter of 2005 as discussed above.~~ increased profitability.
Selling, General and Administrative ~~Expense~~ Expenses
SG&A ~~expenses~~ increased ~~$0.3~~$0.1 million or 1.0% from ~~$3.8~~$6.9 million for the ~~third quarter of 2004~~six months ended June 30, 2005 to ~~$4.1~~$7.0 million for the ~~third quarter of 2005.~~same period in 2006. This net increase is primarily ~~related~~due to ~~higher~~an increase in compensation and severance expense, offset by decreases in the provision for doubtful accounts and legal ~~fees associated with the EDS litigation incurred~~expenses during the ~~third quarter of 2005. These increases were partially offset by a decrease in corporate SG&A expenses primarily due~~six months ended June 30, 2006 compared to the ~~spin-off of NPDC~~same period in ~~November 2004, which were not allocable to discontinued operations.~~ 2005.
Interest Expense
Interest expense decreased $0.1 million from $0.5 million for the third quarter of 2004 to $0.4 million for the third quarter of 2005. The decrease was primarily attributable to General Physics' payoff of its short term borrowings in January 2005. Other Income Other income was $0.1 million for the three months ended September 30, 2005 and 2004, respectively. Income Taxes Income tax expense was $0.9 million for the ~~third quarter of 2005~~six months ended June 30, 2006 compared to ~~$0.5~~$0.7 million for the ~~third quarter of 2004. The Company's effective tax rate was 37.3% and 47.6% for the third quarter of 2005 and 2004, respectively.~~same period in 2005. The increase is primarily due to ~~increased income from continuing operations~~higher short-term borrowing levels during the ~~third quarter~~six months ended June 30, 2006 compared to the same period in 2005.
Other Income
Other income was $0.6 million for the six months ended June 30, 2006 compared to $0.1 million for the same period in 2005. The increase is primarily due to increases in interest income and investment income during the six months ended June 30, 2006 compared to the same period in 2005. Other income for the six months ended June 30, 2006 includes $0.3 million of equity in earnings of a joint venture, for which an immaterial amount was included in revenue during the same period in 2005. 20 ~~NINE MONTHS ENDED SEPTEMBER~~
22

