Conformed

                       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, 2001.

                                       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:    0-26494




                                GSE SYSTEMS, INC.

             (Exact name of registrant as specified in its charter)


               Delaware                                       52-1868008
      (State or other jurisdiction of       (I.R.S. Employer Identification No.)
       incorporation or organization)



                 9189 Red Branch Road, Columbia Maryland, 21045
              (Address of principal executive office and zip code)



       Registrant's telephone number, including area code: (410) 772-3500


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.


                                  Yes X    No ___




As of November 2, 2001, there were 5,218,527 shares of the Registrant's common
stock outstanding.






                                GSE SYSTEMS, INC.

                          QUARTERLY REPORT ON FORM 10-Q

                                      INDEX




                                                                          PAGE
PART I.   FINANCIAL INFORMATION                                              3


  Item 1.   Financial Statements:
            Consolidated Balance Sheets as of September 30, 2001             3
              and December 31, 2000
            Consolidated Statements of Operations for the Three and          4
              Nine Months Ended September 30, 2001 and September 30, 2000
            Consolidated Statements of Comprehensive Income for              5
              the Three and Nine Months Ended September 30, 2001
              and September 30, 2000
            Consolidated Statements of Cash Flows for the Nine               6
              Months Ended September 30, 2001 and September 30, 2000
            Notes to Consolidated Financial Statements                       7


  Item 2.   Management's Discussion and Analysis of Results of Operations    14
            and Financial Condition
  Item 3.   Quantitative and Qualitative Disclosure About Market Risk        22


PART II.   OTHER INFORMATION                                                 22


  Item 1.   Legal Proceedings                                                22
  Item 2.   Changes in Securities and Use of Proceeds                        22
  Item 3.   Defaults Upon Senior Securities                                  22
  Item 4.   Submission of Matters to a Vote of Security Holders              22
  Item 5.   Other Information                                                23
  Item 6.   Exhibits and Reports on Form 8-K                                 23

            SIGNATURES                                                       25





                         

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements
                                                 GSE SYSTEMS, INC. AND SUBSIDIARIES
                                                     CONSOLIDATED BALANCE SHEETS
                                                  (in thousands, except share data)

                                                                                     Unaudited
                                                                                September 30, 2001             December 31, 2000

ASSETS
Current assets:
     Cash and cash equivalents                                                            $ 977                       $ 1,465
     Restricted cash                                                                        164                            30
     Contract receivables                                                                18,741                        14,489
     Inventories                                                                          1,274                         1,587
     Prepaid expenses and other current assets                                            1,905                         2,520
     Deferred income taxes                                                                  877                           277
                                                                           -----------------------------  -------------------------
         Total current assets                                                            23,938                        20,368

Investment in Avantium Technologies B.V.                                                  7,503                         2,895
Property and equipment, net                                                               1,782                         2,299
Software development costs, net                                                           4,030                         5,067
Goodwill, net                                                                             2,554                         2,996
Deferred income taxes                                                                       847                           847
Restricted cash                                                                             340                           503
Other assets                                                                                809                           974
                                                                           -----------------------------  -------------------------
         Total assets                                                                  $ 41,803                      $ 35,949
                                                                           =============================  =========================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current portion of long-term debt                                                  $ 1,387                       $ 2,347
     Accounts payable                                                                     3,228                         5,669
     Accrued expenses                                                                     1,410                         2,115
     Accrued compensation and payroll taxes                                               1,749                         1,940
     Billings in excess of revenue earned                                                 5,901                         1,366
     Accrued warranty reserves                                                              580                           462
     Other current liabilities                                                            1,821                           947
                                                                           -----------------------------  -------------------------
         Total current liabilities                                                       16,076                        14,846

Long-term debt                                                                           13,701                        11,840
Accrued warranty reserves                                                                   497                           550
                                                                           -----------------------------  -------------------------
         Total liabilities                                                               30,274                        27,236
                                                                           -----------------------------  -------------------------

Stockholders' equity:
     Common stock $.01 par value, 18,000,000 shares authorized, shares issued
         and outstanding 5,218,527 in 2001 and 5,193,527 in 2000                             52                            52
     Additional paid-in capital                                                          22,457                        22,230
     Retained earnings (deficit) - at formation                                          (5,112)                       (5,112)
     Retained earnings (deficit) - since formation                                       (4,772)                       (7,555)
     Accumulated other comprehensive loss                                                (1,096)                         (902)
                                                                           -----------------------------  -------------------------
         Total stockholders' equity                                                      11,529                         8,713
                                                                           -----------------------------  -------------------------
         Total liabilities and stockholders' equity                                    $ 41,803                      $ 35,949
                                                                           =============================  =========================

        The accompanying notes are an integral part of these consolidated financial statements.









                         
          GSE SYSTEMS, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF OPERATIONS
        (in thousands, except per share data)
                     (Unaudited)


                                                             Three months                  Nine months
                                                           ended September 30,            ended September 30,
                                                           2001            2000           2001           2000

Contract revenue                                         $ 13,823        $ 13,694       $ 38,146       $ 42,119

Cost of revenue                                             9,469          10,022         27,538         29,460

Gross profit                                                4,354           3,672         10,608         12,659

Operating expenses
     Selling, general and administrative                    2,836           4,517          8,134         12,915
     Depreciation and amortization                            364             404          1,065          1,273

Total operating expenses                                    3,200           4,921          9,199         14,188

Operating income (loss)                                     1,154          (1,249)         1,409         (1,529)

Gain on sale of assets                                        -           -                3,273             -
Interest expense, net                                        (235)           (203)          (687)          (523)
Other income (expense), net                                   (15)             83            118            105


Income (loss) before income taxes                             904          (1,369)         4,113         (1,947)

Provision (benefit) for income taxes                          303            (500)         1,330           (710)

Net income (loss)                                           $ 601          $ (869)       $ 2,783       $ (1,237)
                                                      =============    =============   =============  =============
Basic earnings (loss) per common share                      $0.12         $ (0.17)        $ 0.54        $ (0.24)
                                                      =============    =============   =============  =============

Diluted earnings (loss) per common share                    $0.11         $ (0.17)        $ 0.53        $ (0.24)
                                                      =============    =============   =============  =============


     The accompanying notes are an integral part of these consolidated financial statements.






                         

           GSE SYSTEMS, INC. AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (in thousands)
   (Unaudited)


                                                                   Three months          Nine months
                                                               ended September 30,        ended September 30,
                                                             -------------------------  ------------------------
                                                                 2001         2000          2001          2000
                                                             -----------  ------------  -----------   ----------

Net income (loss)                                               $ 601        $ (869)     $ 2,783      $ (1,237)

Foreign currency translation adjustment                            45          (344)        (194)         (485)
                                                             -----------  ------------  -----------   -----------
Comprehensive income (loss)                                     $ 646      $ (1,213)     $ 2,589      $ (1,722)
                                                             ===========  ============  ===========    ==========

                  The accompanying notes are an integral part of these consolidated financial statements.








