| (Mark One)                 |                                                                                                                                       |
|----------------------------|--------------------------------------------------------------------------------------------------------------------------------------------|
| [ X ]                      | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2010             |
|                       |  OR                                                                                                                                   |
| [    ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from   to ____  |

|   | GSE Systems, Inc.                                      |   |
|--------|--------------------------------------------------------|--------|
|   | (Exact name of registrant as specified in its charter) |   |

| Delaware                                        |   | 52-1868008                                    |
|-------------------------------------------------|--------|-----------------------------------------------|
| (State of incorporation)                        |   | (I.R.S. Employer Identification Number)  |
| 1332 Londontown Blvd., Suite 200, Sykesville MD |   | 21784                                         |
| (Address of principal executive offices)        |   | (Zip Code)                                    |

| Title of each class          |   | Name of each exchange on which registered |
|------------------------------|--------|-------------------------------------------|
| Common Stock, $.01 par value |   | NYSE Amex Stock Exchange                  |

| Large accelerated filer  [  ] | Accelerated filer  [ X ] | Non-accelerated filer [ ]                     | Smaller reporting company [ ] |
|---------------------------------------------------|------------------------------------|-----------------------------------------------|-------------------------------|
|                                              |                               | (Do not check if a smaller reporting company) |                          |

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| PART I         |                                                                                                                                                         | Page     |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| Item 1.        | Business                                                                                                                                                     |  4  |
| Item 1A.       | Risk Factors                                                                                                                                                 | 21       |
| Item 1B.       | Unresolved Staff Comments                                                                                                                                    | 26       |
| Item 2.        | Properties                                                                                                                                                   | 26       |
| Item 3.        | Legal Proceedings                                                                                                                                            | 27       |
| Item 4.        | Removed and Reserved                                                                                                                                    | 27       |
| PART II        |                                                                                                                                                         |     |
| Item 5.        | Market for Registrant’s Common Equity,  Related      Stockholder Matters, and Issuer Purchases of Equity Securities |  27 |
| Item 6.        | Selected Financial Data                                                                                                                                      | 31       |
| Item 7.        | Management’s Discussion and Analysis of Financial Conditionand Results of Operations                                                                   |  32 |
| Item 7A.       | Quantitative and Qualitative Disclosures About Market Risk                                                                                                   | 53       |
| Item 8.        | Financial Statements and Supplementary Data                                                                                                                  | 54       |
| Item 9.        | Changes in and Disagreements with Accountantson Accounting and Financial Disclosure                                                                          |  55 |
| Item 9A.       | Controls and Procedures                                                                                                                                      | 55       |
| Item 9B.       | Other Information                                                                                                                                            | 56       |
| PART III       |                                                                                                                                                         |     |
| Item 10.       | Directors, Executive Officers and Corporate Governance*                                                                                                      | 56       |
| Item 11.       | Executive Compensation*                                                                                                                                      | 57       |
| Item 12.       | Security Ownership of Certain Beneficial Ownersand Management and Related Stockholder Matters*                                                               |  57 |
| Item 13.       | Certain Relationships and Related Transactions, and Director Independence*                                                                                   | 57       |
| Item 14.  | Principal Accountant Fees and Services*                                                                                                                      | 57  |
| PART IV        |                                                                                                                                                         |     |
| Item 15.       | Exhibits and Financial Statement Schedules.                                                                                                                  | 57  |
|           |  SIGNATURES                                                                                                                                             |  59 |
|           | Exhibits Index                                                                                                                                               | 60       |

|   | * | to be incorporated by reference from the Proxy Statement for the registrant’s 2011 Annual Meeting of Shareholders. |
|--------|---|--------------------------------------------------------------------------------------------------------------------------|

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| -   | changes in the rate of economic growth in the United States and other major |
|---------------|-----------------------------------------------------------------------------|

| -   | changes in investment by the nuclear and fossil electric utility industry, the chemical and petrochemical industries and the U.S. military; |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------|

| -   | changes in the financial condition of our customers; |
|---------------|------------------------------------------------------|

| -   | changes in regulatory environment; |
|---------------|------------------------------------|

| -   | changes in project design or schedules; |
|---------------|-----------------------------------------|

| -   | contract cancellations; |
|---------------|-------------------------|

| -   | changes in our estimates of costs to complete projects; |
|---------------|---------------------------------------------------------|

| -   | changes in trade, monetary and fiscal policies worldwide; |
|---------------|-----------------------------------------------------------|

| -   | currency fluctuations; |
|---------------|------------------------|

| -   | war and/or terrorist attacks on facilities either owned or where equipment or services are or may be provided; |
|---------------|----------------------------------------------------------------------------------------------------------------|

| -   | outcomes of future litigation; |
|---------------|--------------------------------|

| -   | protection and validity of our trademarks and other intellectual property rights; |
|---------------|-----------------------------------------------------------------------------------|

| -   | increasing competition by foreign and domestic companies; |
|---------------|-----------------------------------------------------------|

| -   | compliance with our debt covenants; |
|---------------|-------------------------------------|

| -   | recoverability of claims against our customers and others; and |
|---------------|----------------------------------------------------------------|

| -   | changes in estimates used in our critical accounting policies. |
|---------------|----------------------------------------------------------------|

----

| ITEM 1. | BUSINESS. |
|---------|-----------|

|  ̈   | GSE Power Systems, Inc., a Delaware corporation; |
|--------------------|--------------------------------------------------|

|  ̈   | GSE Power Systems, AB, a Swedish corporation; |
|--------------------|-----------------------------------------------|

|  ̈   | GSE Engineering Systems (Beijing) Co. Ltd., a Chinese limited liability company; |
|--------------------|----------------------------------------------------------------------------------|

|  ̈   | GSE Systems, Ltd, a Scottish limited liability company; and |
|--------------------|-------------------------------------------------------------|

|  ̈   | TAS Engineering Consultants Ltd, an English limited liability company. |
|--------------------|------------------------------------------------------------------------|

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|  ̈   | Java Applications & Development Environment (JADETM), a Java-based application that provides a window into the simulation instructor station and takes advantage of the web capabilities of Java, allowing customers to access the simulator and run simulation scenarios from anywhere they have access to the web.  JADE includes the following software modeling tools: |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | JFlowTM, a modeling tool that generates dynamic models for flow and pressure networks. |
|--------------------|---------------------------------------------------------------------------------------------|

|  ̈   | JControlTM, a modeling tool that generates control logic models from logic diagrams. |
|--------------------|-------------------------------------------------------------------------------------------|

|  ̈   | JLogicTM, a modeling tool that generates control logic models from schematic diagrams. |
|--------------------|---------------------------------------------------------------------------------------------|

|  ̈   | JElectricTM, a modeling tool that generates electric system models from schematic and one-line diagrams. |
|--------------------|---------------------------------------------------------------------------------------------------------------|

|  ̈   | JTopmeret®, a modeling tool that generates two phase network dynamic models. |
|--------------------|-----------------------------------------------------------------------------------|

|  ̈   | JDesignerTM, a JADE based intuitive graphic editor for all JADE tools. |
|--------------------|-----------------------------------------------------------------------------|

|  ̈   | JStationTM, a JADE based web-enabled Instructor Station. |
|--------------------|---------------------------------------------------------------|

|  ̈   | Xtreme ToolsTM, a suite of software modeling tools developed under the Microsoft Windows environment.  It includes: |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | Xtreme FlowTM, a modeling tool that generates dynamic models for flow and pressure networks. |
|--------------------|--------------------------------------------------------------------------------------------------------|

|  ̈   | Xtreme ControlTM, a modeling tool that generates control logic models from logic diagrams. |
|--------------------|------------------------------------------------------------------------------------------------------|

|  ̈   | Xtreme LogicTM, a modeling tool that generates control logic models from schematic diagrams. |
|--------------------|---------------------------------------------------------------------------------------------------|

|  ̈   | Xtreme ElectricTM, a modeling tool that generates electric system models from schematic and one-line diagrams. |
|--------------------|---------------------------------------------------------------------------------------------------------------------|

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|  ̈   | RELAP5-HD®, a real-time version of the safety analysis code RELAP5 developed by the Idaho National Laboratory.  The Company’s HD (High Definition) version of RELAP5 R/T enables the engineers to understand and control all of the internal functions of RELAP5, making this solution unique in the market. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | SimExec® and OpenSim®, real-time simulation executive systems that control all real-time simulation activities and allow for an off-line software development environment in parallel with the training environment.  OpenSim is targeted for users of Microsoft Windows operating systems, while SimExec is targeted for users of Microsoft Windows, UNIX and Linux operating systems. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | SmartTutor®, complementary software for instructor stations.  It provides new capabilities to help improve training methodologies and productivity.  Using Microsoft Smart Tag technology, SmartTutor allows the control of the simulator software directly from Microsoft Office products.  The user can run training scenarios directly from a Microsoft Word document, or he can plot and show transients live within a Microsoft PowerPoint slide. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | Xtreme I/STM, a Microsoft Windows based Instructor Station that allows the use of Microsoft Word and PowerPoint to control the real-time simulation environment. Xtreme I/S is a user-friendly tool for classroom training and electronic report generation.  It provides real-time plant performance directly from the simulator during classroom training, which drastically increases learning efficiency. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | Pegasus Surveillance and Diagnosis SystemTM, a software package for semi-automatic plant surveillance and diagnostics, incorporates sophisticated signal processing and simulation techniques to help operators evaluate the condition and performance of plant components.  Pegasus permits plant management to identify degraded performance and replace components before they fail. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | SIMONTM, a computer workstation system used for monitoring stability of boiling water reactor plants. SIMON assists the operator in determining potential instability events, enabling corrective action to be taken to prevent unnecessary plant shutdowns. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | VPanelTM, an interactive visual training solution.  For customers that already have a full scope ANS 3.5 Certified simulator, the VPanel provides a second hardware platform that will run the ASN 3.5 Simulator software model at a fraction of the cost of building a second full scope simulator.  The VPanel Simulator provides the same fidelity of operation as their existing simulator but the VPanel offers portability and versatility at a very affordable price.  All of the features and functions of the full scope ANS 3.5 Simulator are duplicated in the VPanel simulator but the VPanel can be used in a classroom setting or as a second simulator to alleviate many of the time pressures our customers are experiencing with their current simulators.  For nations considering entry into the nuclear power industry the VPanel is the ideal tool to help build a base of experienced nuclear workers either at a university or industrial training facility.  Since the VPanel uses a software load from an ANS 3.5 Certified simulator it will accurately reflect the operations and response of an operating nuclear power plant.  The VPanel provides nations entering the nuclear power industry with realistic hands on experience of the operation of a nuclear facility long before they begin construction on their facilities. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|  ̈   | Continue serving its traditional customer base. |
|--------------------|-------------------------------------------------|

|  ̈   | Combine its simulation capability with training content to provide totally integrated training solutions. |
|--------------------|-----------------------------------------------------------------------------------------------------------|

|  ̈   | Expand the use of high fidelity simulation beyond training to help validate plant design. |
|--------------------|-------------------------------------------------------------------------------------------|

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|                                 | Years ended December 31, |
|--------------------------------------|--------------------------|
|                                 | 2010                     |   | 2009 |   | 2008 |
| Slovenské elektrárne, a.s. | 22.0%                    |   | 13.5% |   | 0.0% |
| Emerson Process Management           | 11.1%                    |   | 12.1% |   | 16.2% |
| Titan-2 Concern                      | 5.0%                     |   | 10.7% |   | 0.0% |
| American Electric Power              | 0.9%                     |   | 6.8% |   | 10.5% |

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|  ̈   | Arc flash hazard studies, |
|--------------------|---------------------------|

|  ̈   | Electrical safety management, |
|--------------------|-------------------------------|

|  ̈   | Functional safety (IEC 61508) support, |
|--------------------|----------------------------------------|

|  ̈   | Potentially explosive atmosphere support, |
|--------------------|-------------------------------------------|

|  ̈   | Alarm management, and |
|--------------------|-----------------------|

|  ̈   | Preventative maintenance procedures incorporating human factors. |
|--------------------|------------------------------------------------------------------|

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|  ̈   | Reputation for Customer Satisfaction.  As part of its ISO-9000 Quality Program Certification, GSE measures customer satisfaction across numerous factors such as On-Time Delivery, Problem Solving, and Customer Communication.  In each category measured we routinely exceed customer expectations. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | Technical and Applications Expertise.  GSE is a leading innovator and developer of real-time software with more than 38 years of experience producing high fidelity real-time simulators.  As a result, the Company has acquired substantial applications expertise in the energy and industrial process industries.  The Company employs a highly educated and experienced multinational workforce of 248 employees, including approximately 187 engineers and scientists.  Of the 187 engineers, approximately 50% of these engineers and scientists have advanced science and technical degrees in fields such as chemical, mechanical and electrical engineering, applied mathematics and computer sciences, while an additional 30% have master degrees, and another 10% have doctorate degrees in the aforementioned fields. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | Proprietary Software Tools.  GSE has developed a library of proprietary software tools including auto-code generators and system models that substantially facilitate and expedite the design, production and integration, testing and modification of software and systems.  These tools are used to automatically generate the computer code and systems models required for specific functions commonly used in simulation applications, thereby enabling it or its customers to develop high fidelity real-time software quickly, accurately and at lower costs.  GSE EnVision Systems, Inc. has added a substantial library of Process Specific Simulation models and Computer Based Learning Modules aimed at the oil and gas, refining and specialty chemicals market. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|  ̈   | Open System Architecture.  GSE’s software products and tools are executed on standard operating systems with third-party off-the-shelf hardware.  The hardware and operating system independence of its software enhances the value of its products by permitting customers to acquire less expensive hardware and operating systems.  The Company’s products work in the increasingly popular Microsoft operating environment, allowing full utilization and integration of numerous off-the-shelf products for improved performance. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | Training Curricula.   The Company has developed detailed course material in nuclear power plant fundamental sciences and specific industrial applications. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | International Strengths.  Approximately 71% of the Company’s 2010 revenue was derived from international sales of its products and services.  GSE has a multinational sales force with offices located in Beijing, China, Nyköping, Sweden, Stockton-on-Tees, UK and agents, representatives and partners in 20 other countries. To capitalize on international opportunities and penetrate foreign markets, the Company has established strategic alliances and partnerships with several foreign entities and universities. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                            |   |   | 2010   |   | 2009   |   | 2008 |
|---------------------------------|--------|--------|--------|--------|--------|--------|------|
| Nuclear power industry          | 72%    |   | 73%    |   | 54%    |
| Fossil fuel power industry      | 18%    |   | 21%    |   | 31%    |
| Process industry                |   | 8%     |   | 4%     |   | 9%     |
| Training and education industry | 2%     |   | 2%     |   | 6%     |
|                            | Total  |   | 100%   |   | 100%   |   | 100% |