Income Tax Expense
Income tax expense increased $0.3 million from $2.0 million for the six months ended June 30, 2005 ~~COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2004 For~~to $2.3 million for the ~~nine months ended September 30, 2005, the Company had~~same period in 2006. This increase is due to increased income from continuing operations before income tax expense ~~of $6,616,000 compared to $1,618,000~~ for the same period in 2004. The improved results were primarily due to increased operating income of $3,576,000 for General Physics' two business segments, as well as reduced general and administrative expenses at the corporate level. Government revenue accounted for approximately 40% and 38% of General Physics' revenue for the ninesix months ended ~~September~~June 30, ~~2005 and 2004, respectively. Revenue~~
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2005 2004 -------- -------- (Dollars in Thousands) Process, Energy & Government $ 65,025 $ 59,329 Manufacturing & BPO 66,778 59,935 Elimination of intercompany revenue with GSE (525) (450) -------- -------- $131,278 $118,814 ======== ========
~~Process, Energy & Government segment revenue increased $5.7 million or 9.6% during the nine months ended September 30, 2005~~2006 compared to the same period ~~of 2004.~~in 2005. Income tax expense for interim 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 six months ended June 30, 2006, the Company’s working capital decreased $15.8 million from $34.8 million at December 31, 2005 to $19.0 million at June 30, 2006. The ~~increase in revenue~~decrease is primarily due to increased contract scopes with our existing government and energy customers to provide various training and domestic preparedness services. The net increase in revenue was partially offset by a decrease in revenue from certain contracts, primarily for hurricane recovery services provided to the state of Florida totaling $2.2 million in 2004, which did not recur in 2005. Manufacturing & BPO segment revenue increased $6.8 million or 11.4% during the nine months ended September 30, 2005 compared to the same period of 2004. The increase is due to an increase in business process outsourcing services provided to customers primarily in the electronics industry, increased system implementation and hosting services primarily to the federal government, and increases in other professional development and training courses provided to customers in the manufacturing industry. The Company continues to expand the scope of services provided to business process and training outsource customers. Gross Profit
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------ 2005 2004 -------------------- ------------------- % Revenue % Revenue --------- --------- (Dollars in thousands) Process, Energy & Government $12,016 18.5% $10,466 17.6% Manufacturing & BPO 7,109 10.6% 4,012 6.7% Elimination of intercompany revenue with GSE (525) -- (450) -- ------- ---- ------- ---- $18,600 14.2% $14,028 11.8% ======= ==== ======= ====
21 ~~Process, Energy & Government gross profit of $12.0 million or 18.5% of revenue for the nine months ended September 30, 2005 increased by $1.6 million or 14.8% when compared to gross profit~~use of approximately ~~$10.5~~$20.3 million ~~or 17.6%~~ of revenue for the same period of 2004. This increase in gross profit was primarily driven by an increase in revenue for training services provided to our government and energy customers. The increase in gross profit as a percentage of revenue is primarily due to a decrease in overhead expenses as a percentage of revenue as our infrastructure costs have not increased at the same rate as our contract revenue growth. Manufacturing & BPO gross profit of $7.1 million or 10.6% of revenue for the nine months ended September 30, 2005 increased by $3.1 million or 77.2% when compared to gross profit of approximately $4.0 million or 6.7% of revenue for the same period of 2004. This increase in gross profit was primarily driven by an increase in revenue from business process outsourcing and training outsourcing services. The increase in gross profit as a percentage of revenue is primarily due to a decrease in overhead expenses as a percentage of revenue as our infrastructure costs have not increased at the same rate as our contract revenue growth. Selling, General and Administrative Expense SG&A decreased $0.3 million or 2.4% from $11.3 million for the nine months ended September 30, 2004 to $11.0 million for the same period of 2005. This decrease is primarily related to a decrease in corporate SG&A expenses, primarily due to the spin-off of NPDC in November 2004, which were not allocable to discontinued operations. Interest Expense Interest expense decreased $0.4 million from $1.5 million for the nine months ended September 30, 2004 to $1.1 million for the same period of 2005. The decrease was primarily attributable to General Physics' payoff of its short term borrowingscash in January ~~2005. Other Income Other income was $0.1 million for~~2006 to complete the nine months ended September 30, 2005 compared to $0.3 million for the same period of 2004. Income Taxes Income tax expense increased by approximately $1.9 million from $1.0 million for the nine months ended September 30, 2004 to $2.9 million for the same period of 2005. This increase is primarily due to increased income from continuing operations during the nine months ended September 30, 2005 compared to the same period of 2004. The Company's effective tax rate was 43.4% and 61.9% for the nine months ended September 30, 2005 and 2004, respectively. LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL AND CASH FLOWS As of September 30, 2005, the Company had cash and cash equivalents totaling $10.5 million.capital stock restructuring discussed below. The Company believes that cash generated from operations and borrowing availability under ~~its~~the Credit Agreement (described below), will be sufficient to fund the working capital and other requirements of the Company for the foreseeable future. 22
On January 19, 2006, the Company completed a restructuring of its capital stock in which it used approximately $20.3 million of cash on hand to repurchase 2,121,500 shares of its Common Stock and 600,000 shares of its Class B Stock, and to exchange 600,000 shares of its Class B Stock for 600,000 shares of Common Stock. In connection with the capital stock restructuring, the Company authorized the repurchase of up to $5 million of additional common shares from time to time in the open market, subject to prevailing business and market conditions and other factors. See Note 7 to the accompanying condensed consolidated financial statements for further details regarding the repurchase and exchange transaction. During the ~~nine~~six months ended ~~September~~June 30, ~~2005,~~2006, the ~~Company's working capital increased by $6.5~~Company repurchased 238,000 shares of its Common Stock in the open market for a total cost of approximately $1.7 million.
On February 3, 2006, the Company completed the acquisition of PMC, a performance improvement and training company in the United Kingdom. The purchase price was $1.3 million in cash, subject to a post-closing adjustment based on actual net equity, plus contingent payments of up to $0.9 million based upon the achievement of certain performance targets during the first year following completion of the acquisition.
Cash Flows
Six months ended June 30, 2006 compared to the six months ended June 30, 2005
The Company’s cash balance decreased $15.9 million from ~~$20.6~~$18.1 million as of December 31, 2005 to $2.2 million at ~~December 31, 2004 to $27.1 million at September~~June 30, ~~2005.~~2006. The ~~Company's cash balance increased $8.1 million from $2.4 million at December 31, 2004 to $10.5 million at September 30, 2005. The increase~~decrease in cash and cash equivalents during the ~~nine~~six months ended ~~September~~June 30, ~~2005~~2006 resulted from cash provided by operating activities of ~~$11.8~~$6.7 million, offset by cash used byin investing activities of ~~$0.8~~$1.0 million and cash used byin financing activities of ~~$2.8 million, and a negative effect of exchange rate changes on cash of approximately $0.1~~$21.6 million. Cash ~~Flows~~flows from ~~Operating Activities~~ discontinued operations are combined with cash flows from continuing operations within the operating, investing, and financing activities categories in the accompanying consolidated statements of cash flows through the effective date of the spin-off of GSE.
Cash provided by operating activities was ~~$11.8~~$6.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2005~~2006 compared to ~~cash used in operating activities of $0.8~~$8.2 million for the same period ~~of 2004.~~in 2005. The ~~increase~~decrease in cash provided by operating activities compared to the prior year period is primarily due to ~~$1.8 million higher net income in 2005 compared to 2004,~~the receipt of proceeds from the EDS ~~lawsuit~~ arbitration award of $13.8 million in