                         
                     GSE SYSTEMS, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (in thousands)
                                 (Unaudited)
                                                                                        Nine months
                                                                                     ended September 30,
                                                                                -----------------------------
                                                                                    2001            2000
                                                                                -------------   -------------
Cash flows from operating activities:
Net income (loss)                                                                   $ 2,783        $ (1,237)
Adjustments to reconcile net income to net cash
     provided by operating activities:
     Depreciation and amortization                                                    2,635           2,943
     Gain on sale of assets                                                          (3,273)            -
     Non-monetary consideration received for software licensed to
         Avantium Technologies B.V.                                                     -            (2,895)
     Deferred income taxes                                                             (600)           (636)
     Changes in assets and liabilities:
         Contract receivables                                                        (4,252)          2,048
         Inventories, prepaid expenses and other assets                                  56           1,398
         Accounts payable, accrued compensation and accrued expenses                 (3,989)         (1,428)
         Billings in excess of revenues earned                                        4,535            (767)
         Accrued warranty reserves                                                       65             121
         Other liabilities                                                              581            (855)
                                                                                -------------   ------------
Net cash used in operating activities                                                (1,459)         (1,308)
                                                                                -------------   -------------
Cash flows from investing activities:
     Capital expenditures                                                              (342)           (389)
     Capitalized software development costs                                            (584)         (1,580)
                                                                                -------------   -------------
Net cash used in investing activities                                                  (926)         (1,969)
                                                                                -------------   -------------
Cash flows from financing activities:
     Proceeds from issuance of notes payable to stockholder                            3,350             -
     (Restrictions) releases of cash as collateral under line of credit, net             29             -
     Increase (decrease) in borrowings under lines of credit                         (1,144)          2,247
     Proceeds from issuance of common stock                                              33             541
     Other financing activities, net                                                   (359)           (406)
                                                                                -------------   ------------
Net cash provided by financing activities                                             1,909           2,382
                                                                                -------------   -------------
Effect of exchange rate changes on cash                                                 (12)           (106)
                                                                                -------------   -------------

Net decrease in cash and cash equivalents                                              (488)         (1,001)
Cash and cash equivalents at beginning of period                                      1,465           2,695
                                                                                -------------   -------------

Cash and cash equivalents at end of period                                            $ 977         $ 1,694
                                                                                =============   =============


  The accompanying notes are an integral part of these consolidated financial statements.







                       GSE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  Nine Months ended September 30, 2001 and 2000
                                   (Unaudited)



  1.    Basis of Presentation


            The consolidated financial statements included herein have been
        prepared by GSE Systems, Inc. (the "Company") without independent audit.
        In the opinion of the Company's management, all adjustments and
        reclassifications of a normal and recurring nature necessary to present
        fairly the financial position, results of operations and cash flows for
        the periods presented have been made. Certain information and footnote
        disclosures normally included in financial statements prepared in
        accordance with accounting principles generally accepted in the United
        States of America have been condensed or omitted. These consolidated
        financial statements should be read in conjunction with the consolidated
        financial statements and notes thereto included in the Company's Annual
        Report on Form 10-K for the year ended December 31, 2000 filed with the
        Securities and Exchange Commission on April 2, 2001.

  2.    Basic and Diluted Earnings (Loss) Per Common Share

            Basic earnings (loss) per share is based on the weighted average
        number of outstanding common shares for the period. Diluted earnings
        (loss) per share adjusts the weighted average shares outstanding for the
        potential dilution that could occur if stock options or warrants were
        exercised or converted into common stock. The number of common shares
        and common share equivalents used in the determination of basic and
        diluted earnings (loss) per share were as follows:


                         
                                                        Three months                    Nine months
                                                    ended September 30,              ended September 30,
                                                 ------------------------------   ------------------------------
                                                    2001            2000             2001            2000
                                                 --------------  --------------   -------------   --------------
Weighted average shares outstanding - Basic       5,206,944       5,193,527       5,197,999        5,190,198
                                                 ==============  ==============   =============   ==============
Weighted average shares outstanding - Diluted     5,288,752       5,193,527       5,235,330        5,190,198
                                                 ==============  ==============   =============   ==============




            The difference between the basic and diluted number of weighted
        average shares outstanding for the quarters ended September 30, 2001
        represents dilutive stock options and warrants to purchase shares of
        common stock computed under the treasury stock method, using the average
        market price during the period. Common stock equivalents are not
        considered if their effect is anti-dilutive.





  3.    Inventories


            Inventories are stated at the lower of cost, as determined by the
        average cost method, or market. Obsolete or unsaleable inventory is
        reflected at its estimated net realizable value. Inventories consist of
        the following:

                         
Note 3 - Inventories

(in thousands)                                           September 30,      December 31,
                                                              2001              2000
                                                        -----------------  ---------------
Raw materials                                                $ 866          $ 1,084
Service parts                                                  408              503
                                                        -----------------  ---------------
      Total inventories                                    $ 1,274          $ 1,587
                                                        =================  ===============



  4.    Software Development Costs

            Certain computer software development costs are capitalized in
        the accompanying consolidated balance sheets. Capitalization of
        computer software development costs begins upon the establishment of
        technological feasibility. Capitalization ceases and amortization of
        capitalized costs begins when the software product is commercially
        available for general release to customers. Amortization of capitalized
        computer software development costs is included in cost of revenue and
        is determined using the straight-line method over the remaining
        estimated economic life of the product, not to exceed five years.

            Software development costs capitalized were $282,000 and $564,000
        for the three months ended September 30, 2001 and 2000, respectively.
        Total amortization expense was $492,000 and $589,000 for the three
        months ended September 30, 2001 and 2000, respectively.

            For the nine months ended September 30, 2001 and 2000, software
        development costs capitalized were $584,000 and $1,580,000,
        respectively. Total amortization expense was $1,570,000 and $1,700,000
        for the nine months ended September 30, 2001 and 2000, respectively.

  5.    Investment in Avantium International B.V.

            On February 24, 2000, the Company licensed certain of its simulation
        software products to Avantium International B.V. ("Avantium") in
        exchange for 251,501 shares of Avantium preferred stock, valued at $2.5
        million, and 352,102 shares of Avantium common stock, valued at
        $349,000. The software license, which is perpetual in nature, gives
        Avantium the right to use the software in the development of new
        software products. Each share of preferred stock is convertible into
        common stock. Subject to certain restrictions, in the event that
        Avantium has not conducted an initial public offering (or been
        purchased) within five years, the Company and certain other holders of
        preferred shares may, at their option, have their shares redeemed by
        Avantium, for the greater of (i) the original purchase price plus 8%
        interest compounded annually plus any accrued and unpaid dividends
        whether or not declared, or (ii) the fair market value of the shares on
        an as-if-converted-into-common-shares-basis plus any accrued and unpaid
        dividends.

            Avantium was formed to develop high-speed experimentation and
        simulation ("HSE&S") technologies for application in new product and
        process development in pharmaceutical, petrochemical, fine chemical,
        biotechnology and polymers industries. Avantium expects to develop HSE&S
        technologies through in-house development and contract research at
        leading universities, hardware developers and informatics companies.
        Avantium has various investors, including Shell International Chemical,
        SmithKline Beecham, W.R. Grace, three major European universities and
        two venture capital firms.

            During the year ended December 31, 2000, the Company recognized
        software-licensing revenue of $2.9 million based on the fair value of
        the consideration received from Avantium. The fair value was established
        based on cash paid by other investors for their respective preferred and
        common stock interests in Avantium. The Company has delivered all
        elements of the software and has no other obligations to Avantium, other
        than standard warranty. The Company will account for its investment in
        Avantium using the cost method of accounting based on management's
        conclusion that the Company does not have significant influence with
        respect to the operations of Avantium. During the year ended December
        31, 2000, the Company also received and completed an additional $2.9
        million contract to make certain improvements and enhancements to the
        software on a best efforts basis for Avantium. The rates and margins in
        the contract were comparable to those the Company earns performing
        services for its existing customers.