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|                       |       Year Ended December 31, |
|----------------------------|-------------------------------------------------------------|
|                       | 2010                                                        |   | 2009 |   | 2008 |
| Slovak Republic            | 22%                                                         |   | 14% |   | 0% |
| Russian Federation         | 6%                                                          |   | 12% |   | 4% |
| People's Republic of China | 4%                                                          |   | 8% |   | 15% |

|  ̈   | incur additional indebtedness and liens; |
|--------------------|------------------------------------------|

|  ̈   | make investments and acquisitions; |
|--------------------|------------------------------------|

|  ̈   | consolidate, merge or sell all or substantially all of its assets. |
|--------------------|--------------------------------------------------------------------|

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|                        |   |                      |   | As of                |
|-----------------------------|--------|---------------------------|--------|----------------------|
|                        |   | Covenant                  |   | Dec. 31, 2010        |
|                        |   |                      |   |                 |
| Tangible net worth          |   | Must Exceed $15.0 million |   | $31.8 million        |
| Funded debt to EBITDA ratio |   | Not to Exceed 2.50 : 1.00 |   |  (30.90) : 1.00 |

| ·   | A written waiver has been granted for the funded debt to EBITDA ratio default. |
|--------------------|--------------------------------------------------------------------------------|

| ·   | The $5.0 million principal line of credit has been terminated. |
|--------------------|----------------------------------------------------------------|

| ·   | The financial covenants for the $2.5 million principal line of credit have been deleted. |
|--------------------|------------------------------------------------------------------------------------------|

| ·   | The Company is required to cash collateralize all outstanding standby letters of credit, which totals $3.4 million. |
|--------------------|---------------------------------------------------------------------------------------------------------------------|

| ·   | All future letters of credit issued by BOA must be cash collateralized. |
|--------------------|-------------------------------------------------------------------------|

| ·       | Borrowings under the line of credit must be cash collateralized.  Currently the Company has in place a $600,000 certificate of deposit as collateral for the line of credit. |
|---------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   2010 |
|-------------|
|        |   |   |   |   |
| Quarter     |   | High |   | Low |
| First       |   |  $         5.98 |   |  $       4.76 |
| Second      |   |  $         5.73 |   |  $       4.06 |
| Third       |   |  $         4.13 |   |  $       3.35 |
| Fourth      |   |  $         3.71 |   |  $       3.21 |
|        |   |   |   |   |
|   2009 |
|        |   |   |   |   |
| Quarter     |   | High |   | Low |
| First       |   |  $         6.88 |   |  $       4.67 |
| Second      |   |  $         6.75 |   |  $       4.96 |
| Third       |   |  $         8.09 |   |  $       5.85 |
| Fourth      |   |  $         6.28 |   |  $       4.35 |
|        |   |   |   |   |

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| Plan category                                              | Number of Securities tobe Issued Upon Exerciseof Outstanding Options,Warrants and Rights(a) | Weighted AverageExercise Price ofOutstanding Options,Warrants and Rights(b) | Number of SecuritiesRemaining Available forFuture Issuance Under EquityCompensation Plans (ExcludingSecurities Reflected in Column (a)(c) |
|------------------------------------------------------------|---------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|
| Equity compensation plans approved by security holders     | 2,016,617                                                                                   | $4.39                                                                       | 148,888                                                                                                                                   |
| Equity compensation plans not approved by security holders | --                                                                                          |  $ --                                                                  | --                                                                                                                                        |
| Total                                                 | 2,016,617                                                                                   | $4.39                                                                       | 148,888                                                                                                                                   |

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|                | 12/31/2005 | 12/31/2006 | 12/31/2007 | 12/31/2008 | 12/31/2009 | 12/31/2010 |
|---------------------|------------|------------|------------|------------|------------|------------|
| GSE Systems, Inc.   | 100.00     | 536.37     | 825.81     | 475.81     | 441.94     | 291.94     |
| NYSE Amex Composite | 100.00     | 119.54     | 144.62     | 87.02      | 118.50     | 152.13     |
| Peer Group          | 100.00     | 121.40     | 166.43     | 96.43      | 118.51     | 148.39     |

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| (in thousands, except per share data)                                                                                                |                                             | Years ended December 31, |               |
|--------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------|--------------------------|--------------------|
|                                                                                                                                 |                                             |                     | 2010               |   |   | 2009 |   |   | 2008 |   |   | 2007 |   |   | 2006 |   |
| Consolidated Statements of Operations:                                                                                               |                                             |                     |               |   |   |   |   |   |   |   |   |   |   |   |   |
| Contract revenue                                                                                                                     |                                             | $                        | 47,213             |   |   | $ | 40,060 |   |   | $ | 29,004 |   |   | $ | 31,900 |   |   | $ | 27,502 |   |
| Cost of revenue                                                                                                                      |                                             |                     | 36,081             |   |   |   | 29,736 |   |   |   | 21,187 |   |   |   | 22,217 |   |   |   | 19,602 |   |
|                                                                                                                                 | Gross profit                                     |                     |               | 11,132 |   |   |   | 10,324 |   |   |   | 7,817 |   |   |   | 9,683 |   |   |   | 7,900 |   |
| Operating expenses:                                                                                                                  |                                             |                     |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                 | Selling, general and administrative              |                     |               | 11,683 |   |   |   | 7,749 |   |   |   | 7,383 |   |   |   | 7,214 |   |   |   | 4,929 |   |
|                                                                                                                                 | ESA related charges                              |                     |               | - |   |   |   | 1,508 |   |   |   | - |   |   |   | - |   |   |   | - |   |
|                                                                                                                                 | Administrative charges from GP Strategies        |                     |               | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 685 |   |
|                                                                                                                                 | Depreciation                                     |                     |               | 579 |   |   |   | 504 |   |   |   | 446 |   |   |   | 258 |   |   |   | 186 |   |
|                                                                                                                                 | Amortization of definite-lived intangible assets |                     |               | 102 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Total operating expenses                                                                                                             |                                             |                     | 12,364             |   |   |   | 9,761 |   |   |   | 7,829 |   |   |   | 7,472 |   |   |   | 5,800 |   |
| Operating income (loss)                                                                                                              |                                             |                     | (1,232             | ) |   |   | 563 |   |   |   | (12 | ) |   |   | 2,211 |   |   |   | 2,100 |   |
| Interest income (expense), net                                                                                                       |                                             |                     | 19                 |   |   |   | 56 |   |   |   | 130 |   |   |   | (433 | ) |   |   | (764 | ) |
| ESA related charges                                                                                                                  |                                             |                     | -                  |   |   |   | (865 | ) |   |   | - |   |   |   | - |   |   |   | - |   |
| Loss on extinguishment of debt                                                                                                       |                                             |                     | -                  |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (1,428 | ) |
| Gain (loss) on derivative instruments                                                                                                |                                             |                     | (913               | ) |   |   | 763 |   |   |   | (453 | ) |   |   | (11 | ) |   |   | (24 | ) |
| Other income (expense), net                                                                                                          |                                             |                     | 83                 |   |   |   | (397 | ) |   |   | (226 | ) |   |   | (555 | ) |   |   | (81 | ) |
| Income (loss) before income taxes                                                                                                    |                                             |                     | (2,043             | ) |   |   | 120 |   |   |   | (561 | ) |   |   | 1,212 |   |   |   | (197 | ) |
| Provision for income taxes                                                                                                           |                                             |                     | 206                |   |   |   | 917 |   |   |   | 129 |   |   |   | 43 |   |   |   | 149 |   |
| Net income (loss)                                                                                                                    |                                             | $                        | (2,249             | ) |   | $ | (797 | ) |   | $ | (690 | ) |   | $ | 1,169 |   |   | $ | (346 | ) |
|                                                                                                                                 |                                             |                     |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic income (loss) per common share (1)                                                                                             |                                             | $                        | (0.12              | ) |   | $ | (0.05 | ) |   | $ | (0.04 | ) |   | $ | 0.09 |   |   | $ | (0.07 | ) |
|                                                                                                                                 |                                             |                     |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted income (loss) per common share (1)                                                                                           |                                             | $                        | (0.12              | ) |   | $ | (0.05 | ) |   | $ | (0.04 | ) |   | $ | 0.08 |   |   | $ | (0.07 | ) |
|                                                                                                                                 |                                             |                     |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding:                                                                                          |                                             |                     |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                 |  -Basic                                     |                     |               | 18,975 |   |   |   | 16,938 |   |   |   | 15,747 |   |   |   | 12,927 |   |   |   | 9,539 |   |
|                                                                                                                                 |  -Diluted                                   |                     |               | 18,975 |   |   |   | 16,938 |   |   |   | 15,747 |   |   |   | 14,818 |   |   |   | 9,539 |   |
|                                                                                                                                 |                                             |                     |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                 |                                             |                     | As of December 31, |   |
|                                                                                                                                 |                                             |                     |               | 2010 |   |   |   | 2009 |   |   |   | 2008 |   |   |   | 2007 |   |   |   | 2006 |   |
| Balance Sheet data:                                                                                                                  |                                             |                     |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Working capital                                                                                                                      |                                             | $                        | 30,040             |   |   | $ | 31,469 |   |   | $ | 13,888 |   |   | $ | 14,711 |   |   | $ | 1,463 |   |
| Total assets                                                                                                                         |                                             |                     |               | 53,614 |   |   |   | 49,520 |   |   |   | 31,015 |   |   |   | 28,364 |   |   |   | 18,448 |   |
| Long-term liabilities                                                                                                                |                                             |                     | 799                |   |   |   | 206 |   |   |   | 906 |   |   |   | 695 |   |   |   | 251 |   |
| Stockholders' equity                                                                                                                 |                                             |                     | 36,906             |   |   |   | 37,143 |   |   |   | 20,700 |   |   |   | 20,365 |   |   |   | 7,361 |   |
|                                                                                                                                 |                                             |                     |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1) In 2006, $279,000 preferred stock dividends were added to net loss to arrive at net loss attributed to common shareholders. |                                             |
| In 2007, $49,000 preferred stock dividends were deducted from net income to arrive at net income attributed to common shareholders.  |                                             |

----

|                        |   |                      |   | As of                |
|-----------------------------|--------|---------------------------|--------|----------------------|
|                        |   | Covenant                  |   | Dec. 31, 2010        |
|                        |   |                      |   |                 |
| Tangible net worth          |   | Must Exceed $15.0 million |   | $31.8 million        |
| Funded debt to EBITDA ratio |   | Not to Exceed 2.50 : 1.00 |   |  (30.90) : 1.00 |

| ·   | A written waiver has been granted for the funded debt to EBITDA ratio default. |
|--------------------|--------------------------------------------------------------------------------|

| ·   | The $5.0 million principal line of credit has been terminated. |
|--------------------|----------------------------------------------------------------|

| ·   | The financial covenants for the $2.5 million principal line of credit have been deleted. |
|--------------------|------------------------------------------------------------------------------------------|

| ·   | The Company is required to cash collateralize all outstanding standby letters of credit, which totals $3.4 million. |
|--------------------|---------------------------------------------------------------------------------------------------------------------|

| ·   | All future letters of credit issued by BOA must be cash collateralized. |
|--------------------|-------------------------------------------------------------------------|

| ·    | Borrowings under the line of credit must be cash collateralized.  Currently the Company has in place a $600,000 certificate of deposit as collateral for the line of credit. |
|---------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

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| ($ in thousands)                                 |   | Years ended December 31, |   |
|--------------------------------------------------|--------|--------------------------|--------|
|                                             |   | 2010                     |   |   | % |   |   | 2009 |   |   | % |   |   | 2008 |   |   | % |   |
| Contract revenue                                 |   | $                        | 47,213 |   |   |   | 100.0 | % |   | $ | 40,060 |   |   |   | 100.0 | % |   | $ | 29,004 |   |   |   | 100.0 | % |
| Cost of revenue                                  |   |                     | 36,081 |   |   |   | 76.4 | % |   |   | 29,736 |   |   |   | 74.2 | % |   |   | 21,187 |   |   |   | 73.1 | % |
|                                             |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                     |   |                     | 11,132 |   |   |   | 23.6 | % |   |   | 10,324 |   |   |   | 25.8 | % |   |   | 7,817 |   |   |   | 26.9 | % |
| Operating expenses:                              |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative              |   |                     | 11,683 |   |   |   | 24.7 | % |   |   | 7,749 |   |   |   | 19.3 | % |   |   | 7,383 |   |   |   | 25.4 | % |
| ESA related charges                              |   |                     | -      |   |   |   | 0.0 | % |   |   | 1,508 |   |   |   | 3.8 | % |   |   | - |   |   |   | 0.0 | % |
| Depreciation                                     |   |                     | 579    |   |   |   | 1.2 | % |   |   | 504 |   |   |   | 1.3 | % |   |   | 446 |   |   |   | 1.5 | % |
| Amortization of definite-lived intangible assets |   |                     | 102    |   |   |   | 0.2 | % |   |   | - |   |   |   | 0.0 | % |   |   | - |   |   |   |   |   |
| Total operating expenses                         |   |                     | 12,364 |   |   |   | 26.1 | % |   |   | 9,761 |   |   |   | 24.4 | % |   |   | 7,829 |   |   |   | 26.9 | % |
|                                             |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                          |   |                     | (1,232 | ) |   |   | (2.6 | )% |   |   | 563 |   |   |   | 1.4 | % |   |   | (12 | ) |   |   | (0.0 | )% |
|                                             |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income, net                             |   |                     | 19     |   |   |   | 0.0 | % |   |   | 56 |   |   |   | 0.1 | % |   |   | 130 |   |   |   | 0.4 | % |
| ESA related charges                              |   |                     | -      |   |   |   | 0.0 | % |   |   | (865 | ) |   |   | (2.2 | )% |   |   | - |   |   |   | 0.0 | % |
| Gain (loss) on derivative instruments            |   |                     | (913   | ) |   |   | (1.9 | )% |   |   | 763 |   |   |   | 1.9 | % |   |   | (453 | ) |   |   | (1.6 | )% |
| Other income (expense), net                      |   |                     | 83     |   |   |   | 0.3 | % |   |   | (397 | ) |   |   | (0.9 | )% |   |   | (226 | ) |   |   | (0.8 | )% |
|                                             |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before income taxes                |   |                     | (2,043 | ) |   |   | (4.3 | )% |   |   | 120 |   |   |   | 0.3 | % |   |   | (561 | ) |   |   | (2.0 | )% |
| Provision for income taxes                       |   |                     | 206    |   |   |   | 0.4 | % |   |   | 917 |   |   |   | 2.3 | % |   |   | 129 |   |   |   | 0.4 | % |
|                                             |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                         |   | $                        | (2,249 | ) |   |   | (4.8 | )% |   | $ | (797 | ) |   |   | (2.0 | )% |   | $ | (690 | ) |   |   | (2.4 | )% |
|                                             |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