January 2005, offset by an increase in net income of $1.4 million and ~~increased non-cash compensation expense~~increases in net working capital changes of ~~$0.8~~$9.8 million ~~in 2005~~during the six months ended June 30, 2006 compared to ~~2004. These increases~~the same period in ~~cash flows from operating activities were offset by a decrease in~~2005. During the six months ended June 30, 2005, working capital changes ~~in other operating items by approximately $4.0~~included an $8.5 million ~~primarily due to a~~ decrease in accrued expenses which was primarily related to the payout of $5$5.0 million of the EDS arbitration proceeds to NPDC ~~in 2005 which were accrued for in 2004. This decrease in changes in other operating items was partially offset by favorable~~pursuant to the spin-off agreement (see Note 12 to the accompanying condensed consolidated financial statements). Excluding this item, net changes in working ~~capital. Cash Flows from Investing Activities~~ capital increased $4.8 million during the six months ended June 30, 2006 compared to the same period in 2005.
Cash used byin investing activities was ~~$0.8~~$1.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2005~~2006 compared to ~~cash used by investing activities of $0.3~~$0.4 million for the same period ~~of 2004.~~in 2005. The increase in cash used byin investing activities is primarily due to ~~proceeds from~~$0.6 million of net cash paid in connection with the ~~sale~~acquisition of ~~marketable securities~~PMC (net of ~~approximately $1.0~~$0.8 million ~~in 2004 that did not recur in 2005. This increase in~~ cash used by investing activities was offset by a decrease in capital expenditures for property, plant and equipment of approximately $0.5 million during the nine months ended September 30, 2005 compared to the same period of 2004. Cash Flows from Financing Activities acquired).
Cash used byin financing activities was ~~$2.8~~$21.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2005~~2006 compared to ~~cash provided by financing activities of $0.5~~$3.2 million for the same period ~~of 2004.~~in 2005. The increase in cash used byin financing activities is primarily due to $20.8 million of cash used in connection with the ~~repayment by General Physics~~capital stock restructuring (including transaction costs) and $1.7 million of ~~its~~cash used for repurchases of common stock in the open market (see Note 7 to the accompanying condensed consolidated financial statements). In addition, cash used in investing activities during the six months ended June 30, 2005 included net repayments of short-term borrowings of ~~$6.1~~$5.4 million, offset by ~~short-term borrowings~~proceeds from the issuance of a convertible note by GSE of $1.5 million, which did not recur in 2006.
Short-term Borrowings and Long-term Debt
General Physics has a $25 million Credit Agreement with a bank that expires on August 13, 2007, as amended, with annual renewal options, and is secured by certain assets of General Physics. The interest rate on borrowings under the Credit Agreement is at the daily LIBOR Market Index Rate plus 3.0%. Based upon the financial performance of General Physics, the interest rate can be reduced. As of June 30, 2006, the rate was reduced to LIBOR plus 2.5%, which resulted in a rate of approximately ~~$1.2 million during~~7.8%. The Credit Agreement also contains certain restrictive covenants. General Physics is currently restricted from paying dividends and management fees to the ~~nine months ended September 30, 2005. This use~~Company in excess of ~~cash was offset by net cash proceeds of $2.0~~$1.0 million in ~~2005 in connection~~any fiscal year, with ~~GSE's issuance~~the exception of a ~~subordinated convertible note prior~~waiver by the lender which permits General Physics to provide cash to the ~~Company's spin-off~~Company to repurchase up to $5 million of ~~GSE, compared~~additional shares of its outstanding Common Stock (see Note 7 to ~~repayments~~the accompanying condensed consolidated financial statements). As of ~~long-term debt by~~June 30, 2006, the Company had no outstanding borrowings under the Credit Agreement and there was approximately $19,012,000 of ~~$0.7 million in 2004. Additionally, cash proceeds from the exercise~~available borrowings based upon 80% of ~~employee stock options increased by $0.8 million during the nine months ended September 30, 2005 compared to the same period~~eligible accounts receivable and 80% of ~~2004. In connection with the spin-off~~eligible unbilled receivables. As of ~~GSE on September 30,~~December 31, 2005, the ~~Company's cash balance decreased by $804,000 as a result of GSE~~Company had no ~~longer being consolidated with~~amounts outstanding under the ~~Company effective with the spin-off. LONG-TERM DEBT AND SHORT-TERM BORROWINGS Pursuant to a Note and Warrant Purchase Agreement dated~~Credit Agreement.
In August 8, 2003, the Company issued and sold to four Gabelli funds $7.5 million aggregate principal amount of 6% Conditional Subordinated Notes due 2008 (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.~~Company’s Common Stock at an exercise price of $8.00. The aggregate purchase price for the Gabelli Notes and GP Warrants was $7.5 23 million. The Gabelli Notes are secured by a mortgage on the ~~Company's~~Company’s former property located in Pawling, New York which was distributed to ~~NPDC in the spin-off.~~National Patent Development Corporation. In addition, at any time that less than ~~$1.9~~$1,875,000 million principal amount of the Gabelli Notes ~~are~~is outstanding, the Company may defease the obligations secured by the mortgage and obtain a release of the mortgage. ~~The~~Subsequent to the spin-offs of NPDC and GSE and in accordance with the anti-dilution provisions of the warrant agreement, the number of GP Warrants was adjusted to 984,116 and the exercise price was adjusted to $5.85 per share. As of June 30, 2006, there were 983,116 warrants with an exercise price of $5.85 outstanding and exercisable.
In October 2003, the Company ~~has~~issued a five-year 5% note due in full onin October ~~21,~~ 2008 in the principal amount of ~~$5,250,955~~