            As a result of the experience with Avantium in 2000, the Company
        concluded that a combination of the relevant interests of the two
        companies would significantly increase the potential of both
        organizations. In addition, focusing the technical and marketing
        resources of Avantium and the GSE VirtualPlant team would produce
        significant cost savings. Accordingly, on March 6, 2001, the Company
        sold its VirtualPlant business to Avantium. Avantium purchased certain
        fixed assets and intellectual property (including BatchCAD and
        BatchWizard software products), obtained perpetual licenses to certain
        GSE Process software products, and employed certain personnel in both
        the US and the UK. GSE received 8% of Avantium's stock, thus increasing
        its holdings in Avantium to approximately 19%. Avantium and GSE will
        continue to work together in the marketplace and in product development
        so that common clients will be able to use Avantium's VirtualPlant
        technology to develop scalable products that will fit together at the
        manufacturing level with GSE's process control and simulation products.
        However, GSE is not obligated to provide any further support to
        Avantium.

            During the first quarter of 2001, the Company recognized a gain on
        the sale of its VirtualPlant business of $3.3 million, before income
        taxes. This gain was determined based on the estimated fair value of the
        Avantium stock received, based on an independent appraisal, net of the
        book value of the assets sold and the estimated costs to settle
        severance with employees terminated from GSE and other transaction
        expenses. GSE retains one seat on the supervisory board of Avantium.
        However, management has concluded that such seat does not provide the
        Company with significant influence. Accordingly, the Company will
        account for its investment in Avantium using the cost method. If a
        decline in fair value below cost is judged by management to be other
        than temporary, the cost basis will be written down to fair value as a
        new cost basis and the amount of the write-down will be included in
        earnings as a realized loss. Any new cost basis derived in this manner
        will not be changed for subsequent recoveries in fair value.

  6.    Long-term Debt

            The Company has a $10.0 million bank line of credit (the "Credit
        Facility") under which the Company and its subsidiaries, GSE Process
        Solutions, Inc. and GSE Power Systems, Inc., are jointly and severally
        liable as co-borrowers. The Credit Facility provides for borrowings to
        support working capital needs and foreign letters of credit ($2.0
        million sublimit). The line is collateralized by substantially all of
        the Company's assets and provides for borrowings up to 85% of eligible
        accounts receivable, 50% of eligible unbilled receivables and 40% of
        eligible inventory (up to a maximum of $1.2 million). GP Strategies
        Corporation, one of the Company's major stockholders, has provided a
        limited guarantee totaling $1.8 million. The interest rate on this line
        of credit is based on the bank's prime rate plus 0.75% (6.75% as of
        September 30, 2001), with interest only payments due monthly. At
        September 30, 2001, the Company's available borrowing base was
        approximately $10 million, of which approximately $8.1 million had been
        utilized. The Credit Facility expires on March 23, 2003.

            The Credit Facility requires the Company to comply with certain
        financial ratios and precludes the Company from paying dividends and
        making acquisitions beyond certain limits without the bank's consent. At
        September 30, 2001, the Company was in compliance with the covenants.

            In the fourth quarter of 2000, the Company issued a demand
        promissory note to ManTech International Corporation ("ManTech"), one of
        the Company's major stockholders, that allowed the Company to borrow up
        to $1.8 million at an interest rate of prime plus one percent. The
        promissory note was secured by the Company's pledge of its equity
        interest in Avantium, but such security interest was subordinate to the
        first lien thereon by the Company's bank. In the first quarter of 2001,
        the Company borrowed an additional $550,000 from ManTech and the
        promissory note was amended to increase the principal amount to $2.1
        million. Subsequently, in the first quarter of 2001, and with ManTech's
        approval, the Company issued a replacement promissory note in the amount
        of $2.1 million to ManTech pursuant to which the Company's obligations
        to ManTech became unsecured and the principal is payable over a two-year
        period, in equal installments, commencing April 1, 2004, with interest
        payments to commence monthly on July 1, 2001. The note permits ManTech
        to convert the principal into GSE convertible preferred stock at a
        conversion rate of $100 per share. ManTech agreed to subordinate the
        note to the Company's Credit Facility.

            In 2000, ManTech had provided $1.8 million in standby letters of
        credit to the bank as additional collateral for the Company's credit
        facility. On April 6, 2001, ManTech agreed to allow the Company's bank
        to draw upon the letters of credit, thus paying down a portion of the
        Company's bank debt in exchange for additional subordinated debt in the
        Company. Accordingly, the Company's promissory note to ManTech was
        amended to increase the amount to $3.9 million. As permitted by the
        note, ManTech elected to convert its debt into equity in the form of
        convertible preferred stock at the conversion rate of $100 per share.
        Thus, the Company expects to issue 39,000 shares of Series A preferred
        stock to ManTech in the fourth quarter 2001. The Company has determined
        that the conversion of this debt into preferred stock does not
        constitute a beneficial conversion. The Series A convertible preferred
        stock has no voting rights and will have a stated dividend rate of 6%
        per annum payable quarterly. Dividends will accumulate if not paid
        quarterly and interest will accrue at the stated rate on any unpaid
        dividends. ManTech at its discretion shall have the right to convert
        each share of Series A convertible preferred stock into GSE common stock
        at a purchase price of $2.645 per share at any time after a one-year
        holding period from the date of issuance. At the end of the third year
        from the date of issuance, the Series A convertible preferred stock
        automatically converts into GSE common stock. Prior to ManTech's
        conversion of the Series A convertible preferred stock to common stock,
        GP Strategies has the option to acquire 50% of the Series A convertible
        preferred stock for $1,950,000.

            On June 25, 2001, the Company issued an additional unsecured
        promissory note to ManTech that allowed the Company to borrow up to $1.0
        million at an interest rate of prime plus one percent. The note is
        subordinated to the Company's Credit Facility. The note and accrued
        interest may be repaid from the cash receipts of a public equity
        offering (see Note 12, Subsequent Events). If the offering is not
        completed, or does not provide sufficient cash to pay off the entire
        promissory note and accrued interest, the principal is payable over a
        two-year period, in equal installments, commencing April 1, 2004, with
        interest payments to commence monthly on January 1, 2002.




  7.    Letters of Credit

            As of September 30, 2001, the Company was contingently liable for
        approximately $503,000 under four letters of credit used as payment
        bonds on contracts, all of which were secured by cash deposits
        classified as restricted cash in the consolidated balance sheet.

  8.    Authorized Common Stock

             At a special shareholder's meeting on August 2, 2001, the Company's
       shareholders approved an amendment to the Certificate of Incorporation
       increasing GSE's authorized common stock by 10 million shares to a total
       of 18 million shares. With this new allocation of common stock, the
       Company intends to issue approximately 3.7 million shares of common as
       follows: (a) 1,474,480 shares to cover the exchange of $3.9 million of
       the ManTech subordinated debt into convertible preferred stock as
       discussed in Note 6, Long-term Debt, and (b) 2,219,701 shares for a
       rights offering to non-affiliated stockholders (see Note 12, Subsequent
       Events).

  9.    Income Taxes

            The Company's effective tax rate is based on its best current
        estimate of its expected annual effective tax rate. The difference
        between the statutory U.S. tax rate and the Company's effective tax rate
        for the quarters ended September 30, 2001 and 2000 is primarily due to
        the effects of foreign operations being taxed at different rates, state
        income taxes and in 2001 the impact of deferred tax assets expected to
        be realized in the current year which previously had not been recognized
        by the Company as a result of a valuation allowance. As of September 30,
        2001 and December 31, 2000, the aggregate deferred tax assets are
        recorded net of valuation allowances of approximately $4.8 million and
        $5.4 million, respectively. For the nine months ended September 30,
        2001, the Company reduced its valuation allowance by approximately
        $600,000. The Company continues to evaluate the likelihood of realizing
        its remaining deferred tax assets. However, management currently
        believes that the remaining amounts of the Company's deferred tax assets
        are more likely than not to be realized.