|  ̈   | The Company has a $4.7 million contract to provide a full scope AGR replacement simulator with a British utility.  In 2010, disagreements arose with the customer over the extent and composition of the simulator testing procedures, the scope of certain plant systems being included in the simulator and the project schedule.  These issues were resolved with the customer in early 2011, however, the resolution has significantly increased the Company’s costs to complete the contract.  Although the Company is currently in negotiations with the customer for additional funding, the Company revised its estimates to complete the project in the fourth quarter 2010 and recorded a $1.2 million loss. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | The lower-margined $23.8 million full scope simulator and digital control system order received in 2009 from a Slovak utility made up 22.0% of the Company’s total revenue in 2010 versus only 13.5% of revenue in 2009. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | Business development and marketing costs increased from $3.2 million for the year ended December 31, 2009 to $4.2 million in the year ended December 31, 2010.  Bidding and proposal cost, which are the costs of operations personnel assisting with the preparation of contract proposals totaled $1.4 million for the year ended December 31, 2010, a $432,000 increase from the prior year.  TAS, which was acquired on April 26, 2010, incurred $216,000 of business development expenses for the period commencing on the date of acquisition and ending on December 31, 2010.  During 2010, the Company hired both a business development manager in the United Kingdom and hired a business development manager in the United States for its 3D visualization program.  During 2009, the Company hired business development managers for both its process simulation business and its education and training business and a marketing specialist for the nuclear simulation business.  Additionally, the Company incurred costs of approximately $200,000 for hosting the Company’s September 2010 Simworld user’s conference in Stockholm, Sweden.  The Company did not host a Simworld conference in 2009. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | The Company’s general and administrative expenses increased from $4.2 million for the year ended December 31, 2009 to $6.9 million in the year ended December 31, 2010.  The increase of $2.7 million is primarily attributable to the following: |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| o   | TAS, which was acquired on April 26, 2010, incurred $549,000 of G&A expenses for the period commencing on the closing date of the acquisition and ending on December 31, 2010. |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | The change in the fair value of contingent consideration (accretion expense) related to the TAS acquisition was $147,000 for the year ended December 31, 2010. |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | The Company incurred approximately $710,000 of expenses related to its acquisition efforts for the year ended December 31, 2010. These acquisition costs were composed of legal, travel, due diligence, valuation and audit expenses.  The Company incurred no acquisition related costs in 2009. |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | The Company recognized approximately $297,000 of foreign currency losses for the year ended December 31, 2010.  The losses were mainly related to the Company’s BOA Euro denominated operating account, intercompany receivable/payable accounts, and a euro-denominated value added tax receivable.  For the year ended December 31, 2009, the Company had recognized foreign currency gains of $130,000. |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | The Company incurred bad debt expense of approximately $249,000 in 2010 versus none in 2009. |
|---------------|----------------------------------------------------------------------------------------------|

| o   | The Company incurred approximately $197,000 of costs related to changes in the Company’s executive management in 2010.   Mr. Jim Eberle started with the Company on June 1, 2010 as Chief Operating Officer and was promoted to Chief Executive Officer on November 1, 2010 upon the retirement of Mr. John Moran as Chief Executive Officer. |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | Gross spending on software product development (“development”) totaled $1.6 million in the year ended December 31, 2010 as compared to $1.3 million in 2009.  For the year ended December 31, 2010, the Company expensed $663,000 and capitalized $903,000 of its development spending.  For the year ended December 31, 2009, the Company expensed $425,000 and capitalized $861,000.  The Company’s capitalized development expenditures in 2010 were mainly related to the customization of RELAP5-HD software (which simulates transient fluid dynamics, neutronics and heat transfer in nuclear power plants) to run on the Company’s real-time executive software; the replacement of the current Graphic User Interface of SimSuite Pro with JADE Designer; and feature enhancements to Jtopmeret, a modeling tool that generates two phase network dynamic models..   The Company anticipates that its total gross development spending in 2011 will approximate $1.5 million. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                            |   | Year ended        |   |
|-------------------------------------------------|--------|-------------------|--------|
| (in thousands)                                  |   | December 31, 2009 |   |
|                                            |   |              |   |
| Trade receivable                                |   | $                 | 1,604  |   |
| Accrued agent fee                               |   |              | (96    | ) |
| Operating expense                               |   |              | 1,508  |   |
|                                            |   |              |   |   |
| Restricted cash- bank guarantee and             |   |              |   |   |
|     accrued interest income |   |              | 1,291  |   |
| Investment in ESA                               |   |              | 117    |   |
| Deferred profit                                 |   |              | (543   | ) |
| Other expense, net                              |   |              | 865    |   |
|                                            |   |              |   |   |
|  Total                                     |   | $                 | 2,373  |   |
|                                            |   |              |   |   |

----

----

|                                      |   | December 31, |   |
|-------------------------------------------|--------|--------------|--------|
| (in thousands)                            |   | 2010         |   |   | 2009 |   |
|                                      |   |         |   |   |   |   |
| Asset derivatives                         |   |         |   |   |   |   |
| Prepaid expenses and other current assets |   | $            | 208    |   |   | $ | 515 |   |
| Other assets                              |   |         | 117    |   |   |   | 396 |   |
|                                      |   |         | 325    |   |   |   | 911 |   |
|                                      |   |         |   |   |   |   |   |   |
| Liability derivatives                     |   |         |   |   |   |   |   |   |
| Other current liabilities                 |   |         | (204   | ) |   |   | (34 | ) |
| Other liabilities                         |   |         | (40    | ) |   |   | (65 | ) |
|                                      |   |         | (244   | ) |   |   | (99 | ) |
|                                      |   |         |   |   |   |   |   |   |
| Net fair value                            |   | $            | 81     |   |   | $ | 812 |   |
|                                      |   |         |   |   |   |   |   |   |

----

----

|  ̈   | Business development and marketing costs increased from $2.9 million for the year ended December 31, 2008 to $3.1 million in the year ended December 31, 2009.  The spending increase mainly reflects a $352,000 increase of bidding and proposal costs, which are the costs of operations personnel in assisting with the preparation of contract proposals and a $104,000 increase in business development labor and benefit costs.  In 2009 the Company hired business development managers for both its process simulation business and its education and training business.  These increases were partially offset by a $137,000 decrease in business development travel expenses. In addition, the Company did not have a Simworld user’s conference in 2009, but spent approximately $75,000 in 2008 for its bi-annual Simworld conference in Beijing, China. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | The Company’s general and administrative expenses were virtually unchanged at $4.2 million for the year ended December 31, 2009 and $4.2 million for the year ended December 31, 2008. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | Gross spending on software product development (“development”) totaled $1.3 million in the year ended December 31, 2009 as compared to $907,000 for the same period in 2008.  For the year ended December 31, 2009, the Company expensed $425,000 and capitalized $861,000 of its development spending and expensed $316,000 and capitalized $591,000 of its development spending in the year ended December 31, 2008.  The Company’s capitalized development expenditures in 2009 were mainly related to the customization of RELAP5-RT software (which simulates transient fluid dynamics, neutronics and heat transfer in nuclear power plants) to run on the Company’s real-time executive software; the replacement of the current Graphic User Interface of SimSuite Pro with JADE Designer; the development of generic simulation models for three oil and gas refining processes: continuous catalytic reformer, hydrotreater, and amine treatment; and a generic combined cycle gas turbine simulator. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                            |   | Year ended        |   |
|-------------------------------------------------|--------|-------------------|--------|
| (in thousands)                                  |   | December 31, 2009 |   |
|                                            |   |              |   |
| Trade receivable                                |   | $                 | 1,604  |   |
| Accrued agent fee                               |   |              | (96    | ) |
| Operating expense                               |   |              | 1,508  |   |
|                                            |   |              |   |   |
| Restricted cash- bank guarantee and             |   |              |   |   |
|     accrued interest income |   |              | 1,291  |   |
| Investment in ESA                               |   |              | 117    |   |
| Deferred profit                                 |   |              | (543   | ) |
| Other expense, net                              |   |              | 865    |   |
|                                            |   |              |   |   |
| Total                                           |   | $                 | 2,373  |   |
|                                            |   |              |   |   |

----

----

|                                      |   | December 31, |   |
|-------------------------------------------|--------|--------------|--------|
| (in thousands)                            |   | 2009         |   |   | 2008 |   |
|                                      |   |         |   |   |   |   |
| Asset derivatives                         |   |         |   |   |   |   |
| Prepaid expenses and other current assets |   | $            | 515    |   |   | $ | 14 |   |
| Other assets                              |   |         | 396    |   |   |   | 537 |   |
|                                      |   |         | 911    |   |   |   | 551 |   |
|                                      |   |         |   |   |   |   |   |   |
| Liability derivatives                     |   |         |   |   |   |   |   |   |
| Other current liabilities                 |   |         | (34    | ) |   |   | (426 | ) |
| Other liabilities                         |   |         | (65    | ) |   |   | (183 | ) |
|                                      |   |         | (99    | ) |   |   | (609 | ) |
|                                      |   |         |   |   |   |   |   |   |
| Net fair value                            |   | $            | 812    |   |   | $ | (58 | ) |
|                                      |   |         |   |   |   |   |   |   |

-  The Company accounted for its investment in ESA using the equity method.  In accordance with the equity method, the Company eliminated 10% of the profit from this contract as the training simulators are assets that have been recorded on the books of ESA, and the Company was thus required to eliminate its proportionate share of the profit included in the asset value.  ESA began to amortize the training simulators effective January 1, 2009 over a four year life; accordingly, GSE began to amortize the deferred profit in January 2009 and recognized income of $181,000 for the year ended December 31, 2009.  However, in conjunction with the Company’s determination that its investment in ESA was impaired as of December 31, 2009, GSE wrote off the balance of the deferred profit, recognizing additional income of $543,000.  See the discussion above in ESA related charges. 

-  For the year ended December 31, 2009, the Company recognized a $615,000 equity loss, respectively, on its investment in ESA.  However, in conjunction with the Company’s determination that its investment in ESA was impaired as of December 31, 2009, it wrote off the balance of its investment in ESA, recognizing an additional equity loss of $117,000.  See the discussion above in ESA related charges. 

-  The Company had other miscellaneous income in the years ended December 31, 2010 and 2009 of $83,000 and of $37,000, respectively. 

----

|  ̈   | A $903,000 increase in the Company’s contracts receivable.   The Company’s trade receivables, net of the allowance for doubtful accounts, decreased from $6.4 million at December 31, 2009 to $5.7 million at December 31, 2010.  The Company’s unbilled receivables increased by $2.0 million to $11.5 million at December 31, 2010.  The increase in the unbilled receivables is due to the timing of contracted billing milestones of the Company’s current projects.  In January and February 2011, the Company invoiced $2.9 million of the unbilled amounts; the balance of the unbilled amounts is expected to be invoiced and collected within one year.  At December 31, 2010, trade receivables outstanding for more than 90 days totaled $318,000 versus $1.4 million at December 31, 2009, excluding the $1.6 million due from ESA which had been fully reserved at both dates.  In January 2011, the Company received a stop work order from NuScale Power (“NuScale”).  NuScale’s primary investor is a defendant in a lawsuit brought by the Securities and Exchange Commission and has ceased funding NuScale’s current operations.  As such, the Company increased its bad debt reserve approximately $400,000 as of December 31, 2010. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | A $922,000 increase in prepaid expenses and other assets.  The Company’s Value Added Tax (“VAT”) receivable increased $250,000 at December 31, 2010 as compared to the prior year.  VAT is included in payments the Company makes to Siemens for the DCS system being provided to a Slovak utility. GSE has filed for a refund of the VAT paid.  In addition, prepaid foreign income taxes and employee advances have increased a combined $400,000 from 2009. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  ̈   | A $932,000 increase in accounts payable, accrued compensation and accrued expenses.  The Company’s accounts payable and accrued liabilities have increased $358,000 due to the costs accrued related to the Company’s acquisition efforts as of December 31, 2010.  Additionally, accrued compensation increased $305,000 primarily due to an increase in the Company’s headcount from December 31, 2009 to December 31, 2010. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | A $1.7 million increase in billings in excess of revenue earned.  The increase is due to the timing of contracted billing milestones of the Company’s current projects. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | A $5.1 million increase in the Company’s contracts receivable.   The Company’s trade receivables increased from $7.3 million (including $1.6 million due from ESA) at December 31, 2008 to $8.2 million at December 31, 2009 (including the same $1.6 million due from ESA).  The Company’s unbilled receivables increased by $5.5 million to $9.5 million at December 31, 2009. The increase in the unbilled receivables is due to the timing of contracted billing milestones of the Company’s current projects.  In January and February 2010, the Company invoiced $1.3 million of the unbilled amounts.  At December 31, 2009, trade receivables outstanding for more than 90 days totaled $3.0 million versus $2.3 million at December 31, 2008; $1.6 million of the overdue amount was due from ESA at both dates.  Approximately $300,000 of the over 90 day balance at December 31, 2009 has been received as of the end of February 2010.  At a meeting of the three ESA shareholders held at ESA on February 17, 2010, the shareholders reached agreement to significantly reduce costs and begin to explore options up to and including the selling of ESA.  Accordingly, the Company increased its bad debt reserve from $2,000 at December 31, 2008 to $1.7 million at December 31, 2009 mainly to reserve the overdue receivable from ESA. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | A $4.1 million increase in accounts payable, accrued compensation and accrued expenses.  The Company’s accounts payable and accrued liabilities had increased due to material purchases and the utilization of subcontractors on several of the Company’s current projects. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈   | A $1.4 million decrease in billings in excess of revenue earned.  The decrease was due to the timing of contracted billing milestones of the Company’s current projects. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|                        |   |                      |   | As of                |
|-----------------------------|--------|---------------------------|--------|----------------------|
|                        |   | Covenant                  |   | Dec. 31, 2010        |
|                        |   |                      |   |                 |
| Tangible net worth          |   | Must Exceed $15.0 million |   | $31.8 million        |
| Funded debt to EBITDA ratio |   | Not to Exceed 2.50 : 1.00 |   |  (30.90) : 1.00 |

| ·   | A written waiver has been granted for the funded debt to EBITDA ratio default. |
|--------------------|--------------------------------------------------------------------------------|

| ·   | The $5.0 million principal line of credit has been terminated. |
|--------------------|----------------------------------------------------------------|

| ·   | The financial covenants for the $2.5 million principal line of credit have been deleted. |
|--------------------|------------------------------------------------------------------------------------------|

| ·   | The Company is required to cash collateralize all outstanding standby letters of credit, which totals $3.4 million. |
|--------------------|---------------------------------------------------------------------------------------------------------------------|

----

| ·   | All future letters of credit issued by BOA must be cash collateralized. |
|--------------------|-------------------------------------------------------------------------|

| ·    | Borrowings under the line of credit must be cash collateralized.  Currently the Company has in place a $600,000 certificate of deposit as collateral for the line of credit. |
|---------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Payments Due by Period(in thousands)   |
|----------------------------------------|
|                                   |   |   |   |   |   |   |
| Contractual Cash Obligations           | Total | Less than 1 year | 1-3 Years | 4-5 Years | After 5 Years |
| Long Term Debt                         |   |  $           - |  $         - |  $           - |  $           - |  $        - |
| Subcontractor and Purchase Commitments |  $   10,682 |  $    8,096 |  $     2,586 |  $           - |  $        - |
| Net Future Minimum Lease Payments      |  $     3,921 |  $       715 |  $     1,559 |  $        443 |  $  1,204 |
| Total                                  |   |  $   14,603 |  $  8,881 |  $     4,145 |  $        443 |  $  1,204 |