$5,250,955 to ManTech ~~International.~~International (ManTech). Interest is payable quarterly. Each year during the term of the note, ~~the holder of the note~~ManTech has the option to convert up to 20% of the original principal amount of the note into ~~common stock~~Common Stock of the Company at the then market price of the ~~Company's common stock,~~Company’s Common Stock, but only in the event that the ~~Company's common stock~~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 not 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. ~~General Physics has~~
Accounting Standard Issued
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a ~~three-year $25 million Credit Agreement~~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 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 48 would equal the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a ~~bank that expires on August 13, 2006 with annual renewal options and is secured by certain assets~~taxing authority having full knowledge of ~~General Physics. The interest rate on borrowings under the Credit Agreement is at the daily LIBOR Market Index Rate plus 3%, which was 6.84%~~all relevant information. FIN 48 will be effective as of ~~September 30, 2005.~~January 1, 2007 for calendar-year companies. In applying the new accounting model prescribed by FIN 48, companies will need to determine and assess all material positions existing as of the adoption date, including all significant uncertain positions, in all tax years, that are still subject to assessment or challenge under relevant tax statutes. The ~~Credit Agreement also contains certain restrictive covenants. General Physics~~Company is currently ~~restricted from paying dividends and management fees to~~evaluating the ~~Company in excess~~impact of $1.0 million in any fiscal year. The Company repaid in full the $6.1 million outstanding under the Credit Agreement as of December 31, 2004 in January of 2005, using the proceeds received from the EDS arbitration award (see Note 9 to the condensedadopting this new accounting standard on its consolidated financial statements). As of September 30, 2005, the Company had no borrowings outstanding under the Credit Agreement and there was approximately $19,313,000 of available borrowings based upon 80% of eligible accounts receivable and 80% of eligible unbilled receivables. As of September 30, 2005, GSE had borrowings of $1,182,000 and a letter of credit for $10,000 under General Physics' Credit Agreement, under which $1,500,000 was allocated for use by GSE. The Company guarantees GSE's borrowings under the Credit Agreement through August 13, 2006. CONTRACTUAL OBLIGATIONS Effective April 11, 2005, General Physics entered into employment agreements with certain of its officers, resulting in committed compensation of approximately $2.0 million annually. These agreements have employment terms expiring in 2007, provide for grants of restricted stock units pursuant to the Company's 2003 Incentive Stock Plan, and contain non-compete covenants and change of control and termination provisions. NEW ACCOUNTING STANDARD statements.
Accounting Standard Adopted
In December 2004, the ~~FASB~~Financial Accounting Standards Board issued ~~SFAS~~Statement of Financial Accounting Standards No. ~~123 - Revised (SFAS No. 123R),~~ 123R, Share-Based Payment, which revises SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes ~~APB~~Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to ~~Employees. Currently, the Company does not record~~Employees, and requires companies to recognize compensation expense for ~~certain stock-based compensation. Under~~all equity-based compensation awards issued to employees that are expected to vest. The Company adopted SFAS No. 123R ~~the Company will measure the cost of employee services received in exchange for stock, based~~ on the grant-date fair value (with limited exceptions) of the stock award. Such cost will be recognized over the period during which the employee is required to provide service in exchange for the stock award (usually the vesting period). The fair value of the stock award will be estimated using an option-pricing model, with excess tax benefits, as defined in SFAS No. 123R, being recognized as an addition to paid in capital. SFAS No. 123R was to be effective as of July 1, 2005. However, based on Final Rule 74 issued by the Securities and Exchange Commission in April 2005, which delayed the implementation of SFAS No. 123R, the Company plans to adopt SFAS No. 123R effective January 1, ~~2006. The Company expects to adopt SFAS No. 123R~~2006, using the Modified Prospective Application method without restatement of prior periods. Under this method, the Company ~~will begin~~began to amortize compensation cost for the remaining portion of its outstanding 24 awards ~~on the adoption date~~ for which the requisite service ~~has~~was not yet ~~been rendered.~~rendered as of January 1, 2006. Compensation cost for these awards ~~will be~~is based on the fair value of those awards as previously disclosed on a ~~pro-forma~~pro forma basis under SFAS ~~123 in Note 3, Stock Based Compensation.~~No. 123. The Company will determine the fair value of and account for awards that are granted, modified, or settled after ~~the adoption date~~January 1, 2006 in accordance with SFAS No. 123R.
During the three and six months ended June 30, 2006, the Company recognized $148,000 and $298,000, respectively, of pre-tax stock-based compensation expense under the fair value method in accordance with SFAS No. 123R. During the three and six months ended June 30, 2006, the Company recognized a deferred income tax benefit of $59,000 and $119,000, respectively, associated with the compensation expense recognized for these awards. As of June 30, 2006, the Company had $48,000 of unrecognized compensation related to the unvested portion of outstanding stock options awards expected to be recognized through July 2007 (a weighted-average remaining vesting period of less than one year). As of June 30, 2006, the Company had unrecognized compensation cost of $974,000 related to the unvested portion of its outstanding stock units expected to be recognized over a weighted average remaining service period of 3.6 years. The Company ~~is currently in~~did not grant any stock-based compensation awards during the ~~process of evaluating the impact of SFAS No. 123R on its consolidated financial statements. FORWARD-LOOKING STATEMENTS The~~six months ended June 30, 2006.