 10.    Segment Information

            The Company's two reportable segments are its core business units
        Process and Power. (The Company's VirtualPlant business was reported
        under the Process segment.) The Company is primarily organized on the
        basis of these two business units. The Company has a wide range of
        knowledge of control and simulation systems and the processes those
        systems are intended to improve, control and model. The Company's
        knowledge is concentrated heavily in the process industries, which
        include the chemicals, food & beverage, and pharmaceuticals fields, as
        well as in the power generation industry. The Process business unit is
        primarily engaged in process control and simulation in a variety of
        commercial industries. Contracts typically range from three to nine
        months. The Power business unit is primarily engaged in simulation for
        the power generation industry, with the vast majority of customers being
        in the nuclear power industry. Contracts typically range from 18 months
        to three years.

            The Company evaluates the performance of its business units
        utilizing "Business Unit Contribution", which is substantially
        equivalent to earnings before interest and taxes before allocating any
        corporate expenses.




            The table below presents information about the reportable segments:


                         

(in thousands)                       Three months ended September 30, 2001          Nine months ended September 30, 2001
                                  --------------------------------------------   --------------------------------------------
                                     Process        Power        Consolidated       Process        Power        Consolidated
Contract revenue                    $ 8,268        $ 5,555         $ 13,823       $ 17,744       $ 20,402         $ 38,146
                                  ============  =============  ===============   ============  =============  ===============
Business unit contribution          $ 2,159          $ (21)         $ 2,138        $ 2,434        $ 1,920          $ 4,354
                                  ============  =============  ===============   ============  =============  ===============

                                     Three months ended September 30, 2000          Nine months ended September 30, 2000
                                  --------------------------------------------   --------------------------------------------
                                     Process         Power        Consolidated       Process        Power        Consolidated
Contract revenue                    $ 6,694        $ 7,000         $ 13,694       $ 19,899       $ 22,220         $ 42,119
                                  ============  =============  ===============   ============  =============  ===============
Business unit contribution           $ (974)         $ 860           $ (114)      $ (1,721)       $ 3,646          $ 1,925
                                  ============  =============  ===============   ============  =============  ===============




            The Company sold its Belgian business in November 2000 and its
        VirtualPlant business in March 2001 (see Note 5, Investment in Avantium
        International B.V.). Whereas the Process segment contract revenue for
        the three months ended September 30, 2001 included no revenue from these
        divested businesses, the Process revenue for the three months ended
        September 30, 2000 included revenue of $1.5 million. For the nine months
        ended September 30, 2001 and 2000, Process revenue included $507,000 and
        $6.6 million, respectively, for these two divested businesses. The
        Process 2000 revenue also includes $2.9 million from a software-license
        sold to Avantium (see Note 5, Investment in Avantium International
        B.V.).

            Process business unit contribution for the three and nine months
        ended September 30, 2000 included losses of $1.7 million and $1.6
        million, respectively, from the two divested businesses. In 2001, the
        Process business unit contribution included a loss for VirtualPlant of
        $471,000 prior to its sale in March 2001.

            A reconciliation of segment business unit contribution to
        consolidated income (loss) before taxes is as follows:

                         

(in thousands)                                              Three months            Nine months
                                                        ended September 30,      ended September 30,
                                                      -------------------------    ---------------------------
                                                          2001          2000           2001           2000
                                                      -----------   -----------    -----------    ------------
Segment business unit contribution                      $ 2,138        $ (114)       $ 4,354         $ 1,925
Corporate expenses                                         (999)       (1,052)        (2,827)         (3,349)
Gain on disposition of assets                                -             -           3,273              -
Interest expense, net                                      (235)         (203)          (687)           (523)
                                                      -----------   -----------    -----------    ------------
  Income (loss) before income taxes                       $ 904      $ (1,369)       $ 4,113        $ (1,947)
                                                      ===========   ===========    ===========    ============




 11.    New Accounting Standards

            Effective January 1, 2001, the Company adopted Financial Accounting
        Standards No. 133, "Accounting for Derivative Instruments and Hedging
        Activities," and No. 138 "Accounting for Certain Derivative Instruments
        and Certain Hedging Activities." These statements require that an entity
        recognize all derivatives as either assets or liabilities in the
        statement of financial position and measure those instruments at fair
        value. The adoption of these standards, including the valuation of
        derivative instruments outstanding on the effective date, did not have a
        material impact on the Company's consolidated financial statements.

            On July 20, 2001, the FASB issued Statement No. 141, "Business
        Combinations," and Statement No. 142, "Goodwill and Other Intangible
        Assets." Statement 141 requires that all business combinations be
        accounted for under a single method -- the purchase method. Use of the
        pooling-of-interests method no longer is permitted. Statement 141
        requires that the purchase method be used for business combinations
        initiated after June 30, 2001. Statement 142 requires that goodwill no
        longer be amortized to earnings, but instead be reviewed for impairment
        at least annually. The amortization of goodwill ceases upon adoption of
        the Statement, which for calendar year-end companies, will be January 1,
        2002.

            In October 2001, The FASB issued Statement No. 144, "Accounting for
        the Impairment or Disposal of Long-Lived Assets." The provisions of this
        statement are effective for fiscal years beginning after December 15,
        2001. The Company does not expect the adoption of this standard to have
        a material impact on the Company's consolidated financial statements.

 12.    Subsequent Events

            On October 25, 2001, the Company filed a final registration
        statement with the SEC for a fixed price rights offering which became
        effective on October 29, 2001. In early November, the Company
        distributed to non-affiliated holders of its common stock, based on an
        October 26, 2001 record date, subscription rights to purchase additional
        shares of common stock at a subscription price of $2.53 per share. Each
        non-affiliated holder of its common stock received .711 subscription
        rights for each share held as of the record date. Shareholders have
        until the expiration date of December 14, 2001 to subscribe to the
        offering. Rights holders who exercise their rights in full will also
        have the opportunity to subscribe for additional shares of common stock
        that are not purchased by other eligible rights holders.

            The pricing for the rights offering was approved by the Company's
        board of directors on May 30, 2001 at 10% above the market price on June
        15, 2001. The market price on June 15, 2001 was $2.30 per share. A 10%
        premium equals a rights offering price of $2.53 per share, 5% below the
        price per share of common stock issuable upon conversion of the
        preferred stock to be issued to ManTech. If all shares offered are sold,
        the estimated proceeds to GSE would be approximately $5.6 million before
        the fees and expenses related to the offering. The principal purposes of
        the offering are for repayment of a $1 million loan from ManTech (see
        Note 6, Long-term Debt), working capital, strategic acquisitions,
        capital expenditures and general corporate purposes.

            Avantium International BV, of which GSE owns approximately 19% (see
        Note 5, Investment in Avantium BV) requires a significant amount of
        additional capital to continue its business operations. We have been
        advised that, under the terms of a pending financing, GSE's ownership
        will be diluted.





                       GSE SYSTEMS, INC. AND SUBSIDIARIES
                                    FORM 10-Q
                  Nine Months ended September 30, 2001 and 2000

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

Cautionary Statement Regarding Forward-Looking Statements

         This Form 10-Q contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are subject to the
safe harbors created by those Acts. These statements include the plans and
objectives of management for future operations, including plans and objectives
relating to the development of the Company's business in the domestic and
international marketplace. All forward-looking statements involve risks and
uncertainties, including, without limitation, risks relating to the Company's
ability to enhance existing software products and to introduce new products in a
timely and cost-effective manner, reduced development of nuclear power plants
that may utilize the Company's products, a long pay-back cycle from the
investment in software development, uncertainties regarding the ability of the
Company to grow its revenues and successfully integrate operations through
expansion of its existing business and strategic acquisitions, the ability of
the Company to respond adequately to rapid technological changes in the markets
for process control and simulation software and systems, significant
quarter-to-quarter volatility in revenues and earnings as a result of customer
purchasing cycles and other factors, dependence upon key personnel, the ability
of the Company to meet bank financial covenants and manage cash needs, and
general market conditions and competition. See "Risk Factors," in Part I of the
Company's Form 10-K for the year-ended December 31, 2000. The forward-looking
statements included herein are based on current expectations that involve
numerous risks and uncertainties as set forth herein, the failure of any one of
which could materially adversely affect the operations of the Company. The
Company's plans and objectives are also based on the assumptions that market
conditions and competitive conditions within the Company's business areas will
not change materially or adversely and that there will be no material adverse
change in the Company's operations or business. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could be inaccurate and there can, therefore, be no assurance that
the forward-looking statements included in this Form 10-Q will prove to be
accurate. In light of the significant uncertainties inherent in forward-looking
statements, any such information included herein should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.