----

----

----

|                                                                                                                  | Page      |
|-----------------------------------------------------------------------------------------------------------------------|-----------|
| GSE Systems, Inc. and Subsidiaries                                                                                    |      |
| Report of Independent Registered Public Accounting Firm-- Internal Control over Financial Reporting                   | F-1       |
| Report of Independent Registered Public Accounting Firm -- Consolidated Financial Statements                          | F-3       |
| Consolidated Balance Sheets as of December 31, 2010 and 2009                                                          | F-4       |
| Consolidated Statements of Operations for the years endedDecember 31, 2010, 2009, and 2008                            |  F-5 |
| Consolidated Statements of Comprehensive Loss for the years endedDecember 31, 2010, 2009, and 2008               |  F-6 |
| Consolidated Statements of Changes in Stockholders’ Equity for the years endedDecember 31, 2010, 2009, and 2008 |  F-7 |
| Consolidated Statements of Cash Flows for the years endedDecember 31, 2010, 2009, and 2008                            |  F-8 |
| Notes to Consolidated Financial Statements                                                                            | F-9       |

----

----

----

----

|                                                                                                                                             |   |         |    |   |   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|---------|--------|--------|--------|
| PART I - FINANCIAL INFORMATION                                                                                                                   |   |         |    |   |   |   |
| Item 1.  Financial Statements                                                                                                          |   |         |    |   |   |   |
| GSE SYSTEMS, INC. AND SUBSIDIARIES                                                                                                               |   |
| CONSOLIDATED BALANCE SHEETS                                                                                                                      |   |
| (in thousands, except share data)                                                                                                                |   |
|                                                                                                                                             |   | December 31, |    |
|                                                                                                                                             |   | 2010         |    |   | 2009   |   |
| ASSETS                                                                                                                                           |   |
| Current assets:                                                                                                                                  |   |         |    |   |   |   |
| Cash and cash equivalents                                                                                                                        |   | $            | 26,577  |   |   | $      | 25,270 |   |
|  Restricted cash                                                                                                                            |   |         | 179     |   |   |   | 938 |   |
| Contract receivables, net                                                                                                                        |   |         | 17,201  |   |   |   | 15,941 |   |
|        Prepaid expenses and other current assets                                                                   |   |         | 1,992   |   |   |   | 1,491 |   |
| Total current assets                                                                                                                             |   |         | 45,949  |   |   |   | 43,640 |   |
|                                                                                                                                             |   |         |    |   |   |   |   |   |
| Equipment and leasehold improvements                                                                                                             |   |         | 4,727   |   |   |   | 4,065 |   |
| Accumulated depreciation                                                                                                                         |   |         | (3,667  | )      |   |   | (3,076 | ) |
|        Equipment and leasehold improvements, net                                                                   |   |         | 1,060   |   |   |   | 989 |   |
|                                                                                                                                             |   |         |    |   |   |   |   |   |
| Software development costs, net                                                                                                                  |   |         | 1,790   |   |   |   | 1,865 |   |
| Goodwill                                                                                                                                         |   |         | 2,609   |   |   |   | 1,739 |   |
| Intangible assets, net                                                                                                                           |   |         | 637     |   |   |   | - |   |
| Long-term restricted cash                                                                                                                        |   |         | 794     |   |   |   | 876 |   |
| Other assets                                                                                                                                     |   |         | 775     |   |   |   | 411 |   |
|    Total assets                                                                                                                        |   | $            | 53,614  |   |   | $      | 49,520 |   |
|                                                                                                                                             |   |         |    |   |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                             |   |
| Current liabilities:                                                                                                                             |   |         |    |   |   |   |   |   |
|  Accounts payable                                                                                                                           |   | $            | 4,945   |   |   | $      | 5,009 |   |
|  Accrued expenses                                                                                                                           |   |         | 1,753   |   |   |   | 852 |   |
|       Accrued compensation and payroll taxes                                                                            |   |         | 2,053   |   |   |   | 1,747 |   |
| Billings in excess of revenue earned                                                                                                             |   |         | 4,268   |   |   |   | 2,579 |   |
|  Accrued warranty                                                                                                                           |   |         | 1,680   |   |   |   | 1,273 |   |
| Other current liabilities                                                                                                                        |   |         | 1,210   |   |   |   | 711 |   |
| Total current liabilities                                                                                                                        |   |         | 15,909  |   |   |   | 12,171 |   |
|                                                                                                                                             |   |         |    |   |   |   |   |   |
| Other liabilities                                                                                                                                |   |         | 799     |   |   |   | 206 |   |
|   Total liabilities                                                                                                                         |   |         | 16,708  |   |   |   | 12,377 |   |
| Commitments and contingencies                                                                                                                    |   |         | -       |   |   |   | - |   |
|                                                                                                                                             |   |         |    |   |   |   |   |   |
| Stockholders' equity:                                                                                                                            |   |         |    |   |   |   |   |   |
|           Preferred stock $.01 par value, 2,000,000 shares authorized,  shares issued and |   |         |    |   |   |   |   |   |
|            outstanding none in 2010 and 2009                                                   |   |         | -       |   |   |   | - |   |
|           Common stock $.01 par value, 30,000,000 shares authorized, shares issued and              |   |         |    |   |   |   |   |   |
| outstanding 19,171,855 in 2010 and 18,930,368 in 2009                                                                                            |   |         | 192     |   |   |   | 189 |   |
| Additional paid-in capital                                                                                                                       |   |         | 69,298  |   |   |   | 67,559 |   |
|  Accumulated deficit                                                                                                                        |   |         | (31,864 | )      |   |   | (29,615 | ) |
|        Accumulated other comprehensive loss                                                                        |   |         | (720    | )      |   |   | (990 | ) |
| Total stockholders' equity                                                                                                                       |   |         | 36,906  |   |   |   | 37,143 |   |
|           Total liabilities and stockholders' equity                                                |   | $            | 53,614  |   |   | $      | 49,520 |   |
|                                                                                                                                             |   |         |    |   |   |   |   |   |
|                                                                                                                                             |   |         |    |   |   |   |   |   |
| 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)                                                   |   |
|                                                                                    |   |                     |   |   |   |   |   |   |   |
|                                                                                    |   | Years ended December 31, |   |
|                                                                                    |   | 2010                     |   |   | 2009   |   |   | 2008   |   |
|                                                                                    |   |                     |   |   |   |   |   |   |   |
| Contract revenue                                                                        |   | $                        | 47,213 |   |   | $      | 40,060 |   |   | $ | 29,004 |   |
| Cost of revenue                                                                         |   |                     | 36,081 |   |   |   | 29,736 |   |   |   | 21,187 |   |
| Gross profit                                                                            |   |                     | 11,132 |   |   |   | 10,324 |   |   |   | 7,817 |   |
|                                                                                    |   |                     |   |   |   |   |   |   |   |   |   |   |
| Operating expenses                                                                      |   |                     |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative                                                     |   |                     | 11,683 |   |   |   | 7,749  |   |   |   | 7,383 |   |
| ESA related charges                                                                     |   |                     | -      |   |   |   | 1,508  |   |   |   | - |   |
|  Depreciation                                                                      |   |                     | 579    |   |   |   | 504    |   |   |   | 446 |   |
| Amortization of definite-lived intangible assets                                        |   |                     | 102    |   |   |   | -      |   |   |   | - |   |
| Total operating expenses                                                                |   |                     | 12,364 |   |   |   | 9,761  |   |   |   | 7,829 |   |
|                                                                                    |   |                     |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                                                                 |   |                     | (1,232 | )      |   |   | 563    |   |   |   | (12 | ) |
|                                                                                    |   |                     |   |   |   |   |   |   |   |   |   |   |
| Interest income, net                                                                    |   |                     | 19     |   |   |   | 56     |   |   |   | 130 |   |
| ESA related charges                                                                     |   |                     | -      |   |   |   | (865   | )      |   |   | - |   |
| Gain (loss) on derivative instruments                                                   |   |                     | (913   | )      |   |   | 763    |   |   |   | (453 | ) |
| Other income (expense), net                                                             |   |                     | 83     |   |   |   | (397   | )      |   |   | (226 | ) |
|                                                                                    |   |                     |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before income taxes                                                       |   |                     | (2,043 | )      |   |   | 120    |   |   |   | (561 | ) |
|                                                                                    |   |                     |   |   |   |   |   |   |   |   |   |   |
| Provision for income taxes                                                              |   |                     | 206    |   |   |   | 917    |   |   |   | 129 |   |
|                                                                                    |   |                     |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                |   | $                        | (2,249 | )      |   | $      | (797   | )      |   | $ | (690 | ) |
|                                                                                    |   |                     |   |   |   |   |   |   |   |   |   |   |
|                                                                                    |   |                     |   |   |   |   |   |   |   |   |   |   |
| Basic loss per common share                                                             |   | $                        | (0.12  | )      |   | $      | (0.05  | )      |   | $ | (0.04 | ) |
|                                                                                    |   |                     |   |   |   |   |   |   |   |   |   |   |
| Diluted loss per common share                                                           |   | $                        | (0.12  | )      |   | $      | (0.05  | )      |   | $ | (0.04 | ) |
|                                                                                    |   |                     |   |   |   |   |   |   |   |   |   |   |
| The accompanying notes are an integral part of these consolidated financial statements. |   |
|                                                                                    |   |                     |   |   |   |   |   |   |   |   |   |   |

----

| GSE SYSTEMS, INC. AND SUBSIDIARIES                                                      |   |
|-----------------------------------------------------------------------------------------|--------|
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS                                           |   |
| (in thousands)                                                                          |   |
|                                                                                    |   |   |   |   |   |   |   |   |   |
|                                                                                    |   |   |   |   |   |   |   |   |   |
|                                                                                    |   |   |   |   |   |   |   |   |   |
|                                                                                    |   | Years ended December 31, |   |
|                                                                                    |   | 2010 |   |   | 2009 |   |   | 2008 |   |
|                                                                                    |   |   |   |   |   |   |   |   |   |
|                                                                                    |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                |   | $ | (2,249 | ) |   | $ | (797 | ) |   | $ | (690 | ) |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency translation adjustment                                                 |   |   | 270 |   |   |   | 224 |   |   |   | (327 | ) |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive loss                                                                      |   | $ | (1,979 | ) |   | $ | (573 | ) |   | $ | (1,017 | ) |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |
| The accompanying notes are an integral part of these consolidated financial statements. |   |