Forward-Looking Statements
This report contains forward-looking statements ~~contained herein~~within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward looking statements. Forward-looking statements are not statements of historical facts, but rather reflect ~~GP Strategies' management's~~our current ~~views with respect to~~expectations concerning future events and ~~financial performance.~~results. We use words such as ~~"expects"~~“expects”, ~~"intends"~~“intends”, “believes”, “may”, “will” and ~~"anticipates"~~“anticipates” to indicate forward-looking statements. ~~These~~Because these forward-looking statements ~~are subject to certain~~involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those ~~in the~~expressed or implied by these forward-looking statements, ~~all of which are difficult to predict and many of which are beyond the control of GP Strategies,~~ including, but not limited to, ~~our holding company structure, failure to continue to attract and retain personnel, loss~~those factors set forth under Item 1A - Risk Factors of ~~business from significant customers, failure to keep pace with technology, changing economic conditions, competition, our ability to implement procedures that will reduce~~ the ~~likelihood that material weaknesses in internal control over financial reporting will not occur in the future,~~Company’s 2005 Annual Report on Form 10-K and those other risks and uncertainties detailed in ~~GP Strategies'~~the Company’s periodic reports and registration statements filed with the Securities and Exchange Commission. We caution that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict these new risk factors, nor can we assess the effect, if any, of the new risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ from those expressed or implied by these forward-looking statements.
If any one or more of these expectations and assumptions proves incorrect, actual results will likely differ materially from those contemplated by the forward-looking statements. Even if all of the foregoing assumptions and expectations prove correct, actual results may still differ materially from those expressed in the forward-looking statements as a result of factors we may not anticipate or that may be beyond our control. While we cannot assess the future impact that any of these differences could have on our business, financial condition, results of operations and cash flows or the market price of shares of our common stock, the differences could be significant. We do not undertake to update any forward-looking statements made by ~~us. 25~~ ~~ITEM~~us, whether as a result of new information, future events or otherwise. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report.

Item 3. ~~QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK~~            Quantitative and Qualitative Disclosure About Market Risk
The Company has no material changes to the disclosure on this matter made in its ~~report~~Annual Report on Form ~~10-K/A~~10-K for the fiscal year ended December 31, ~~2004. ITEM~~2005.
Item 4. ~~CONTROLS AND PROCEDURES~~ Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13-15(b) of the Securities Exchange Act of 1934, as amended. Based upon that evaluation and the material ~~weaknesses~~weakness described below, the Chief Executive Officer and Chief Financial Officer concluded that the ~~Company's~~Company’s disclosure controls and procedures were not effective as of the date covered by this report.
As discussed more fully in Item 9A of our Annual Report on Form ~~10-K/A-2~~10-K dated ~~April 29, 2005,~~March 16, 2006, for the year ended December 31, ~~2004,~~2005, in connection with our audit of our consolidated financial statements for the fiscal year ended December 31, ~~2004,~~2005, we determined that the ~~Company's policies~~Company’s account reconciliation and ~~procedures did~~management review controls over the accounting for income taxes were not ~~provide for adequate management oversight and review~~operating effectively because of the ~~Company's income tax accounting. This~~ lack of adequate ~~management oversight and review of the Company's income~~ tax accounting ~~resulted in~~expertise as of December 31, 2005. As a result, there was a material ~~errors~~misstatement in the ~~Company's~~Company’s income tax provision ~~which were identified and~~that was corrected prior to the issuance of the consolidated financial statements for the year ended December 31, 2004. This deficiency represents more than a remote likelihood that a material misstatement of the Company's annual or interim financial statements would not have been prevented or detected. The Company's policies and procedures did not provide for adequate management oversight and review of the Company's consolidated financial statements and footnote disclosures. In addition, the Company did not have adequate technical resources to ensure the timely completion and review of its consolidated financial statements and footnote disclosures. These deficiencies resulted in material errors in the consolidated financial statements, primarily the number of weighted average common shares outstanding used in the earnings per share calculation, the presentation of cash flows from operating and financing activities, and certain financial statement footnote disclosures related to income taxes and stock-based compensation, which were identified and corrected prior to the issuance of the 2004 consolidated financial statements. These deficiencies represent more than a remote likelihood that a material misstatement of the Company's annual or interim financial statements would not have been prevented or detected. 2005.
Based on the material ~~weaknesses~~weakness described above, management concluded that the ~~Company's~~Company’s internal control over financial reporting was not effective as of December 31, ~~2004.~~2005. This assessment is based on ~~management's~~management’s conclusion that as of December 31, ~~2004,~~2005, there was more than a remote likelihood that a material misstatement of the ~~Company's~~Company’s annual or interim financial statements would not be prevented or detected on a timely basis by Company employees in the normal course of performing their assigned functions.
As a result, we implemented changes in certain of our internal controls over financial reporting during the ~~nine~~six months ended ~~September~~June 30, ~~2005,~~2006, as follows: -
·                  The Company has, subsequent to December 31, ~~2004, revised~~2005, continued to revise its processes and procedures ~~to prepare the consolidated income tax provision and the consolidated financial statements and footnote disclosures, and implemented additional management review controls~~ over the ~~related processes. -~~accounting for income taxes.
·                  The Company hired a new Director of ~~Financial Reporting~~Tax on December 31, 2005 who ~~is dedicated~~we believe will provide the Company with the necessary technical skills to perform, review and analyze complex tax accounting activities.
We believe these improvements in our internal controls will enable us to remediate the ~~Company's financial reporting requirements. 26~~ material weakness; however, such determination will not occur until these additional controls have been in place for a period of time sufficient to demonstrate that the controls are operating effectively. We will continue to evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis, and will take further action as appropriate. However, there can be no assurance that our controls and procedures will prevent or detect material misstatement of the ~~Company's~~Company’s annual or interim financial statements.
27