General Business Environment

         GSE Systems, Inc. ("GSE Systems", "GSE" or the "Company") develops and
delivers business and technology solutions by applying process control,
simulation software, systems and services to the energy, process and
manufacturing industries worldwide. The Company's solutions and services assist
customers in improving quality, safety and throughput; reducing operating
expenses; and enhancing overall productivity.

         Power Simulation Business

         The Company's Power Simulation Business Unit ("Power") is continuing
its efforts to expand its leadership in nuclear simulation technology to the
fossil simulation marketplace. In the past year, GSE has released its "G-Suite"
software tools which target fossil simulation applications. These new tools
elevate the level of simulation beyond traditional training to allow the
operator to optimize plant performance. Following a concerted global marketing
effort, GSE has been awarded over $9 million of new orders for six fossil
simulators in the United States and India in the last twelve months, including
an award from American Electric Power in 2001 for two full-scope fossil training
simulators.

          The deregulation of the electric power industry and the California
energy crisis have underscored the importance of efficient and reliable
operations of power stations. The use of simulation to address these issues has
resulted in new opportunities for GSE to improve the simulation fidelity of
existing simulators and the supply of new simulators around the world. While GSE
simulators are primarily utilized for power plant operator training, the uses
are expanding to include engineering, plant modification studies, and operation
efficiency improvements for both nuclear and fossil utilities. During plant
construction, simulators are used to test control strategies and ensure on-time
start-up. After commissioning, the same tools can be used to increase plant
availability and optimize plant performance for the life of the facility.

         President Bush's National Energy Policy encourages the improvement of
nuclear plant operating performance from 90%, the current level, to 92%. In the
second quarter of 2001, GSE released several products using advanced signal
analysis techniques to help nuclear plants achieve this increase in operating
performance. GSE's Pegasus Plant Surveillance and Diagnosis System(TM) helps
improve plant availability, safety and economy. Pegasus is a software package
for semi-automatic plant surveillance and diagnostics and enables site engineers
to perform detailed analysis for specified component faults, allowing the
identification of degraded performance and replacement of components before they
fail. SensBase(TM) provides comprehensive sensor test services, thus ensuring
that changes in transmitters and other instruments do not jeopardize the
function of the nuclear plant protection systems. BRUS(TM), a noise analysis
program package, is a collection of signal analysis tools which allow users to
detect developing abnormalities in the plant.

         The Company recently entered into two strategic marketing alliances
which are expected to help expand the Power business. The first alliance is with
General Physics Corporation, the leading supplier of operator instructional
training programs for the Power industry. Whereas GSE is the leading
manufacturer of operating training simulators for the Power industry, the
alliance with General Physics Corporation will allow a more encompassing
solution to both companies' client base and strengthen their respective product
lines. In addition to cooperating in marketing of individual products, the
companies will combine some of General Physics' extensive training materials and
programs with GSE's power plant simulation models to provide truly interactive
and adaptive total training solutions. GSE will also help sell and
distribute General Physics' GFE product to GSE's customer base.

         The second alliance is with Powergen's Simulator Training Systems
Group, a premier supplier of simulation systems and technology for Combined
Cycle Gas Turbine (CCGT) power plants. The Simulator Training Systems Group has
developed a range of distributed control system emulation tools necessary to
effectively simulate the control systems for fossil and nuclear power plants.
Power has the extensive knowledge, models and tools necessary to simulate the
functionality of power plant systems. By combining the tool sets and jointly
marketing this capability worldwide, the companies believe they can both
significantly expand their offering and provide greater value to users in the
nuclear, fossil and CCGT power industry.

         The Company is also looking to leverage the technology it acquired a
few years ago for plant access control and intrusion detection in light of
recent security concerns at nuclear plants and other sensitive locations. The
Company has implemented its software at various nuclear power plants in the US,
and sees applications at other facilities. The system is the command and control
center that ties together card readers, retinal scanners, closed circuit TV and
other field devices used for intrusion detection and personnel access control.


         Process Control Business

         In order to return the Company's Process Control Business Unit
("Process") to profitability, the Company implemented a restructuring plan in
2000 that included personnel reductions, the outsourcing of Process'
manufacturing and assembly operations, and the November, 2000 sale of Process'
unprofitable European operations based in Belgium. The restructuring was
completed in the first quarter 2001 with the sale of the Business Unit's
VirtualPlant technology and assets to Avantium International BV ("Avantium") in
exchange for Avantium stock. Avantium and GSE expect to continue to work
together in the marketplace and in product development so that common clients
will be able to use Avantium's VirtualPlant technology to develop scalable
products that will fit together at the manufacturing level with GSE's process
control and simulation products, thus speeding up market introduction and
reducing the overall life cycle costs.

         Process released the latest version, 10.2, of its D/3 Distributed
Control System(TM) software in December 2000. The new release furthers GSE's
strategy of providing an open system able to seamlessly communicate with a
variety of third-party hardware and software. By allowing maximum flexibility in
selection of Input-Output systems, customers can take advantage of the latest
control technology without costly replacement of their plant hardware. In
September 2001, the Company received a $2.8 million contract from Archer Daniels
Midland (ADM) to purchase upgrades for all of ADM's 24 D/3 systems worldwide to
version 10.2. In addition, the Company received a $6.7 million three-year
contract from Westinghouse Savannah River Company for D/3 version 10.2 hardware,
licenses and services for a new Tritium Extraction processing facility.

         To expand within its traditional customer base, and gain new customers,
Process embarked upon a program to modify its process control module (PCM) to
increase its operating speed and reduce its manufacturing costs. This will allow
the Company to bridge the cost gap between programmable logic controllers (PLCs)
and the distributed control systems while providing the increased performance of
a full-function distributed control system. Products based upon these
modifications will start to be released in the fourth quarter of 2001 and
continue into 2002. The Company has also initiated a campaign to find expanded
distribution channels for its new products.