----

|                                                                                    |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |                                                                                   |                                                                                   |   |
|-----------------------------------------------------------------------------------------|---------------------------------|---------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------|---------------------------------------------------------------------------------|---------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------|---------------------------------------------------------------------|---------------------------------------------------------------------------------------|----------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------|--------|
| GSE SYSTEMS, INC, AND SUBSIDIARIES                                                      |
| CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY                              |
| (in thousands)                                                                          |
|                                                                                    |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |                                                                                   |                                                                                   |   |
|                                                                                    |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      | Accumulated                                                                            |                                                                                   |   |
|                                                                                    |                            |                                                                                        |                                                                            |                                                                            | Preferred                                                     |                                                                                                  | Common                                                                                                                                |                                                                                                                                  | Additional                                                          |                                                                |                                                                                  |                                                                             | Other                                                                                                                                 |                                                                                                                                  |                                                                                                                                  |
|                                                                                    |                            |                                                                                        |                                                                            |                                                                            | Stock                                                         |                                                                                                  | Stock                                                                                                                                 |                                                                                                                                  | Paid-in                                                             |                                                                | Accumulated                                                                           |                                                                             |      Comprehensive                                                                                                |
|                                                                                    |                            |                                                                                        |                                                                            |                                                                            | Shares                                                        |                                                                                                  | Amount                                                                                                                                |                                                                                                                                  | Shares                                                              |                                                                | Amount                                                                                |                                                                             | Capital                                                                                                                               |                                                                                                                                  |                                                                                                                                  | Deficit                                                                                                                   |                                                                                                                      | Loss                                                                                   |                                                                                   | Total  |
| Balance, January 1, 2008                                                                |                            |              -             |                                                                            |  $       -                              |                                                          |               15,508            |                                                                                                                                  |  $    155                                                                                                    |                                                                |  $   49,225                                     |                                                                                  |                                                                             |  $          (28,128)                                                           |                                                                                                                                  |  $             (887)                                            |                                                                                                                      |  $    20,365                                                                                     |
|                                                                                    |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |                                                                                   |                                                                                   |   |
| Stock-based compensation                                                                |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |
|                                                                                    | expense                         |                                                                                        |                                                                            |              - |                                                          |           -                                         |                                                                                                                                  |                       - |                                                                |           -       |                                                                                  |            650            |                                                                                                                                  |                                                                                                                                  |                       - |                                                                                                                      |                     - |                                                                                   |             650            |
| Common stock issued for                                                                 |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |
|                                                                                    | options exercised, net of       |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |                                                                                   |
|                                                                                    | 30,645 shares returned to       |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |                                                                                   |
|                                                                                    |  GSE to pay for employee's |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |                                                                                   |
|                                                                                    | income tax liabilities of       |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |                                                                                   |
|                                                                                    | $251                            |                                                                                        |                                                                            |              - |                                                          |           -                                         |                                                                                                                                  |                    194                 |                                                                |            2 |                                                                                  |              29 |                                                                                                                                  |                                                                                                                                  |                       - |                                                                                                                      |                     - |                                                                                   |               31 |
| Common stock issued for                                                                 |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |
|                                                                                    | services provided               |                                                                                        |              - |                                                                            |           - |                                                                                                  |                      17      |                                                                                                                                  |           -       |                                                                |            131                 |                                                                             |                                                                                                                                  |                       - |                                                                                                                                  |                     - |                                                                                                                      |             131            |
| Common stock issued for                                                                 |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |
|                                                                                    | warrants exercised              |                                                                                        |              - |                                                                            |           - |                                                                                                  |                    249                 |                                                                                                                                  |            3 |                                                                |            537                 |                                                                             |                                                                                                                                  |                       - |                                                                                                                                  |                     - |                                                                                                                      |             540            |
| Foreign currency translation                                                            |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |
|                                                                                    | adjustment                      |                                                                                        |              - |                                                                            |           - |                                                                                                  |                       - |                                                                                                                                  |           -       |                                                                |               - |                                                                             |                                                                                                                                  |                       - |                                                                                                                                  |                 (327)                     |                                                                                                                      |           (327)                      |
| Net loss                                                                                |                            |                                                                                        |              - |                                                                            |           - |                                                                                                  |                       - |                                                                                                                                  |           -       |                                                                |               - |                                                                             |                                                                                                                                  |                   (690)                     |                                                                                                                                  |                     - |                                                                                                                      |           (690)                      |
| Balance, December 31, 2008                                                              |                            |                - |                                                                            |             -       |                                                          |               15,968            |                                                                                                                                  |        160                                                                                         |                                                                |       50,572                          |                                                                                  |                                                                             |              (28,818)                                                |                                                                                                                                  |              (1,214)                                                 |                                                                                                                      |        20,700                                                                          |
|                                                                                    |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |                                                                                   |                                                                                   |   |
| Stock-based compensation                                                                |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |
|                                                                                    | expense                         |                                                                                        |                                                                            |              - |                                                          |           -                                         |                                                                                                                                  |                       - |                                                                |           -       |                                                                                  |            906            |                                                                                                                                  |                                                                                                                                  |                       - |                                                                                                                      |                     - |                                                                                   |             906            |
| Issuance of common stock                                                                |                            |              -             |                                                                            |           -                   |                                                          |                 2,875 |                                                                                                                                  |          29                                                                              |                                                                |       15,847                          |                                                                                  |                                                                             |                       - |                                                                                                                                  |                     -             |                                                                                                                      |        15,876                                                                          |
| Common stock issued for                                                                 |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |
|                                                                                    | options exercised               |                                                                                        |              - |                                                                            |           - |                                                                                                  |                      58      |                                                                                                                                  |           -       |                                                                |            103                 |                                                                             |                                                                                                                                  |                       - |                                                                                                                                  |                     - |                                                                                                                      |             103            |
| Common stock issued for                                                                 |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |
|                                                                                    | services provided               |                                                                                        |              - |                                                                            |           - |                                                                                                  |                      19      |                                                                                                                                  |           -       |                                                                |            113                 |                                                                             |                                                                                                                                  |                       - |                                                                                                                                  |                     - |                                                                                                                      |             113            |
| Common stock issued for                                                                 |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |
|                                                                                    | warrants exercised              |                                                                                        |              - |                                                                            |           - |                                                                                                  |                      10      |                                                                                                                                  |           -       |                                                                |              18      |                                                                             |                                                                                                                                  |                       - |                                                                                                                                  |                     - |                                                                                                                      |               18 |
| Foreign currency translation                                                            |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |
|                                                                                    | adjustment                      |                                                                                        |              - |                                                                            |           - |                                                                                                  |                       - |                                                                                                                                  |           -       |                                                                |               - |                                                                             |                                                                                                                                  |                       - |                                                                                                                                  |                  224                 |                                                                                                                      |             224            |
| Net loss                                                                                |                            |                                                                                        |              - |                                                                            |           - |                                                                                                  |                       - |                                                                                                                                  |           -       |                                                                |               - |                                                                             |                                                                                                                                  |                   (797)                     |                                                                                                                                  |                     - |                                                                                                                      |           (797)                      |
| Balance, December 31, 2009                                                              |                            |                - |                                                                            |             -       |                                                          |               18,930            |                                                                                                                                  |        189                                                                                         |                                                                |       67,559                          |                                                                                  |                                                                             |              (29,615)                                                |                                                                                                                                  |                 (990)                                 |                                                                                                                      |        37,143                                                                          |
|                                                                                    |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |                                                                                   |                                                                                   |   |
| Stock-based compensation                                                                |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |
|                                                                                    | expense                         |                                                                                        |                                                                            |              - |                                                          |           -                                         |                                                                                                                                  |                       - |                                                                |           -       |                                                                                  |            807            |                                                                                                                                  |                                                                                                                                  |                       - |                                                                                                                      |                     - |                                                                                   |             807            |
| Common stock issued for                                                                 |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |
|                                                                                    | options exercised               |                                                                                        |              - |                                                                            |           - |                                                                                                  |                      57      |                                                                                                                                  |            2 |                                                                |              95      |                                                                             |                                                                                                                                  |                       - |                                                                                                                                  |                     - |                                                                                                                      |               97 |
| Common stock issued for                                                                 |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |
|                                                                                    | warrants exercised              |                                                                                        |              - |                                                                            |           - |                                                                                                  |                      45      |                                                                                                                                  |           -       |                                                                |              79      |                                                                             |                                                                                                                                  |                       - |                                                                                                                                  |                     - |                                                                                                                      |               79 |
| Common stock issued for                                                                 |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |
|                                                                                    | services provided               |                                                                                        |              - |                                                                            |           - |                                                                                                  |                      17      |                                                                                                                                  |           -       |                                                                |              76      |                                                                             |                                                                                                                                  |                       - |                                                                                                                                  |                     - |                                                                                                                      |               76 |
| Common stock issued for                                                                 |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |
|                                                                                    | TAS acquisition                 |                                                                                        |              - |                                                                            |           - |                                                                                                  |                    123                 |                                                                                                                                  |            1 |                                                                |            682                 |                                                                             |                                                                                                                                  |                       - |                                                                                                                                  |                     - |                                                                                                                      |             683            |
| Foreign currency translation                                                            |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |
|                                                                                    | adjustment                      |                                                                                        |              - |                                                                            |           - |                                                                                                  |                       - |                                                                                                                                  |           -       |                                                                |               - |                                                                             |                                                                                                                                  |                       - |                                                                                                                                  |                  270                 |                                                                                                                      |             270            |
| Net loss                                                                                |                            |                                                                                        |              - |                                                                            |           - |                                                                                                  |                       - |                                                                                                                                  |           -       |                                                                |               - |                                                                             |                                                                                                                                  |                (2,249)                                     |                                                                                                                                  |                     - |                                                                                                                      |        (2,249)                                      |
| Balance, December 31, 2010                                                              |                            |                - |                                                                            |  $       -                              |                                                          |               19,172            |                                                                                                                                  |  $    192                                                                                                    |                                                                |  $   69,298                                     |                                                                                  |                                                                             |  $          (31,864)                                                           |                                                                                                                                  |  $             (720)                                            |                                                                                                                      |  $    36,906                                                                                     |
|                                                                                    |                            |                                                                                        |                                                                            |                                                                            |                                                          |                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                |                                                                |                                                                                  |                                                                             |                                                                                                                                  |                                                                                                                                  |                                                                                                                                  |                                                                                                                      |                                                                                                                      |                                                                                   |                                                                                   |   |
| The accompanying notes are an integral part of these consolidated financial statements. |

----

| GSE SYSTEMS, INC. AND SUBSIDIARIES                                                                                                                                       |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                                                                    |
| (in thousands)                                                                                                                                                           |   |
|                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                     |   | Years ended December 31, |   |
|                                                                                                                                                                     |   | 2010 |   |   | 2009 |   |   | 2008 |   |
| Cash flows from operating activities:                                                                                                                                    |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                                                                                                 |   | $ | (2,249 | ) |   | $ | (797 | ) |   | $ | (690 | ) |
| Adjustments to reconcile net loss to net cash                                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |
| provided by operating activities:                                                                                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
|   Depreciation                                                                                                                                                      |   |   | 579 |   |   |   | 504 |   |   |   | 446 |   |
| Intangible asset amortization                                                                                                                                            |   |   | 102 |   |   |   | - |   |   |   | - |   |
| Capitalized software amortization                                                                                                                                        |   |   | 978 |   |   |   | 483 |   |   |   | 274 |   |
| Amortization of deferred financing costs                                                                                                                                 |   |   | 92 |   |   |   | 46 |   |   |   | 142 |   |
| Change in fair value of contingent consideration                                                                                                                         |   |   | 147 |   |   |   | - |   |   |   | - |   |
| Stock-based compensation expense                                                                                                                                         |   |   | 883 |   |   |   | 1,019 |   |   |   | 781 |   |
|    Equity loss on investment in GSE-UNIS Simulation Technology Co. Ltd.                                                                                        |   |   | 13 |   |   |   | - |   |   |   | - |   |
|    Elimination of profit on Emirates Simulation Academy, LLC contract                                                                                          |   |   | - |   |   |   | - |   |   |   | 28 |   |
|    Amortization of deferred profit on Emirates Simulation Academy, LLC contract                                                                                |   |   | - |   |   |   | (724 | ) |   |   | - |   |
|    Equity loss on investment in Emirates Simulation Academy, LLC                                                                                               |   |   | - |   |   |   | 732 |   |   |   | 213 |   |
|    Reserve on cash collateral for Emirates Simulation Academy, LLC line of credit                                                                              |   |   | - |   |   |   | 1,291 |   |   |   | - |   |
| (Gain)/loss on derivative instruments                                                                                                                                    |   |   | 913 |   |   |   | (763 | ) |   |   | 453 |   |
| Changes in assets and liabilities:                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Contract receivables                                                                                                                                                     |   |   | (903 | ) |   |   | (5,100 | ) |   |   | (527 | ) |
| Prepaid expenses and other assets                                                                                                                                        |   |   | (922 | ) |   |   | 155 |   |   |   | (143 | ) |
|                 Accounts payable, accrued compensation and accrued expenses                   |   |   | 932 |   |   |   | 4,148 |   |   |   | (1,033 | ) |
|         Billings in excess of revenues earned                                                                                         |   |   | 1,669 |   |   |   | (1,421 | ) |   |   | 1,750 |   |
| Accrued warranty reserves                                                                                                                                                |   |   | 407 |   |   |   | 207 |   |   |   | 342 |   |
|   Other liabilities                                                                                                                                                 |   |   | (209 | ) |   |   | 546 |   |   |   | 220 |   |
| Net cash provided by operating activities                                                                                                                                |   |   | 2,432 |   |   |   | 326 |   |   |   | 2,256 |   |
|                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash flows from investing activities:                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |
|    Release (restriction) of cash as collateral for letters of credit, bank guarantees,                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
| and foreign currency contracts                                                                                                                                           |   |   | 1,135 |   |   |   | 2,484 |   |   |   | (836 | ) |
|   Capital expenditures                                                                                                                                         |   |   | (519 | ) |   |   | (361 | ) |   |   | (705 | ) |
|  Capitalized software development costs                                                                                                                             |   |   | (903 | ) |   |   | (861 | ) |   |   | (591 | ) |
|    Investment in GSE-UNIS Simulation Technology Co. Ltd.                                                                                                       |   |   | (587 | ) |   |   | - |   |   |   | - |   |
| Acquisitions, net of cash acquired                                                                                                                                       |   |   | (549 | ) |   |   | - |   |   |   | - |   |
|  Proceeds from sale/leaseback transaction                                                                                                                           |   |   | 377 |   |   |   | - |   |   |   | - |   |
|    Drawdown of cash collateral on  Emirates Simulation Academy, LLC line of credit                                                                   |   |   | (294 | ) |   |   | - |   |   |   | - |   |
|  Investment in Emirates Simulation Academy, LLC                                                                                                                     |   |   | - |   |   |   | (14 | ) |   |   | (486 | ) |
| Net cash provided by (used in) investing activities                                                                                                                      |   |   | (1,340 | ) |   |   | 1,248 |   |   |   | (2,618 | ) |
|                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash flows from financing activities:                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Proceeds from issuance of common stock                                                                                                                                   |   |   | 176 |   |   |   | 15,997 |   |   |   | 571 |   |
| Restriction of cash for credit facility collateral                                                                                                                       |   |   | - |   |   |   | (600 | ) |   |   | - |   |
| Deferred financing costs                                                                                                                                                 |   |   | (82 | ) |   |   | (20 | ) |   |   | (88 | ) |
| Net cash provided by financing activities                                                                                                                                |   |   | 94 |   |   |   | 15,377 |   |   |   | 483 |   |
|                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |
| Effect of exchange rate changes on cash                                                                                                                                  |   |   | 121 |   |   |   | 45 |   |   |   | (19 | ) |
| Net increase in cash and cash equivalents                                                                                                                                |   |   | 1,307 |   |   |   | 16,996 |   |   |   | 102 |   |
| Cash and cash equivalents at beginning of year                                                                                                                           |   |   | 25,270 |   |   |   | 8,274 |   |   |   | 8,172 |   |
| Cash and cash equivalents at end of period                                                                                                                               |   | $ | 26,577 |   |   | $ | 25,270 |   |   | $ | 8,274 |   |
|                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |
| Supplemental cash flow disclosures                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-cash financing activities                                                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |
|                  Issuance of 122,617 shares of common stock to acquire TAS Holdings Ltd. |   | $ | 683 |   |   | $ | - |   |   | $ | - |   |
|                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |
| The accompanying notes are an integral part of these consolidated financial statements.                                                                                  |   |

----

| ·   | A written waiver has been granted for the funded debt to EBITDA ratio default. |
|--------------------|--------------------------------------------------------------------------------|

| ·   | The $5.0 million principal line of credit has been terminated. |
|--------------------|----------------------------------------------------------------|

| ·   | The financial covenants for the $2.5 million principal line of credit have been deleted. |
|--------------------|------------------------------------------------------------------------------------------|

| ·   | The Company is required to cash collateralize all outstanding standby letters of credit, which totals $3.4 million. |
|--------------------|---------------------------------------------------------------------------------------------------------------------|

| ·   | All future letters of credit issued by BOA must be cash collateralized. |
|--------------------|-------------------------------------------------------------------------|

| ·     | Borrowings under the line of credit must be cash collateralized.  Currently the Company has in place a $600,000 certificate of deposit as collateral for the line of credit. |
|---------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| (in thousands)          |   | As of and for the        |   |
|-------------------------|--------|--------------------------|--------|
|                    |   | Years ended December 31, |   |
|                    |   | 2010                     |   |   | 2009 |   |   | 2008 |   |
|                    |   |                     |   |   |   |   |   |   |   |
| Beginning balance       |   | $                        | 1,746  |   |   | $ | 2 |   |   | $ | 2 |   |
|                    |   |                     |   |   |   |   |   |   |   |   |   |   |
| Current year provision  |   |                     | 294    |   |   |   | 1,744 |   |   |   | - |   |
|                    |   |                     |   |   |   |   |   |   |   |   |   |   |
| Current year write-offs |   |                     | -      |   |   |   | - |   |   |   | - |   |
|                    |   |                     |   |   |   |   |   |   |   |   |   |   |
| Ending balance          |   | $                        | 2,040  |   |   | $ | 1,746 |   |   | $ | 2 |   |
|                    |   |                     |   |   |   |   |   |   |   |   |   |   |

----

----

| (in thousands)         | As of and for the                                                                                                          |
|------------------------|----------------------------------------------------------------------------------------------------------------------------|
|                   | Years ended December 31,                                                                                                   |
|                   | 2010                                                                                                                       |   | 2009 |   | 2008 |
|                   |                                                                                                                       |   |   |   |   |
| Beginning balance      |  $            1,273                                       |   |  $            1,066 |   |  $               724 |
|                   |                                                                                                                       |   |   |   |   |
| Current year provision |                   718            |   |                   605 |   |                   799 |
|                   |                                                                                                                       |   |   |   |   |
| Current year claims    |                  (330)                |   |                  (407) |   |                  (448) |
|                   |                                                                                                                       |   |   |   |   |
| Currency adjustment    |                     19 |   |                     10 |   |                      (9) |
|                   |                                                                                                                       |   |   |   |   |
| Ending balance         |  $            1,680                                       |   |  $            1,273 |   |  $            1,066 |
|                   |                                                                                                                       |   |   |   |   |