PART II. OTHER INFORMATION ~~ITEM 6. EXHIBITS~~
~~31.1 Certification~~
Item 1.
Legal Proceedings
None.
Item 1A.
Risk Factors
The Company has no material changes to the disclosure on this matter made in its Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
Item 2.
Unregistered Sales of ~~Chief Executive Officer and Chief Financial Officer of the Company dated November 14, 2005 pursuant to~~Equity Securities and ~~Exchange Act Rule 13d-14(a)/15(d-14(a), as adopted pursuant~~Use of Proceeds
The following table provides information about the Company’s share repurchase activity for the three months ended June 30, 2006:

Issuer Purchases of Equity Securities

Total number

Approximate

of shares

dollar value of

Total number

Average

purchased as

shares that may yet

of shares

price paid

part of publicly

be purchased under

Month

purchased

per share

announced program

the program

April 1-30, 2006

214,300
(1)
$
6.88

214,300

$
3,454,000

May 1-31, 2006

—

—

—

—

June 1-30, 2006

13,700
(1)
$
7.56

13,700

$
3,350,000

(1)             Represents shares repurchased in the open market in connection with the Company’s share repurchase program under which the Company may repurchase up to $5 million of its common stock from time to time in the open market subject to prevailing business and market conditions and other factors. This program was authorized by the Company’s Board of Directors and was publicly announced on January 19, 2006. There is no expiration date for the repurchase program.
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Submission of Matters to ~~Section 302 and 404~~a Vote of the Sarbanes-Oxley Act of 2002.* 32.1 Certification of Chief Executive Officer and Chief Financial Officer of the Company dated November 14, 2005 pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* Security Holders
None.
Item 5.
Other Information
None.
Item 6.
Exhibits
~~- ----------~~
31.1Certification of Chief Executive Officer of the Company dated August 9, 2006 pursuant to Securities and Exchange Act Rule 13d-14(a)/15(d-14(a), as adopted pursuant to Section 302 and 404 of the Sarbanes-Oxley Act of 2002.*
31.2Certification of Executive Vice President and Chief Financial Officer of the Company dated August 9, 2006 pursuant to Securities and Exchange Act Rule 13d-14(a)/15(d-14(a), as adopted pursuant to Section 302 and 404 of the Sarbanes-Oxley Act of 2002.*

32.1Certification of Chief Executive Officer and Chief Financial Officer of the Company dated August 9, 2006 pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
* Filed herewith 28 ~~SIGNATURE~~
29

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed inon its behalf by the undersigned thereunto duly authorized. GP STRATEGIES CORPORATION November 14, 2005 /s/ Scott N. Greenberg ---------------------------------------- Chief Executive Officer and Chief Financial Officer 29

		Page
Part I. ~~FINANCIAL INFORMATION~~	Financial Information

Item 1. ~~Consolidated~~	Financial Statements ~~(Unaudited)~~

	Condensed Consolidated Balance Sheets ~~- September~~— June 30, ~~2005~~2006 and December 31, ~~2004~~ 2005	1

	Condensed Consolidated Statements of ~~Operations-~~ Operations — Three Months and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2005~~2006 and ~~2004~~ 2005	2

	Condensed Consolidated Statement of Stockholders’ Equity — Six Months Ended June 30, 2006	3

	Condensed Consolidated Statements of Cash Flows ~~- Nine~~— Six Months Ended ~~September~~June 30, ~~2005~~2006 and ~~2004 3~~ 2005	4

	Notes to Condensed Consolidated Financial Statements 4	5

Item 2. ~~Management's~~	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosure About Market Risk 26	27