Results of Operations

         The following table sets forth the results of operations for the
periods presented expressed in thousands of dollars and as a percentage of
revenues:


                         
(in thousands)                        Three months ended September 30,           Nine months ended September 30,
                                   2001        %         2000        %        2001        %        2000        %
                                  ---------   -------   ---------  --------  ---------  --------  ---------   -------
Contract revenue                  $13,823    100.0%     $13,694    100.0%    $38,146    100.0%    $42,119    100.0%
Cost of revenue                     9,469     68.5 %     10,022     73.2%     27,538     72.2 %    29,460     69.9 %
                                  ---------   -------   ---------  --------  ---------  --------  ---------   -------
Gross profit                        4,354     31.5 %      3,672     26.8 %    10,608     27.8 %    12,659     30.1 %
                                  ---------   -------   ---------  --------  ---------  --------  ---------   -------
Operating expenses:
  Selling, general
  and administrative                2,836     20.5 %      4,517     33.0 %     8,134     21.3 %    12,915     30.7 %
  Depreciation and amortization       364      2.6 %        404      3.0 %     1,065      2.8 %     1,273      3.0 %
                                  ---------   -------   ---------  --------  ---------  --------  ---------   -------
Total operating expenses            3,200     23.1 %      4,921     35.9 %     9,199     24.1 %    14,188     33.7 %
                                  ---------   -------   ---------  --------  ---------  --------  ---------   -------
Operating income (loss)             1,154      8.3 %     (1,249)    (9.1)%     1,409      3.7 %    (1,529)    (3.6)%

Gain on sale of assets                -        0.0 %         -       0.0 %     3,273      8.6 %        -       0.0 %
Interest expense, net                (235)    (1.7)%       (203)    (1.5)%      (687)    (1.8)%      (523)    (1.2)%
Other income (expense), net           (15)    (0.1)%         83      0.6 %       118      0.3 %       105      0.2 %
                                  ---------   -------   ---------  --------  ---------  --------  ---------   -------
Income(loss)before income taxes       904      6.5 %     (1,369)   100.0%      4,113     10.8 %    (1,947)    (4.6)%

Provision(benefit)for income taxes    303      2.2 %       (500)    (3.7)%     1,330      3.5 %      (710)    (1.7)%
                                  ---------   -------   ---------  --------  ---------  --------  ---------   -------
Net income (loss)                   $ 601      4.3 %     $ (869)    (6.3)%    $2,783      7.3 %   $(1,237)    (2.9)%
                                  =========   =======   =========  ========  =========  ========  =========   =======





         Contract Revenue. Revenue for the three and nine months ended September
30, 2001 amounted to $13.8 million and $38.1 million, respectively, as compared
with revenue of $13.7 million and $42.1 million for the three and nine months
ended September 30, 2000.

         The Process business unit's revenue was $8.3 million for the third
quarter 2001, compared with $6.7 million for the third quarter 2000; revenue for
the nine months ended September 30, 2001 and 2000 was $17.7 million and $19.9
million, respectively. The Company sold its unprofitable Belgian subsidiary, GSE
Process Solutions N.V., on November 30, 2000 to Newton Integrated Services B.V.
of the Netherlands, and sold its VirtualPlant technology and assets on March 6,
2001 to Avantium. Whereas revenues for the three months ended September 30, 2001
included no revenues from these divested businesses, the revenues for the three
months ended September 30, 2000 included revenues of $1.5 million. For the nine
months ended September 30, 2001 and 2000, Process revenues included $507,000 and
$6.6 million, respectively, for these two divested businesses. Included in the
2000 revenues was $2.9 million from the sale of licenses for five of GSE's
software products to Avantium International B.V., in exchange for an equity
interest in Avantium (see Note 5, Investment in Avantium International B.V. in
the Notes to Consolidated Financial Statements). Excluding the revenue for
these divested businesses, the Process business unit's revenue increased $3.1
million, or 60%, in the third quarter 2001 as compared with the prior year, and
increased $3.9 million , or 29%, for the nine months ended September 30, 2001 as
compared to the same period in the prior year. The increase in Process'
continuing business revenue is mainly attributable to two significant orders
received from Westinghouse Savannah River Corporation in the third quarter 2001.

           The Power business unit revenue decreased 20.6% in the third
quarter, from $7.0 million in 2000 to $5.6 million in 2001. Revenue for the nine
months ended September 30, 2001 and 2000 was $20.4 million and $22.2 million,
respectively. The decrease in revenue is attributable to the completion of
several large international projects in 2001 and fewer upgrades for simulators
in the United States in 2001 as compared to 2000.

                  Gross Profit. Gross profit totaled $4.4 million (31.5% of
revenue) for the quarter ended September 30, 2001, as compared with $3.7 million
(26.8% of revenue) for the same period in 2000. The increase in gross margin as
a percentage of revenue is largely due to the restructuring of the Process
business unit, including the sale of the Belgian subsidiary and VirtualPlant
businesses, the outsourcing of the Process manufacturing/assembly operation in
November 2000, and personnel reductions.

         For the nine months ended September 30, 2001 and 2000, gross profit
decreased from $12.7 million (30.1%) in 2000 to $10.6 million (27.8%) in 2001.
The gross profit and gross profit margins for 2000 reflect the software licenses
sold to Avantium in the first quarter 2000. Excluding the gross profit from sale
of software licenses to Avantium the gross profit margin for 2000 was 24.9%.

         Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses totaled $2.8 million in the quarter ended
September 30, 2001, a 37.2% decrease from the $4.5 million for the same period
in 2000. SG&A expenses for the nine months ended September 30, 2001 decreased
37.0% to $8.1 million as compared to $12.9 million for the same period in the
prior year. The decreases in SG&A reflect reduced sales, marketing and corporate
administration headcount, and lower net research and product development
expenditures ("R&D"), as discussed below.

         Gross R&D totaled $499,000 in the third quarter of 2001, as compared
with $1.1 million in the same period of 2000. Capitalized software development
costs totaled $282,000 and $564,000 for the third quarter of 2001 and 2000,
respectively. Accordingly, net R&D, expensed and included in SG&A, was $217,000
and $536,000 for the third quarters of 2001 and 2000, respectively. The
Company's R&D expenditures were reduced significantly in 2001 due to the
completion of three major development projects: VPbatch(TM), the Windows NT
version of its FlexBatch(R) Recipe and Process Management software; initiatives
to improve product ease of use of SimSuite Pro(TM), its process simulation
product; and the release of version 10.2 of the D/3 Distributed Control System
in December 2000.

         Similar reductions in R&D spending have occurred in the nine months
ending September 30, 2001 versus September 30, 2000. Gross R&D spending in 2001
totaled $1.2 million versus $3.3 million in 2000; capitalized software
development costs totaled $584,000 in 2001 versus $1.6 million in 2000; and net
R&D, expensed and included in SG&A, was $624,000 in 2001 versus $1.7 million in
2000. R&D expenditures in 2001 are mainly related to improvements in the process
control module for the Process D/3 system and the development of a high
availability server system.

         Depreciation and Amortization. Depreciation expense totaled $197,000
and $267,000 during the quarters ended September 30, 2001 and 2000,
respectively. For the nine months ended September 30, 2001 and 2000,
depreciation expense was $562,000 and $888,000, respectively. The decrease in
depreciation in 2001 is primarily due to disposals of fixed assets as the
Company restructured its operations and divested certain businesses.

         Amortization  of goodwill was $167,000 and $137,000 during the three
months ended September 30, 2001 and 2000, respectively. During the nine months
ended September 30, 2001 and September 30, 2000, amortization expense was
$503,000 and $394,000, respectively. The increase in amortization in 2001
reflects the increase in goodwill due to payments made for contingent
consideration for prior year acquisitions.

         Operating Income (Loss). The Company had operating income of $1.2
million (8.3% of revenue) in the third quarter 2001, compared with an operating
loss of $1.2 million (9.1% of revenue) for the same period in 2000. For the nine
months ended September 30, 2001 and September 30, 2000, operating income (loss)
was $1.4 million or 3.7% of revenue and ($1.5) million or (3.6)% of revenue,
respectively.

         Excluding the operating results of the divested businesses, the
Company's operating income for the third quarter 2001 was $1.2 million compared
with $722,000 for the third quarter 2000 and for the nine months ended September
30, 2001 was $1.9 million compared with $810,000. The Company attributes its
business restructuring initiatives for the improvement in operating income of
its remaining businesses.

          Gain on Sale of Assets. On March 6, 2001, the Company sold its
VirtualPlant business technology and assets to Avantium. GSE received 8% of
Avantium's stock, thus increasing its holdings in Avantium to approximately 19%,
and recognized a gain on the sale of $3.3 million, before income taxes. This
gain was determined based on the estimated fair market value of the Avantium
stock received, based on an independent appraisal, less the book value of the
assets sold, approximately $700,000 in severance costs payable to certain former
employees of VirtualPlant that were not hired by Avantium (these amounts will be
paid during the balance of 2001), and other transaction expenses.