----

----

|                                                                                                              |   |                     |       |   |   |   |       |   |   |
|-------------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|--------|--------|--------|------------|--------|--------|
| (in thousands, except for share and per share amounts)                                                            |   |                     |       |   |   |   |       |   |   |
|                                                                                                              |   | Years ended December 31, |       |
|                                                                                                              |   | 2010                     |       |   | 2009   |   |       | 2008   |   |
| Numerator:                                                                                                        |   |                     |       |   |   |   |       |   |   |
| Net loss attributed to                                                                                            |   |                     |       |   |   |   |       |   |   |
| common stockholders                                                                                               |   | $                        | (2,249     | )      |   | $      | (797       | )      |   | $ | (690 | ) |
|                                                                                                              |   |                     |       |   |   |   |       |   |   |   |   |   |
|                                                                                                              |   |                     |       |   |   |   |       |   |   |   |   |   |
| Denominator:                                                                                                      |   |                     |       |   |   |   |       |   |   |   |   |   |
|      Weighted-average shares outstanding for basic                                            |   |                     |       |   |   |   |       |   |   |   |   |   |
| earnings per share                                                                                                |   |                     | 18,975,007 |   |   |   | 16,938,392 |   |   |   | 15,746,616 |   |
|                                                                                                              |   |                     |       |   |   |   |       |   |   |   |   |   |
| Effect of dilutive securities:                                                                                    |   |                     |       |   |   |   |       |   |   |   |   |   |
| Employee stock options, warrants and                                                                              |   |                     |       |   |   |   |       |   |   |   |   |   |
| convertible preferred stock                                                                                       |   |                     | -          |   |   |   | -          |   |   |   | - |   |
|                                                                                                              |   |                     |       |   |   |   |       |   |   |   |   |   |
|      Adjusted weighted-average shares outstanding                                             |   |                     |       |   |   |   |       |   |   |   |   |   |
| and assumed conversions for diluted                                                                               |   |                     |       |   |   |   |       |   |   |   |   |   |
| earnings per share                                                                                                |   |                     | 18,975,007 |   |   |   | 16,938,392 |   |   |   | 15,746,616 |   |
|                                                                                                              |   |                     |       |   |   |   |       |   |   |   |   |   |
|       Shares related to dilutive securities excluded                                     |   |                     |       |   |   |   |       |   |   |   |   |   |
|              because inclusion would be anti-dilutive |   |                     | 1,679,907  |   |   |   | 1,791,757  |   |   |   | 1,196,746 |   |

|                                 | Years ended December 31, |
|--------------------------------------|--------------------------|
|                                 | 2010                     |   | 2009 |   | 2008 |
| Slovenské elektrárne, a.s. | 22.0%                    |   | 13.5% |   | 0.0% |
| Emerson Process Management           | 11.1%                    |   | 12.1% |   | 16.2% |
| Titan-2 Concern                      | 5.0%                     |   | 10.7% |   | 0.0% |
| American Electric Power              | 0.9%                     |   | 6.8% |   | 10.5% |

----

|                                                                    |   | December 31, |   |
|-------------------------------------------------------------------------|--------|--------------|--------|
| (in thousands)                                                          |   | 2010         |   |   | 2009 |   |
|                                                                    |   |         |   |   |   |   |
| Asset derivatives                                                       |   |         |   |   |   |   |
|      Prepaid expenses and other current assets |   | $            | 208    |   |   | $ | 515 |   |
|        Other assets                  |   |         | 117    |   |   |   | 396 |   |
|                                                                    |   |         | 325    |   |   |   | 911 |   |
|                                                                    |   |         |   |   |   |   |   |   |
| Liability derivatives                                                   |   |         |   |   |   |   |   |   |
|   Other current liabilities                                   |   |         | (204   | ) |   |   | (34 | ) |
|    Other liabilities                                          |   |         | (40    | ) |   |   | (65 | ) |
|                                                                    |   |         | (244   | ) |   |   | (99 | ) |
|                                                                    |   |         |   |   |   |   |   |   |
| Net fair value                                                          |   | $            | 81     |   |   | $ | 812 |   |

----

|                                                                                |   |                    |   |   |   |   |   |   |   |
|-------------------------------------------------------------------------------------|--------|-------------------------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                |   | Year ended December 31, |   |
| (in thousands)                                                                      |   | 2010                    |   |   | 2009   |   |   | 2008   |   |
|                                                                                |   |                    |   |   |   |   |   |   |   |
| Foreign exchange contracts- change                                                  |   | $                       | (745   | )      |   | $      | 851    |   |   | $ | (174 | ) |
|          in fair value                 |   |                    |   |   |   |   |   |   |   |   |   |   |
| Remeasurement of related contract                                                   |   |                    |   |   |   |   |   |   |   |
|          receivables and billings in excess |   |                    |   |   |   |   |   |   |   |
|          of revenue earned                  |   |                    | (168   | )      |   |   | (88    | )      |   |   | (279 | ) |
|                                                                                |   | $                       | (913   | )      |   | $      | 763    |   |   | $ | (453 | ) |

----

----

| Cash and stock purchase price      |   | $      | 1,289 |   |
|------------------------------------|--------|--------|-------|--------|
| Estimated contingent consideration |   |   | 740   |   |
| Total estimated purchase price     |   | $      | 2,029 |   |

| April 26, 2010                                                                        |
|---------------------------------------------------------------------------------------|
| (unaudited)                                                                           |
|                                                                                  |   |   |
| Cash                                                                                  |  $ | 68 |   |
| Contract receivables                                                                  |   | 594  |   |
| Prepaid expenses and other current assets                                        |   | 17  |   |
| Property, plant and equipment, net                                                    |   | 496  |   |
| Intangible assets                                                                     |   | 735  |   |
| Goodwill                                                                              |   | 865  |   |
| Total assets                                                                          |   | 2,775  |   |
|                                                                                  |   |   |   |
| Accounts payable, accrued expenses and other liabilities                         |   | 703  |   |
| Billings in excess of costs and estimated earnings on uncompleted contracts |   | 43  |   |
| Total liabilities assumed                                                             |   | 746  |   |
|                                                                                  |   |   |   |
| Net assets acquired                                                                   |  $ | 2,029 |   |

----

|                                                             |         |                     |                |   |   |                                     |
|------------------------------------------------------------------|--------------|--------------------------|---------------------|--------|--------|------------------------------------------|
| (in thousands)                                                   |         | Twelve Months Ended |
|                                                             |         | December 31,             |
|                                                             |         | (unaudited)              |
| Pro forma financial information including the acquisition of TAS |    |                     | 2010                |   |   | 2009                                     |
| Revenue                                                          |    | $                        | 48,381              |   | $      | 43,811                                   |
| Operating income (loss)                                          |         |                     |   (1,153) |   |   |       400  |
| Net loss                                                         |    |                     |   (2,185) |   |   |       (63) |
| Loss per common share — basic                              |    | $                        | (0.12)              |   | $      | 0.00                                     |
| Loss per common share — diluted                            |    | $                        | (0.12)              |   | $      | 0.00                                     |

| (in thousands)                                  |                                       |                                        |                                            | December 31,                                |                      |
|-------------------------------------------------|--------------------------------------------|---------------------------------------------|-------------------------------------------------|---------------------------------------------|---------------------------|
|                                            |                                       |                                        |                                            |                                        |                      | 2010 |   | 2009 |   |
| Billed receivables                              |                                       |                                        |                                            |  $     7,733  |                      |  $    8,183 |   |
| Recoverable costs and accrued profit not billed |       11,508 |                                        |        9,504 |                                        |
| Allowance for doubtful accounts                 |                                       |       (2,040) |                                            |       (1,746) |                      |
|                                            | Total contract receivables, net            |                                        |  $   17,201                 |                                        |  $  15,941 |   |

----

| (in thousands)                 |   |                                                                       |                                                                  | December 31,                                                                    |
|--------------------------------|--------|----------------------------------------------------------------------------|-----------------------------------------------------------------------|---------------------------------------------------------------------------------|
|                           |   |                                                                       |                                                                  |                                                                            |   | 2010 |   | 2009 |
| Prepaid expenses               |   |                                                                       |                                                                  |  $        416                      |   |  $        348 |
| Employee advances              |   |                                                                       |                                                                  |             96      |   |              - |
| Deferred income taxes- current |   |             35 |                                                                  |              - |
| Value added tax receivable     |   |                                                                       |            718 |                                                                            |            464 |
| Other current assets           |   |                                                                       |                                                                  |            727           |   |            679 |
|                           | Total  |                                                                       |                                                                  |                                                                            |   |  $     1,992 |   |  $     1,491 |

| (in thousands)           |                                      |                           |                                                      | December 31,                                               |
|--------------------------|-------------------------------------------|--------------------------------|-----------------------------------------------------------|------------------------------------------------------------|
|                     |                                      |                           |                                                      |                                                       |   | 2010 |   | 2009 |
| Computer equipment       |                                      |                           |  $   3,446                            |                                                       |  $     2,954 |
| Leasehold improvements   |                                      |                           |          533 |                                                       |            166 |
| Furniture and fixtures   |                                      |                           |          748 |                                                       |            944 |
|                     |                                      |                           |                                                      |                                                       |   |       4,727 |   |         4,064 |
| Accumulated depreciation |                                      |                           |     (3,667)                           |                                                       |       (3,075) |
|                     | Equipment and leasehold improvements, net |  $   1,060 |                                                      |  $        989 |

|                                   |                                       |   |                                                        |         |                                                        |   |   |   |
|----------------------------------------|--------------------------------------------|--------|-------------------------------------------------------------|--------------|-------------------------------------------------------------|--------|--------|--------|
| (in thousands)                         |                                       |   |                                                        | December 31, |
|                                   |                                       |   |                                                        |         |                                                        | 2010   |   | 2009   |
| Capitalized software development costs |  $     2,594 |   |  $     2,318                  |
| Accumulated amortization               |                                       |   |          (804) |         |          (453) |
|                                   | Software development costs, net            |   |  $     1,790                  |         |  $     1,865                  |

----

----

|                                            |   | Year ended        |   |
|-------------------------------------------------|--------|-------------------|--------|
| (in thousands)                                  |   | December 31, 2009 |   |
|                                            |   |              |   |
| Trade receivable                                |   | $                 | 1,604  |   |
| Accrued agent fee                               |   |              | (96    | ) |
| Operating expense                               |   |              | 1,508  |   |
|                                            |   |              |   |   |
| Restricted cash- bank guarantee and             |   |              |   |   |
|     accrued interest income |   |              | 1,291  |   |
| Investment in ESA                               |   |              | 117    |   |
| Deferred profit                                 |   |              | (543   | ) |
| Other expense, net                              |   |              | 865    |   |
|                                            |   |              |   |   |
|  Total                                     |   | $                 | 2,373  |   |

----

|                       |   | Quoted Prices    |   |   | Significant |   |   |         |   |   |   |   |
|----------------------------|--------|------------------|--------|--------|-------------|--------|--------|--------------|--------|--------|--------|--------|
|                       |   | in Active        |   |   | Other       |   |   | Significant  |   |   |   |   |
|                       |   | Markets for      |   |   | Observable  |   |   | Unobservable |   |   |   |   |
|                       |   | Identical Assets |   |   | Inputs      |   |   | Inputs       |   |   |   |   |
| (in thousands)             |   | (Level 1)        |   |   | (Level 2)   |   |   | (Level 3)    |   |   | Total  |   |
|                       |   |             |   |   |        |   |   |         |   |   |   |   |
|                       |   |             |   |   |        |   |   |         |   |   |   |   |
| Money market fund          |   | $                | 17,017 |   |        | $      | -      |         |   | $      | -      |   |   |   | 17,017 |   |
| Certificates of deposit    |   |             | 779    |   |        |   | -      |         |   |   | -      |   |   |   | 779 |   |
| Foreign exchange contracts |   |             | -      |   |        |   | 325    |         |   |   | -      |   |   |   | 325 |   |
|                       |   |             |   |   |        |   |   |         |   |   |   |   |   |   |   |   |
| Total assets               |   | $                | 17,796 |   |        | $      | 325    |         |   | $      | -      |   |   | $ | 18,121 |   |
|                       |   |             |   |   |        |   |   |         |   |   |   |   |   |   |   |   |
| Foreign exchange contracts |   | $                | -      |   |        | $      | (244   | )            |   | $      | -      |   |   | $ | (244 | ) |
|                       |   |             |   |   |        |   |   |         |   |   |   |   |   |   |   |   |
| Total liabilities          |   | $                | -      |   |        | $      | (244   | )            |   | $      | -      |   |   | $ | (244 | ) |

----

|                        |   |                      |   | As of                |
|-----------------------------|--------|---------------------------|--------|----------------------|
|                        |   | Covenant                  |   | Dec. 31, 2010        |
|                        |   |                      |   |                 |
| Tangible net worth          |   | Must Exceed $15.0 million |   | $31.8 million        |
| Funded debt to EBITDA ratio |   | Not to Exceed 2.50 : 1.00 |   |  (30.90) : 1.00 |

| ·   | A written waiver has been granted for the funded debt to EBITDA ratio default. |
|--------------------|--------------------------------------------------------------------------------|

| ·   | The $5.0 million principal line of credit has been terminated. |
|--------------------|----------------------------------------------------------------|

| ·   | The financial covenants for the $2.5 million principal line of credit have been deleted. |
|--------------------|------------------------------------------------------------------------------------------|

| ·   | The Company is required to cash collateralize all outstanding standby letters of credit, which totals $3.4 million. |
|--------------------|---------------------------------------------------------------------------------------------------------------------|

| ·   | All future letters of credit issued by BOA must be cash collateralized. |
|--------------------|-------------------------------------------------------------------------|

| ·     | Borrowings under the line of credit must be cash collateralized.  Currently the Company has in place a $600,000 certificate of deposit as collateral for the line of credit. |
|---------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| (in thousands) |   |   | Years ended December 31, |   |
|----------------|--------|--------|--------------------------|--------|
|           |   |   | 2010                     |   |   | 2009 |   |   | 2008 |   |
| Domestic       |   |   | $                        | (3,114 | ) |   | $ | (2,115 | ) |   | $ | (674 | ) |
| Foreign        |   |   |                     | 1,071  |   |   |   | 2,235 |   |   |   | 113 |   |
|           | Total  |   | $                        | (2,043 | ) |   | $ | 120 |   |   | $ | (561 | ) |

| (in thousands) |   | Years ended December 31, |   |
|----------------|--------|--------------------------|--------|
|           |   | 2010                     |   |   | 2009 |   |   | 2008 |   |
| Current:       |   |                     |   |   |   |   |   |   |   |
| Federal        |   | $                        | -      |   |   | $ | 29 |   |   | $ | - |   |
| State          |   |                     | 9      |   |   |   | 80 |   |   |   | 10 |   |
| Foreign        |   |                     | 233    |   |   |   | 512 |   |   |   | 245 |   |
| Subtotal       |   |                     | 242    |   |   |   | 621 |   |   |   | 255 |   |
|           |   |                     |   |   |   |   |   |   |   |   |   |   |
| Deferred:      |   |                     |   |   |   |   |   |   |   |   |   |   |
| Foreign        |   |                     | (36    | ) |   |   | 296 |   |   |   | (126 | ) |
| Subtotal       |   |                     | (36    | ) |   |   | 296 |   |   |   | (126 | ) |
|           |   |                     |   |   |   |   |   |   |   |   |   |   |
|   Total   |   | $                        | 206    |   |   | $ | 917 |   |   | $ | 129 |   |