Item 4.	Controls and Procedures ~~26 PART~~	27

Part II. ~~OTHER INFORMATION~~	Other Information

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3.	Defaults Upon Senior Securities	28

Item 4.	Submission of Matters to a Vote of Security Holders	28

Item 5.	Other Information	28

Item 6.	Exhibits	28

Signatures 29		30

	June 30,
	2006			December 31,
	(Unaudited)			2005
Assets
Current assets:
Cash and cash equivalents	$	2,164		$	18,118
Accounts and other receivables, less allowance for doubtful accounts of $632 in 2006 and $1,166 in 2005	23,703			27,079
Costs and estimated earnings in excess of billings on uncompleted contracts	13,109			11,487
Prepaid expenses and other current assets	5,719			5,936
Total current assets	44,695			62,620
Property, plant and equipment	6,864			6,619
Accumulated depreciation	(5,007		)	(4,762		)
Property, plant and equipment, net	1,857			1,857
Goodwill	58,435			57,483
Other intangible assets, net	746			647
Deferred tax assets	7,874			10,391
Other assets	1,613			1,643
	$	115,220		$	134,641
Liabilities and Stockholders’ Equity
Current liabilities:
Current maturities of long-term debt	$	58		$	71
Accounts payable and accrued expenses	19,188			20,315
Billings in excess of costs and estimated earnings on uncompleted contracts	6,438			7,430
Total current liabilities	25,684			27,816
Long-term debt less current maturities	11,558			11,309
Other noncurrent liabilities	1,193			1,174
Total liabilities	38,435			40,299

Stockholders’ equity:
Common stock, par value $0.01 per share	178			171
Class B capital stock, par value $0.01 per share	—			12
Additional paid-in capital	161,835			168,737
Accumulated deficit	(68,596		)	(71,710		)
Unearned compensation	—			(1,133		)
Accumulated other comprehensive loss	(954		)	(1,087		)
Note receivable from stockholder	(124		)	(619		)
Treasury stock at cost	(15,554		)	(29		)
Total stockholders’ equity	76,785			94,342
	$	115,220		$	134,641

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2006		2005			2006		2005
Revenue	$	45,779	$	43,659		$	89,307	$	87,219
Cost of revenue	38,822		37,291			76,588		75,307
Gross profit	6,957		6,368			12,719		11,912
Selling, general and administrative expenses	3,632		3,398			7,004		6,936
Operating income	3,325		2,970			5,715		4,976
Interest expense	443		379			857		742
Other income	180		12			584		54
Income from continuing operations before income tax expense	3,062		2,603			5,442		4,288
Income tax expense	1,317		1,162			2,328		2,005
Income from continuing operations	1,745		1,441			3,114		2,283
Loss from discontinued operations, net of income taxes	—		(221		)	—		(595		)
Net income	$	1,745	$	1,220		$	3,114	$	1,688

Basic weighted average shares outstanding	15,550		18,141			15,889		18,029
Diluted weighted average shares outstanding	16,461		18,761			16,795		18,879

Per common share data:
Basic
Income from continuing operations	$	0.11	$	0.08		$	0.20	$	0.12
Loss from discontinued operations	—		(0.01		)	—		(0.03		)
Net income	$	0.11	$	0.07		$	0.20	$	0.09
Diluted
Income from continuing operations	$	0.11	$	0.08		$	0.19	$	0.12
Loss from discontinued operations	—		(0.01		)	—		(0.03		)
Net income	$	0.11	$	0.07		$	0.19	$	0.09

			Class B												Accumulated			Note
	Common		capital			Additional									other			receivable						Total
	stock		stock			paid-in			Accumulated			Unearned			comprehensive			from			Treasury			stockholders’
	($0.01 par)		($0.01 par)			capital			deficit			compensation			loss			stockholder			stock at cost			equity
Balance at December 31, 2005	$	171	$	12		$	168,737		$	(71,710	)	$	(1,133	)	$	(1,087	)	$	(619	)	$	(29	)	$	94,342
Net income	—		—			—			3,114			—			—			—			—			3,114
Repurchase and exchange of common stock and Class B stock in capital stock restructuring	6		(12		)	(6,062		)	—			—			—			—			(14,758		)	(20,826		)
Repayment of note receivable from stockholder	—		—			—			—			—			—			495			—			495
Repurchases of common stock in the open market	—		—			—			—			—			—			—			(1,662		)	(1,662		)
Elimination of unearned compensation upon adoption of SFAS No. 123R	—		—			(1,133		)	—			1,133			—			—			—			—
Stock-based compensation expense	—		—			298			—			—			—			—			—			298
Other comprehensive income	—		—			—			—			—			133			—			—			133
Net issuances of stock primarily for stock option exercises and retirement savings plan	1		—			(5		)	—			—			—			—			895			891
Balance at June 30, 2006	$	178	$	—		$	161,835		$	(68,596	)	$	—		$	(954	)	$	(124	)	$	(15,554	)	$	76,785