         Interest Expense, Net. Net interest expense increased to $235,000 for
the quarter ended September 30, 2001, from $203,000 for the same period in 2000.
For the nine months ended September 30, 2001 and September 30, 2000, net
interest expense totaled $687,000 and $523,000, respectively. These increases
are primarily attributable to an increase in the Company's average debt
outstanding during the 2001 period in order to fund working capital
requirements.

         Other Income (Expense), Net. Other income (expense) mainly reflects the
receipt of $147,000 equity distribution from the Company's liquidated Joint
Venture in China (this investment was written off in a prior year) offset by net
foreign currency transaction losses.

         Provision for Income Taxes. The Company's effective tax rate is based
on the best current estimate of its expected annual effective tax rate. The
difference between the statutory U.S. tax rate and the Company's effective tax
rate for the quarters ended September 30, 2001 and 2000 is primarily due to the
effects of foreign operations being taxed at different rates, state income taxes
and in 2001 the impact of deferred tax assets expected to be realized in the
current year which previously had not been recognized by the Company as a result
of a valuation allowance. As of September 30, 2001 and December 31, 2000, the
aggregate deferred tax assets are recorded net of valuation allowances of
approximately $4.8 million and $5.4 million, respectively. For the nine months
ended September 30, 2001, the Company reduced its valuation allowance by
approximately $600,000. The Company continues to evaluate the likelihood of
realizing its remaining deferred tax assets.

Liquidity and Capital Resources

         As of September 30, 2001, the Company's cash and cash equivalents
totaled $977,000, compared to $1,694,000 at September 30, 2001. The decrease in
cash from September 30, 2000 to September 30, 2001 was mainly attributable to
cash used in operating activities and investing activities partially offset by
cash provided by financing activities.

         Cash from operating activities. Net cash used in operating activities
was $1.5 million and $1.3 million for the nine months ended September 30, 2001
and 2000, respectively. The gain on the Company's sale of its VirtualPlant
technology and assets to Avantium International B.V. in March 2001 ($3.3
million) was a non-monetary exchange that had no impact on the Company's
operating cash flow in 2001. Likewise, the Company's $2.9 million licensing of
software to Avantium in the first quarter 2000 for an equity stake in Avantium
was also a non-monetary transaction. Significant changes in the Company's assets
and liabilities in 2001 included an increase in contract receivables of $4.3
million, a $4.2 million reduction in accounts payable and accrued expenses, and
a $4.5 million increase in billings in excess of revenues earned.

         Cash used in investing activities. Net cash used in investing
activities for the first nine months of 2001 was $914,000, including $584,000 of
capitalized software development costs and $330,000 for capital expenditures.
For the comparable period of 2000, net cash used in investing activities was
$1,969,000, comprised of $1,580,000 of capitalized software development costs
and $389,000 of capital expenditures. The decrease in capitalized software costs
was due to the completion of several development projects.

         Cash used in financing activities. Cash used in financing activities
was $1.9 million in the nine month period ended September 30, 2001 as compared
to cash generated from financing activities of $2.4 million in the nine month
period ended September 30, 2000. In 2001, the Company reduced its borrowings
under its bank line of credit by $1.1 million to a total of $8.1 million (versus
an increase in the Company's bank line of credit of $2.2 million in 2000), but
increased its borrowings from ManTech by $3.4 million to a total of $4.9
million.In 2000, GSE generated $500,000 from the sale of stock to ManTech.

         Other. The Company has a $10.0 million bank line of credit (the "Credit
Facility") under which the Company and its subsidiaries, GSE Process Solutions,
Inc. and GSE Power Systems, Inc., are jointly and severally liable as
co-borrowers. The Credit Facility provides for borrowings to support working
capital needs and foreign letters of credit ($2.0 million sublimit). The line is
collateralized by substantially all of the Company's assets and provides for
borrowings up to 85% of eligible accounts receivable, 50% of eligible unbilled
receivables and 40% of eligible inventory (up to a maximum of $1.2 million). GP
Strategies Corporation, a major stockholder, has provided a limited guarantee
totaling $1.8 million. The interest rate on this line of credit is based on the
bank's prime rate plus 0.75% (6.75% as of September 30, 2001), with interest
only payments due monthly. At September 30, 2001, the Company's available
borrowing base was approximately $10 million, of which approximately $8.1
million had been utilized.

         The Credit Facility requires the Company to comply with certain
financial ratios and precludes the Company from paying dividends and making
acquisitions beyond certain limits without the bank's consent. At September 30,
2001, the Company was in compliance with the bank covenants.

          In the fourth quarter of 2000, the Company had issued a demand
promissory note to ManTech that allowed the Company to borrow up to $1.8 million
at an interest rate of prime plus one percent. The promissory note was secured
by the Company's pledge of its equity interest in Avantium, but such security
interest was subordinate to the first lien thereon by the Company's bank. In the
first quarter of 2001, the Company borrowed an additional $550,000 from ManTech
and the promissory note was amended to increase the principal amount to $2.1
million. Subsequently, in the first quarter of 2001, and with ManTech's
approval, the Company issued a replacement promissory note in the amount of $2.1
million to ManTech pursuant to which the Company's obligations to ManTech became
unsecured and the principal is payable over a two-year period, in equal
installments, commencing April 1, 2004, with interest payments to commence
monthly on July 1, 2001. The note permits ManTech to convert the principal into
GSE convertible preferred stock at a conversion rate of $100 per share. ManTech
agreed to subordinate the note to the Company's credit facility.

         In 2000, ManTech provided $1.8 million in standby letters of credit to
the bank as additional collateral for the Company's Credit Facility. On April 6,
2001, ManTech agreed to allow the Company's bank to draw upon ManTech's $1.8
million letter of credit which supported the Company's credit facility, thus
paying down a portion of the Company's bank debt in exchange for additional
subordinated debt in the Company. Accordingly, the Company's promissory note to
ManTech was amended to increase the amount to $3.9 million. As permitted by the
note, ManTech has elected to convert its debt into equity in the form of Series
A convertible preferred stock at the conversion rate of $100 per share. Thus,
the Company expects to issue 39,000 shares of Series A preferred stock to
ManTech in the fourth quarter 2001. The Company has determined that the
conversion of this debt into preferred stock does not constitute a beneficial
conversion. The Series A convertible preferred stock has no voting rights and
will bear dividends at the rate of 6% per annum payable quarterly. Dividends
will accumulate if not paid quarterly and compounded interest will accrue on any
unpaid dividends. ManTech at its discretion shall have the right to convert each
share of Series A convertible preferred stock into GSE common stock at a
purchase price of $2.645 per share at any time after a one-year holding period
from the date of issuance. At the end of the third year from the date of
issuance, the Series A convertible preferred stock automatically converts into
GSE common stock. Prior to ManTech's conversion of the Series A convertible
preferred stock to common stock, GP Strategies has the option to acquire 50% of
the Series A convertible preferred stock for $1,950,000.

         At a special shareholder's meeting on August 2, 2001, the Company's
shareholders approved an amendment to the Certificate of Incorporation
increasing GSE's authorized common stock by 10 millions shares to a total of 18
million shares. With this new allocation of common stock, the Company intends to
issue approximately 3.7 million shares of common as follows: (a) 1,474,480
shares to cover the exchange of $3.9 million of the ManTech subordinated debt
into convertible preferred stock as discussed above, and (b) 2,219,701 shares
for a rights offering to non-affiliated stockholders.