----

|                                           |   | Effective Tax Rate Percentage (%) |   |
|------------------------------------------------|--------|-----------------------------------|--------|
|                                           |   | Years ended December 31,          |   |
|                                           |   | 2010                              |   |   | 2009 |   |   | 2008 |   |
| Statutory federal income tax rate              |   |                              | 34.0   | % |   |   | 34.0 | % |   |   | (34.0 | ) % |
| State income taxes, net of federal tax benefit |   |                              | (0.5   | ) |   |   | 44.1 |   |   |   | 1.2 |   |
| Effect of foreign operations                   |   |                              | (4.6   | ) |   |   | (157.2 | ) |   |   | 0.2 |   |
| Change in valuation allowance                  |   |                              | (38.8  | ) |   |   | 669.6 |   |   |   | 39.6 |   |
| Other, principally permanent differences       |   |                              | (0.2   | ) |   |   | 173.7 |   |   |   | 16.0 |   |
| Effective tax rate                             |   |                              | (10.1  | ) % |   |   | 764.2 | % |   |   | 23.0 | % |

| (in thousands)                                                             |   | December 31, |   |
|----------------------------------------------------------------------------|--------|--------------|--------|
|                                                                       |   | 2010         |   |   | 2009 |   |   | 2008 |   |
| Deferred tax assets:                                                       |   |         |   |   |   |   |   |   |   |
|   Net operating loss carryforwards                                    |   | $            | 5,893  |   |   | $ | 5,650 |   |   | $ | 6,691 |   |
|   Capital loss carryforwards                                          |   |         | 2,472  |   |   |   | 2,443 |   |   |   | 1,675 |   |
| Accruals and reserves                                                      |   |         | 126    |   |   |   | 251 |   |   |   | 61 |   |
|     Expenses not currently deductible for tax purposes      |   |         | 1,358  |   |   |   | 1,153 |   |   |   | 412 |   |
|     Alternative minimum tax credit carryforwards            |   |         | 166    |   |   |   | 166 |   |   |   | 162 |   |
| Other                                                                      |   |         | 1,163  |   |   |   | 660 |   |   |   | 654 |   |
| Total deferred tax asset                                                   |   |         | 11,178 |   |   |   | 10,323 |   |   |   | 9,655 |   |
| Valuation allowance                                                        |   |         | (8,662 | ) |   |   | (8,375 | ) |   |   | (8,259 | ) |
|      Total deferred tax asset less valuation allowance |   |         | 2,516  |   |   |   | 1,948 |   |   |   | 1,396 |   |
|                                                                       |   |         |   |   |   |   |   |   |   |   |   |   |
| Deferred tax liabilities:                                                  |   |         |   |   |   |   |   |   |   |   |   |   |
|     Tax in excess of book depreciation                      |   |         | -      |   |   |   | - |   |   |   | (8 | ) |
|     Undistributed earnings of foreign subsidiary            |   |         | (1,790 | ) |   |   | (1,313 | ) |   |   | (683 | ) |
|    Software development costs                                    |   |         | (677   | ) |   |   | (724 | ) |   |   | (579 | ) |
| Other                                                                      |   |         | (421   | ) |   |   | (87 | ) |   |   | - |   |
| Total deferred tax liability                                               |   |         | (2,888 | ) |   |   | (2,124 | ) |   |   | (1,270 | ) |
|                                                                       |   |         |   |   |   |   |   |   |   |   |   |   |
|      Net deferred tax asset (liability)                |   | $            | (372   | ) |   | $ | (176 | ) |   | $ | 126 |   |

----

|   | Long-term incentive plan |
|--------|--------------------------|

----

|                                               |                       |                                                     |                                                                                     |                                                                                     |                                                                                     |                                                                                          |                                                                                                       |                                                                                                       | Weighted         |
|----------------------------------------------------|----------------------------|----------------------------------------------------------|------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------|------------------|
|                                               |                       |                                                     |                                                                                     |                                                                                     |                                                                                     |                                                                                          | Aggregate                                                                                                  |                                                                                                       | Average          |
|                                               |                       |                                                     | Number                                                                                   |                                                                                     | Weighted                                                                                 |                                                                                          | Intrinsic                                                                                                  |                                                                                                       | Remaining        |
|                                               |                       |                                                     | of                                                                                       |                                                                                     | Average                                                                                  |                                                                                          | Value                                                                                                      |                                                                                                       | Contractual Life |
|                                               |                       |                                                     | Shares                                                                                   |                                                                                     | Exercise Price                                                                           |                                                                                          | (in thousands)                                                                                             |                                                                                                       | (Years)          |
|                                               |                       |                                                     |                                                                                     |                                                                                     |                                                                                     |                                                                                          |                                                                                                       |                                                                                                       |             |
| Shares under option and warrant, December 31, 2009 | 2,061,611                  |                                                     |  $           4.33            |                                                                                     |                                                                                     |                                                                                          |                                                                                                       |
|                                               | Options granted            |                                                     |         422,143                                  |                                                                                     |               4.22 |                                                                                          |                                                                                                       |                                                                                                       |             |
|                                               | Options exercised          |                                                     |         (57,000)                                 |                                                                                     |               1.67 |                                                                                          |                                                                                                       |                                                                                                       |             |
|                                               | Warrants exercised         |         (45,198) |                                                                                     |               1.77 |                                                                                     |                                                                                          |                                                                                                       |                                                                                                       |
|                                               | Options  expired |                                                     |              (285)      |                                                                                     |               5.95 |                                                                                          |                                                                                                       |                                                                                                       |             |
|                                               | Options forfeited          |                                                     |       (107,143)                                            |                                                                                     |               5.95 |                                                                                          |                                                                                                       |                                                                                                       |             |
| Shares under option and warrant, December 31, 2010 | 2,274,128                  |                                                     |               4.35 |                                                                                     |  $         1,538                       |                                                                                          |                  4.46 |
| Options expected to vest                           |                       |         902,294  |                                                                                     |               5.35 |                                                                                     |  $              45 |                                                                                                       |                  6.65 |

----

|                                   |                                                                |                                                      |                                                                    |                                                                               |                                                                               | Weighted   |
|----------------------------------------|---------------------------------------------------------------------|-----------------------------------------------------------|-------------------------------------------------------------------------|------------------------------------------------------------------------------------|------------------------------------------------------------------------------------|------------|
|                                   |                                                                |                                                      |                                                                    | Number                                                                             |                                                                               | Average    |
|                                   |                                                                |                                                      |                                                                    | of Shares                                                                          |                                                                               | Fair Value |
|                                   |                                                                |                                                      |                                                                    |                                                                               |                                                                               |       |
| Nonvested options at December 31, 2009 |           827,723 |                                                      |  $          4.35 |
| Options granted                        |                                                                |                                                      |           422,143     |                                                                               |              1.52 |
| Options vested during the period       |                                                                |         (240,144) |                                                                    |              3.74 |
| Options forfeited                      |                                                                |                                                      |         (107,143)               |                                                                               |              4.34 |
|                                   |                                                                |                                                      |                                                                    |                                                                               |                                                                               |       |
| Nonvested options at December 31, 2010 |           902,579 |                                                      |  $          3.19 |
|                                   |                                                                |                                                      |                                                                    |                                                                               |                                                                               |       |

|                        | Years ended December 31, |
|-----------------------------|--------------------------|
|                        | 2010                     |   | 2009 |   | 2008 |
|                        |                     |   |   |   |   |
| Risk-free interest rates    | .57% - 2.93%             |   | 1.71% - 3.04% |   | 2.75% - 3.05% |
| Dividend yield              | 0%                       |   | 0% |   | 0% |
| Expected life               |  2.5 - 6.5 years    |   |  5.5 - 7.0 years |   |  4.9 - 8.5 years |
| Volatility                  | 37.2 - 63.8%             |   | 65.9% - 78.22% |   | 68.8% - 78.22% |
| Weighted average volatility | 55.38%                   |   | 67.85% |   | 77.40% |

----

| (in thousands) | Gross Future |
|----------------|--------------|
|           |         |   | Minimum Lease |
|           |         |   | Payments |
|           |         |   |   |
|           | 2011         |   |           $                   715 |
|           | 2012         |   |                       604 |
|           | 2013         |   |                       525 |
|           | 2014         |   |                       430 |
|           | 2015         |   |                       443 |
|           | Thereafter   |                    1,204 |
|           |         |   Total | $                3,921 |
|           |         |   |   |

----

----

| (in thousands)                         |   | Year ended December 31, 2010 |   |
|----------------------------------------|--------|------------------------------|--------|
|                                   |   | United States                |   |   | Europe |   |   | Asia |   |   | Eliminations |   |   | Consolidated |   |
|                                   |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Contract revenue                       |   | $                            | 37,197 |   |   | $ | 9,699 |   |   | $ | 317 |   |   | $ | - |   |   | $ | 47,213 |   |
| Transfers between geographic locations |   |                         | (674   | ) |   |   | 121 |   |   |   | 553 |   |   |   | - |   |   |   | - |   |
| Total contract revenue                 |   | $                            | 36,523 |   |   | $ | 9,820 |   |   | $ | 870 |   |   | $ | - |   |   | $ | 47,213 |   |
| Operating income (loss)                |   | $                            | (2,397 | ) |   | $ | 1,157 |   |   | $ | 8 |   |   | $ | - |   |   | $ | (1,232 | ) |
| Total assets, at December 31           |   | $                            | 70,783 |   |   | $ | 12,689 |   |   | $ | 353 |   |   | $ | (30,211 | ) |   | $ | 53,614 |   |
|                                   |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (in thousands)                         |   | Year ended December 31, 2009 |   |
|                                   |   | United States                |   |   | Europe |   |   | Asia |   |   | Eliminations |   |   | Consolidated |   |
|                                   |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Contract revenue                       |   | $                            | 34,056 |   |   | $ | 6,004 |   |   | $ | - |   |   | $ | - |   |   | $ | 40,060 |   |
| Transfers between geographic locations |   |                         | 323    |   |   |   | 30 |   |   |   | 604 |   |   |   | (957 | ) |   |   | - |   |
| Total contract revenue                 |   | $                            | 34,379 |   |   | $ | 6,034 |   |   | $ | 604 |   |   | $ | (957 | ) |   | $ | 40,060 |   |
| Operating income (loss)                |   | $                            | (536   | ) |   | $ | 1,018 |   |   | $ | 81 |   |   | $ | - |   |   | $ | 563 |   |
| Total assets, at December 31           |   | $                            | 71,216 |   |   | $ | 5,710 |   |   | $ | 231 |   |   | $ | (27,637 | ) |   | $ | 49,520 |   |
|                                   |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (in thousands)                         |   | Year ended December 31, 2008 |   |
|                                   |   | United States                |   |   | Europe |   |   | Asia |   |   | Eliminations |   |   | Consolidated |   |
|                                   |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Contract revenue                       |   | $                            | 24,483 |   |   | $ | 4,521 |   |   | $ | - |   |   | $ | - |   |   | $ | 29,004 |   |
| Transfers between geographic locations |   |                         | 177    |   |   |   | 23 |   |   |   | 407 |   |   |   | (607 | ) |   |   | - |   |
| Total contract revenue                 |   | $                            | 24,660 |   |   | $ | 4,544 |   |   | $ | 407 |   |   | $ | (607 | ) |   | $ | 29,004 |   |
| Operating income (loss)                |   | $                            | (682   | ) |   | $ | 641 |   |   | $ | 29 |   |   | $ | - |   |   | $ | (12 | ) |
| Total assets, at December 31           |   | $                            | 55,460 |   |   | $ | 3,110 |   |   | $ | 82 |   |   | $ | (27,637 | ) |   | $ | 31,015 |   |
|                                   |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| (in thousands) |         |   |   | Year ended December 31,                                                                                                          |
|----------------|--------------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|
|           |         |   |   |                                                                                                                             | 2010 |   | 2009 |   | 2008 |
|           |         |   |   |                                                                                                                             |   |   |   |   |   |
| Cash paid:     |         |   |   |                                                                                                                             |   |   |   |   |   |
|           | Interest     |   |   |  $                    - |   |  $                   1 |   |  $                   2 |
|           | Income taxes |   |   |  $               545                             |   |  $               206 |   |  $                 68 |
|           |         |   |   |                                                                                                                             |   |   |   |   |   |

----

| (in thousands, except per share data)  |   |                                        |   |   |    |   |   |    |   |   |    |   |
|----------------------------------------|--------|---------------------------------------------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|
|                                   |   | Year ended December 31, 2010 Quarterly Data |   |
|                                   |   | First                                       |   |   | Second  |   |   | Third   |   |   | Fourth  |   |
|                                   |   | Quarter                                     |   |   | Quarter |   |   | Quarter |   |   | Quarter |   |
| Contract revenue                       |   | $                                           | 11,208 |   |    | $      | 11,773 |    |   | $      | 11,904  |   |   | $ | 12,328 |   |
| Operating income (loss)                |   |                                        | 453    |   |    |   | 751    |    |   |   | (328    | )      |   |   | (2,108 | ) |
| Net income (loss)                      |   |                                        | 449    |   |    |   | 370    |    |   |   | (548    | )      |   |   | (2,520 | ) |
|                                   |   |                                        |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Basic income (loss) per common share   |   | $                                           | 0.02   |   |    | $      | 0.02   |    |   | $      | (0.03   | )      |   | $ | (0.13 | ) |
| Diluted income (loss) per common share |   | $                                           | 0.02   |   |    | $      | 0.02   |    |   | $      | (0.03   | )      |   | $ | (0.13 | ) |
|                                   |   |                                        |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| (in thousands, except per share data)  |   |                                        |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
|                                   |   | Year ended December 31, 2009 Quarterly Data |   |
|                                   |   | First                                       |   |   | Second  |   |   | Third   |   |   | Fourth  |   |
|                                   |   | Quarter                                     |   |   | Quarter |   |   | Quarter |   |   | Quarter |   |
| Contract revenue                       |   | $                                           | 8,128  |   |    | $      | 10,650 |    |   | $      | 10,217  |   |   | $ | 11,065 |   |
| Operating income (loss)                |   |                                        | 531    |   |    |   | 658    |    |   |   | 428     |   |   |   | (1,054 | ) |
| Net income (loss)                      |   |                                        | 333    |   |    |   | 571    |    |   |   | 458     |   |   |   | (2,159 | ) |
|                                   |   |                                        |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
|                                   |   |                                        |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Basic income (loss) per common share   |   | $                                           | 0.02   |   |    | $      | 0.04   |    |   | $      | 0.03    |   |   | $ | (0.11 | ) |
|                                   |   |                                        |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Diluted income (loss) per common share |   | $                                           | 0.02   |   |    | $      | 0.03   |    |   | $      | 0.03    |   |   | $ | (0.11 | ) |
|                                   |   |                                        |   |   |    |   |   |    |   |   |    |   |   |   |   |   |