	2006			2005
Cash flows from operating activities:
Net income	$	3,114		$	1,688
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,293			1,499
Collection of deposit in escrow, including interest	—			13,798
Deferred income taxes	1,889			1,524
Issuance of stock for retirement savings plan and non-cash compensation expense	870			517
Minority interest	—			(622		)
Changes in other operating items, net of effect of acquisition:
Accounts and other receivables	4,138			(6		)
Costs and estimated earnings in excess of billings on uncompleted contracts	(1,622		)	(663		)
Prepaid and other current assets	470			(890		)
Accounts payable and accrued expenses	(1,837		)	(8,529		)
Billings in excess of costs and estimated earnings on uncompleted contracts	(1,646		)	(197		)
Other	—			35
Net cash provided by operating activities	6,669			8,154
Cash flows from investing activities:
Additions to property, plant and equipment	(447		)	(431		)
Acquisition, net of cash acquired	(619		)	—
Other investing activities	71			14
Net cash used in investing activities	(995		)	(417		)
Cash flows from financing activities:
Repayment of short-term borrowings	—			(5,393		)
Repurchase and exchange of common stock and Class B stock in capital stock restructuring	(20,826		)	—
Proceeds from issuance of subordinated convertible note by GSE	—			1,500
Repayment of note receivable from stockholder	495			—
Repurchases of common stock in the open market	(1,662		)	—
Proceeds from stock option exercises	423			931
Deferred financing costs	—			(182		)
Payments on obligations under capital leases	(53		)	(47		)
Net cash used in financing activities	(21,623		)	(3,191		)

Effect of exchange rate changes on cash and cash equivalents	(5		)	(62		)
Net increase (decrease) in cash and cash equivalents	(15,954		)	4,484
Cash and cash equivalents at beginning of period	18,118			2,417
Cash and cash equivalents at end of period	$	2,164		$	6,901

	Three months		Six months
	ended June 30,		ended June 30,
	2006		2006
Cost of revenue	$	106	$	211
Selling, general and administrative expenses	42		87
Total stock-based compensation expense (pre-tax)	$	148	$	298

					Weighted
					average
			Weighted		remaining	Aggregate
	Number of		average		contractual	intrinsic
Stock Options	options		exercise price		term	value
Outstanding at December 31, 2005	1,411,345		$	4.83

Granted	—
Exercised	(88,016	)	4.73
Forfeited/expired	(23,973	)	5.47
Outstanding and expected to vest at June 30, 2006	1,299,356		$	4.83	1.50	$	3,880,000
Exercisable at June 30, 2006	1,252,575		$	4.78	1.50	$	3,798,000

	Three and
	Six months
	ended
	June 30, ~~---------------------~~ 2005 ~~2004 --------- ---------~~
Expected dividend yield ~~0% 0%~~	—	%
Risk-free interest rate ~~3.56% 1.69%~~	3.56	%
Expected volatility ~~53.51% 34.08%~~	53.51	%
Expected ~~life~~ term	4.0 years ~~2.0 years~~

Cash	$	845
Accounts receivable and other current assets	840
Property, plant and equipment, net	88
Goodwill	868
Intangible assets	200
Total assets	2,841

Accounts payable, accrued expenses and other liabilities	723
Billings in excess of costs and estimated earnings on uncompleted contracts	654
Total liabilities assumed	1,377

Net assets acquired	$	1,464

Item 1.		Legal Proceedings

		None.

Item 1A.		Risk Factors

		The Company has no material changes to the disclosure on this matter made in its Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

Item 2.		Unregistered Sales of ~~Chief Executive Officer and Chief Financial Officer of the Company dated November 14, 2005 pursuant to~~Equity Securities and ~~Exchange Act Rule 13d-14(a)/15(d-14(a), as adopted pursuant~~Use of Proceeds

		The following table provides information about the Company’s share repurchase activity for the three months ended June 30, 2006:

	Issuer Purchases of Equity Securities
					Total number	Approximate
					of shares	dollar value of
	Total number		Average		purchased as	shares that may yet
	of shares		price paid		part of publicly	be purchased under
Month	purchased		per share		announced program	the program
April 1-30, 2006	214,300	(1)	$	6.88	214,300	$	3,454,000
May 1-31, 2006	—		—		—	—
June 1-30, 2006	13,700	(1)	$	7.56	13,700	$	3,350,000

Item 3.		Defaults Upon Senior Securities

		None.

Item 4.		Submission of Matters to ~~Section 302 and 404~~a Vote of the Sarbanes-Oxley Act of 2002.* 32.1 Certification of Chief Executive Officer and Chief Financial Officer of the Company dated November 14, 2005 pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* Security Holders

		None.

Item 5.		Other Information

		None.

Item 6.		Exhibits

		GP STRATEGIES CORPORATION


August 9, 2006		/s/ Scott N. Greenberg
		Chief Executive Officer


		/s/ Sharon Esposito-Mayer
		Executive Vice President and Chief Financial Officer

General Overview As of September 30, 2005, the Company's

Significant Events of 2006

Liquidity and Capital Resources