         On October 25, 2001, the Company filed a final registration statement
with the SEC for a fixed price rights offering which became effective on October
29, 2001. In early November, the Company distributed to non-affiliated holders
of its common stock, based on an October 26, 2001 record date, subscription
rights to purchase additional shares of common stock at a subscription price of
$2.53 per share. Each non-affiliated holder of its common stock received .711
subscription rights for each share held as of the record date. Shareholders have
until the expiration date of December 14, 2001 to subscribe to the offering.
Rights holders who exercise their rights in full will also have the opportunity
to subscribe for additional shares of common stock that are not purchased by
other eligible rights holders.

         The pricing for the rights offering was approved by the Company's board
of directors on May 30, 2001 at 10% above the market price on June 15, 2001. The
market price on June 15, 2001 was $2.30 per share. A 10% premium equals a rights
offering price of $2.53 per share, 5% below the price per share of common stock
issuable upon conversion of the preferred stock to be issued to ManTech. If all
shares offered are sold, the estimated proceeds to GSE would be approximately
$5.6 million before the fees and expenses related to the offering. The principal
purposes of the offering are for repayment of a $1 million loan from ManTech
(see below), working capital, strategic acquisitions, capital expenditures and
general corporate purposes.

         On June 25, 2001, the Company issued an additional unsecured promissory
note to ManTech that allowed the Company to borrow up to $1.0 million at an
interest rate of prime plus one percent. The Company used the loan proceeds for
working capital purposes. The note is subordinated to the Company's credit
facility. The note and accrued interest may be repaid from the cash receipts of
the contemplated rights offering. If the rights offer is not completed, or does
not provide sufficient cash to pay off the entire promissory note and accrued
interest, the principal is payable over a two period, in equal installments,
commencing April 1, 2004, with interest payments to commence monthly on January
1, 2002.

         The Company has undertaken a number of initiatives during 2000 and 2001
to improve operating results and cash flows. Management believes the initiatives
undertaken will enable the Company to maintain compliance with the bank
financial covenants as well as provide sufficient cash flow to meet the
Company's obligations as they become due.






Item 3.  Quantitative and Qualitative Disclosure about Market Risk

         The Company's market risk is principally confined to changes in foreign
currency exchange rates and potentially adverse effects of differing tax
structures. The Company's exposure to foreign exchange rate fluctuations arises
in part from inter-company accounts in which costs incurred in one entity are
charged to other entities in different foreign jurisdictions. The Company is
also exposed to foreign exchange rate fluctuations as the financial results of
all foreign subsidiaries are translated into U.S. dollars in consolidation. As
exchange rates vary, those results when translated may vary from expectations
and adversely impact overall expected profitability.

         The Company is also subject to market risk related to the interest
rates on its existing line of credit. As of September 30, 2001, such interest
rates are based on the bank's prime rate plus 75 basis-points.

          As of September 30, 2001, $13 million of the Company's debt was
subject to variable interest rates. A 100 basis-point change in such rates
during the quarter and nine months ended September 30, 2001 would have increased
the Company's interest expense by approximately $28,000 and $82,000,
respectively.




PART II - OTHER INFORMATION


Item 1.  Legal Proceedings


         In accordance with its conduct in the ordinary course of business,
certain actions and proceedings are pending to which the Company is a party. In
the opinion of management, the aggregate liabilities, if any, arising from such
actions are not expected to have a material adverse effect on the financial
condition of the Company.

Item 2.  Changes in Securities and Use of Proceeds

         None

Item 3.  Defaults Upon Senior Securities

         None

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


                         
                             Proposal                              For         Against       Abstain      Votes Withheld
       ------------------------------------------------------  ------------   -----------   -----------   -------------

1)     Amendment to the Company's Certificate                   3,807,790      418,645         300             --
         of Incorporation increasing the Company's
         authorized common stock from
         8,000,000 shares to 18,000,000 shares

2)     Approve an amendment to the Company's                    2,667,591      472,774         485         1,085,885
         1995 Long-Term Incentive Plan




Item 5.  Other Information

         None

Item 6.  Exhibits and Reports on Form 8-K

         (a)  Exhibits

         None

         (b)  Reports on Form 8-K

        The Company filed a report on Form 8-K effective July 31, 2001 regarding
        the following transactions:

                (a) On January 1, 1999, GSE Systems, Inc. entered into
            employment agreements with Directors Jerome I. Feldman, George J.
            Pedersen, Scott N. Greenberg, and John A. Moore, Jr. to serve as
            executive employees, providing strategic planning in acquisitions
            and divestitures, management of financing arrangements, and customer
            and other business development activities.

                (b) On March 10, 2000, GSE Systems, Inc. entered into certain
            change of control agreements with the following current employees:
            Jerry Jen, President and COO, Jeffery G. Hough, Senior Vice
            President and Chief Financial Officer, Gill R. Grady, Senior Vice
            President, and Dion Freedman, Vice President (Process Business).


                (c) On May 3, 2001, GSE Systems, Inc. established an Executive
            Compensation Plan for Jerry Jen, who was appointed President on
            March 27, 2001. This report on Form 8-K included the Executive
            Compensation Plan between GSE Systems, Inc. and Jerry Jen filed as
            an exhibit.

                (d) On June 25, 2001, GSE Systems, Inc. issued a promissory note
            to ManTech International Corporation, one of its largest
            stockholders, in the amount of $1 million at an interest rate of
            prime plus 1% and used the loan proceeds for working capital
            purposes. This report on Form 8-K included the Promissory Note
            issued by GSE Systems, Inc. to ManTech International Corporation
            dated June 25, 2001 filed as an exhibit.

        The Company filed a report on Form 8-K effective August 15, 2001
        regarding the following transactions:


                (a) On September 13, 1999, GSE Systems, Inc. issued Warrant
            Agreements to stockholders GP Strategies Corporation and ManTech
            International Corporation in consideration for their respective
            guarantees/support services in connection with Registrant's credit
            facilities. The essential terms and conditions of each Warrant
            Agreement are as follows: (1) number of warrants: 150,000 shares of
            GSE common stock; (2) warrant price: exercise price of $2.375 per
            share (reflecting the market price as of the date the board of
            directors approved the granting of the warrants); and (3) term of
            warrant: through August 16, 2003. This report on Form 8-K included
            the Warrant Agreement No. 1 dated September 13, 1999 between GSE
            Systems, Inc. and ManTech International Corporation; Warrant
            Agreement No. 2 dated September 13, 1999 between GSE Systems, Inc.
            and GP Strategies Corporation filed as exhibits.


                (b) On April 6, 2001, GSE Systems, Inc. entered into the Allonge
            and First Modification to Replacement Promissory Note with ManTech
            International Corporation. The essential terms and conditions of
            this Allonge are as follows: (1) ManTech had previously guaranteed
            the Registrant's credit facility up to $1.8 million, in the form of
            two separate letters of credit; (2) ManTech agreed to allow the
            Registrant's bank to draw down the full amount of the letters of
            credit, thereby reducing Registrant's debt level with the bank; and
            (3) as a result, the principal amount of the loan from ManTech
            increased by $1.8 million, from $2.1 million to $3.9 million. This
            report on Form 8-K included the Allonge and First Modification to
            Replacement Promissory Note dated April 6, 2001 between GSE Systems,
            Inc. and ManTech International Corporation filed as an exhibit.







                                   SIGNATURES



    Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


Date:  November 14, 2001                      GSE SYSTEMS, INC.



                                            /S/ CHIN-OUR JERRY JEN
                                                Chin-Our Jerry Jen
                                          Chief Operating Officer and President
                                               (Principal Executive Officer)



                                             /S/ JEFFERY G. HOUGH
                                                 Jeffery G. Hough
                              Senior Vice President and Chief Financial Officer
                                (Prinipal Financial and Accounting Officer)