----

| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
|---------|---------------------------------------------------------------------------------------|

----

| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
|----------|---------------------------------------------------------|

----

| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
|----------|-------------------------------------------------------------------------------------------------|

|   | ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. |
|--------|----------|---------------------------------------------------------------------------|

| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
|----------|--------------------------------------------|

|                                                                                                            |
|-----------------------------------------------------------------------------------------------------------------|
| GSE Systems, Inc. and Subsidiaries                                                                              |
|                                                                                                            |
| Report of Independent Registered Public Accounting Firm – Internal Control over Financial Reporting       |
| Report of Independent Registered Public Accounting Firm – Consolidated Financial Statements               |
| Consolidated Balance Sheets as of December 31, 2010 and 2009                                                    |
| Consolidated Statements of Operations for the years ended December 31, 2010, 2009, and 2008                     |
| Consolidated Statements of Comprehensive Loss for the years ended December 31, 2010,2009,  and 2008   |
| Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2010,2009, and 2008 |
| Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009, and 2008                     |
| Notes to Consolidated Financial Statements                                                                      |

----

----

| Date:  March 14, 2011 |   | /s / JAMES A. EBERLE                     |   |
|---------------------------------|--------|------------------------------------------|--------|
|                            |   | James A. Eberle, Chief Executive Officer |   |
|                            |   | (Principal Executive Officer)            |   |

| Date: March 14, 2011 |   | / s / JEFFERY G. HOUGH                       |   |
|----------------------|--------|----------------------------------------------|--------|
|                 |   | Jeffery G. Hough, Senior Vice President      |   |
|                 |   | and Chief Financial Officer                  |   |
|                 |   | (Principal Financial and Accounting Officer) |   |

| Date: March 8, 2011 | (Jerome I. Feldman, Chairman of the Board | ) | By:    | / s / JEFFERY G. HOUGH |
|---------------------|-------------------------------------------|---|--------|------------------------|
|                | (Michael D. Feldman, Director             | ) |   | Jeffery G. Hough       |
|                | (Dr. Sheldon L. Glashow, Director         | ) |   | Attorney-in-Fact       |
|                | (Jane Bryant Quinn, Director              | ) |   |                   |
|                | (Dr. Roger Hagengruber, Director          | ) |   |                   |
|                | (Joseph W. Lewis, Director                | ) |   |                   |
|                | (George J. Pedersen, Director             | ) |   |                   |
|                | (Orrie Lee Tawes III, Director            | ) |   |                   |

----

| Exhibit                                                       | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|---------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 1                                                             | Underwriting Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 1.1                                                           | Underwriting Agreement, dated August 31, 2009 between the Company and Roth Capital Partners, LLC.  Previously filed in connection with Form 8-K as filed with the Securities and Exchange Commission on September 1, 2009 and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2  2.1  2.2  2.3  2.4 | Plan of acquisition, reorganization, arrangement, liquidation, or succession  Share Purchase Agreement relating to TAS Holdings, Ltd. dated April 26, 2010, by and between John Maplesden, Anthony Maplesden, and John Easton and GSE Systems, Ltd and GSE Systems, Inc. previously filed with Form 8-K as filed with the Securities and Exchange Commission on April 30, 2010. Contract for the Sale and Leaseback of Land and Buildings at 37-39 Norton Road, Stockton-on-Tees TS18 2BU between TAS Holdings Ltd. and John Maplesden, Anthony Maplesden and John Easton, dated April 26, 2010, previously filed with Form 8-K as filed with the Securities and Exchange Commission on April 30, 2010. Stock Purchase Agreement, dated as of January 1, 2011 among GSE Systems, Inc., Toshi Shinohara, Santosh Joshi, Hideo Shinohara, and EnVision Systems, Inc.  Previously filed with Form 8-K as filed with the Securities and Exchange Commission on January 10, 2011. Employment Agreement, dated as of January 1, 2011 between Santosh Joshi and EnVision Systems, Inc.  Previously filed with Form 8-K as filed with the Securities and Exchange Commission on January 10, 2011.  |
|  3                                                       |  Articles of Incorporation and Bylaws                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3(i)                                                          | Fourth Amended and Restated Certificate of Incorporation of the Company.  Previously filed in connection with the GSE Systems, Inc. Form DEF 14A as filed with the Securities and Exchange Commission on November 20, 2007 and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3(ii)                                                         | Amended and Restated Bylaws of the Company.  Previously filed in connection with Form DEF 4A as filed with the Securities and Exchange Commission on November 20, 2007 and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

----

| 4.     | Instruments Defining Rights of Security Holders, including Indenture.                                                                                                                                                                                                                                                                                                                                                                 |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1    | Specimen Common Stock Certificate of the Company. Previously filed in connection with Amendment No. 3 to the GSE Systems, Inc. Form S-1 Registration Statement as filed with the Securities and Exchange Commission on July 24, 1995 and incorporated herein by reference.                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.2    | Form of Warrant to Purchase 166,667 shares of Common Stock of GSE Systems, Inc. dated as of June 15, 2007.  Previously filed in connection with the GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on June 18, 2007 and incorporated herein by reference.                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.3    | Securities Purchase Agreement, dated as of June 15, 2007 by and between GSE Systems, Inc. and each of the Investors to sell a total of 1,666,667 shares of GSE Common Stock.  Previously filed in connection with the GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on June 18, 2007 and incorporated herein by reference.                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.4    | Registration Rights Agreement, dated as of June 15, 2007 by and between GSE Systems, Inc. and each of the Investors.  Previously filed in connection with the GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on June 18, 2007 and incorporated herein by reference.                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4. 5   | Consent and Waiver, dated as of June 15, 2007, among GSE Systems, Inc., GSE Power Systems, Inc. and Laurus Master Fund Ltd. Previously filed in connection with the GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on June 18, 2007 and incorporated herein by reference.                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.    | Material Contracts                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1   | Agreement among ManTech International Corporation, National Patent Development Corporation, GPS Technologies, Inc., General Physics Corporation, Vattenfall Engineering AB and GSE Systems, Inc. (dated as of April 13, 1994). Previously filed in connection with the GSE Systems, Inc. Form S-1 Registration Statement as filed with the Securities and Exchange Commission on April 24, 1995 and incorporated herein by reference. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2   | GSE Systems, Inc. 1995 Long-Term Incentive Plan, amended as of September 25, 2007. Previously filed in connection with the GSE Systems, Inc. Form DEF 14A as filed with the Securities and Exchange Commission on November 20, 2007 and incorporated herein by reference. *                                                                                                                                                           |

----

| 10.3                                | Form of Option Agreement Under the GSE Systems, Inc. 1995 Long-Term Incentive Plan.  Previously filed in connection with the GSE Systems, Inc. Form 10-K as filed with the Securities and Exchange Commission on March 22, 1996 and incorporated herein by reference. *                                                                                                             |
|-------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.4                                | Memorandum of Association of Limited Liability Company dated November 8, 2005 by and between Al Qudra Holding PJSC, Centre of Excellence for Applied Research and Training, and GSE Systems, Inc.  Previously filed in connection with the GSE Systems, Inc. Form 10-Q/A filed with the Securities and Exchange Commission on October 4, 2006 and incorporated herein by reference. |
|                                |                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.5                                | Supply Agreement Contract by and between Emirates Simulation Academy, LLC and GSE Power Systems, Inc. dated January 3, 2006.  Previously filed in connection with the GSE Systems, Inc. Form 10-Q/A filed with the Securities and Exchange Commission on October 4, 2006 and incorporated herein by reference.                                                                      |
|                                |                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.6                                | License and Technology Transfer Agreement by and Between GSE Power Systems, Inc. and Emirates Simulation Academy, LLC dated January 3, 2006.  Previously filed in connection with the GSE Systems, Inc. Form 10-Q/A filed with the Securities and Exchange Commission on October 4, 2006 and incorporated herein by reference.                                                      |
|                                |                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.7                                | Office Lease Agreement between 1332 Londontown, LLC and GSE Systems, Inc. (dated as of February 27, 2008).   Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission on March 11, 2008 and incorporated herein by reference.                                                                              |
| 10.8            | $3,500,000 Ex-Im Bank-Guaranteed Transaction Specific Revolving Line of Credit, dated as of March 28, 2008.  Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission on April 3, 2008 and incorporated herein by reference.                                                                                    |
| 10.9                                | Security Agreement by and among GSE Systems, Inc., GSE Power Systems, Inc and Bank of America, N.A. dated March 28, 2008.  Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission on April 3, 2008 and incorporated herein by reference.                                                                      |
| 10.10      | Borrower Agreement by and among GSE Systems, Inc., GSE Power Systems, Inc. and Bank of America, N.A. dated March 28, 2008.  Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission on April 3, 2008 and incorporated herein by reference.                                                                          |

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| 10.11                        | $1,500,000 Domestic Revolving Line of Credit dated as of March 28, 2008.  Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission on April 3, 2008 and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                    |
|------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12              | Security Agreement by and among GSE Systems, Inc., GSE Power Systems, Inc. and Bank of America, N.A. dated as of March 28, 2008 (Domestic Revolving Line of Credit).  Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission on April 3, 2008 and incorporated herein by reference.                                                                                                                                                                                                                                                                                                        |
| 10.13                        | Continuing and Unconditional Guaranty by GSE Process Solutions, Inc. and Bank of America, N.A. dated as of March 28, 2008.  Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission on April 3, 2008 and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                  |
| 10.14  10.15  | Continuing and Unconditional Guaranty by MSHI, Inc. and Bank of America, N.A. dated as of March 28, 2008.  Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission on April 3, 2008 and incorporated herein by reference. Pledge Agreement by and among the Company, MSHI, Inc., GSE Power Systems, Inc., GSE Process Solutions, Inc. and Bank of America, N.A. dated as of March 28, 2008.  Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission on April 3, 2008 and incorporated herein by reference.  |
| 10.16                   | First Amendment to $1,500,000 Domestic Revolving Line of Credit, dated May 5, 2009.  Previously filed in connection with the GSE Systems, Inc. Form 10-Q as filed with the Securities and Exchange Commission on May 11, 2009 and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.17                        | First Amendment to Security Agreement by and among GSE Systems, Inc., GSE Power Systems, Inc. and Bank of America N.A (Domestic Revolving Line of Credit), dated as of May 5, 2009.  Previously filed in connection with the GSE Systems, Inc. Form 10-Q as filed with the Securities and Exchange Commission on May 11, 2009 and incorporated herein by reference.                                                                                                                                                                                                                                                                                              |

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| 10.18  10.19  10.20  10.21  10.22  10.23 | Ratification of Guarantee by GSE Process Solutions, Inc. and MSHI, Inc. (Ex-Im Bank-Guaranteed Transaction Specific Revolving Line of Credit), dated May 5, 2009.  Previously filed in connection with the GSE Systems, Inc. Form 10-Q as filed with the Securities and Exchange Commission on May 11, 2009 and incorporated herein by reference. Second Amendment to Loan Agreement (Ex-Im Bank-Guaranteed Transaction Specific Revolving Line of Credit) dated March 29, 2010. Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission on April 2, 2010 and incorporated herein by reference. Second Amendment to Loan Agreement (Domestic Revolving Line of Credit) dated March 29, 2010.  Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission on April 2, 2010 and incorporated herein by reference. Ratification of Guaranty (Ex-Im Bank-Guaranteed Transaction Specific Revolving Line of Credit) dated March 29, 2010.  Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission on April 2, 2010 and incorporated herein by reference. Ratification of Guaranty (Domestic Revolving Line of Credit) dated March 29, 2010.  Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission on April 2, 2010 and incorporated herein by reference. Consulting Agreement, dated as of April 30, 2010 between John V. Moran and GSE Systems, Inc. Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission on April 30, 2010 and incorporated herein by reference.   |
|--------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  10.24  10.25  10.26  10.27                             |  Employment Agreement dated as of November 1, 2010 between GSE Systems, Inc. and James Eberle.  Previously filed in connection with the GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on November 1, 2010 and incorporated herein by reference.* Employment Agreement dated as of January 1, 2011 between GSE Systems, Inc. and Chin-our Jerry Jen.  Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission on February 2, 2011 and incorporated herein by reference. Employment Agreement dated as of January 1, 2011 between GSE Systems, Inc. and Jeffery G. Hough.  Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission on February 2, 2011 and incorporated herein by reference. Employment Agreement dated as of January 1, 2011 between GSE Systems, Inc. and Michael D. Feldman, filed herewith.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

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| 10.28       | Employment Agreement dated as of January 1, 2011 between GSE Systems, Inc. and Gill Grady.  Previously filed in connection with the GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on February 2, 2011 and incorporated herein by reference.*  |
|-------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  10.29 |  Employment Agreement dated as of January 1, 2011 between GSE Systems, Inc. and Lawrence Gordon, filed herewith.                                                                                                                                                        |
| 10.30       | Third Amendment to Loan Agreement (Ex-Im Bank-Guaranteed Transaction Specific Revolving Line of Credit) dated March 14, 2011. Filed herewith.                                                                                                                                |
| 10.31       | Third Amendment to Loan Agreement (Domestic Revolving Line of Credit) dated March 14, 2011.  Filed herewith.                                                                                                                                                                 |
| 10.32       | Ratification of Guaranty (Domestic Revolving Line of Credit) dated March 14, 2011.  Filed herewith.                                                                                                                                                                               |
| 10.33       | Employment Agreement dated as of January 1, 2011 between GSE Systems, Inc. and Jerome I. Feldman.  Previously filed in connection with the GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on February 2, 2011 and incorporated herein by reference. |

| 14.    | Code of Ethics                                                                                                                                                                                                                                                             |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                       |
| 14.1   | Code of Ethics for the Principal Executive Officer and Senior Financial Officers.  Previously filed in connection with the GSE Systems, Inc. Form 10-K filed with the Securities and Exchange Commission on March 31, 2006 and incorporated herein by reference. |   |
|   |                                                                                                                                                                                                                                                                       |
| 21.    | Subsidiaries.                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                       |
| 21.1   | List of Subsidiaries of Registrant at December 31, 2010, filed herewith.                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                       |
| 23.    | Consents of Experts and Counsel                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                       |
| 23.1.  | Consent of KPMG LLP, filed herewith.                                                                                                                                                                                                                                  |   |
| 24.    | Power of Attorney                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                       |
| 24.1   | Power of Attorney for Directors’ and Officers’ Signatures on SEC Form 10-K, filed herewith.                                                                                                                                                          |

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| 31.    | Certifications                                                                                                                                                                                                                                                                                                                                          |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1   | Certification of Chief Executive Officer of the Company 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, filed herewith.                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 31.2   | Certification of Chief Financial Officer of the Company 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, filed herewith.                                                                                                                           |
| 32.    | Section 1350 Certifications                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 32.1   | Certification of Chief Executive Officer and Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, file herewith. *   Management contracts or compensatory plans required to be filed as exhibits pursuant to Item 14 (c) of this report. |

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