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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                        Amendment No. 1 to Form 10-K on
                                  FORM 10-K/A

(Mark one)

 X  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
---
    of 1934

                  For the fiscal year ended December 31, 2000

                                      OR

___ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934

                        Commission File Number: 0-27696

                              GENSYM CORPORATION
            (Exact name of registrant as specified in its charter)

                     Delaware                                  04-2932756
           (State or other jurisdiction of                  (I.R.S. Employer
           incorporation or organization)                  Identification No.)

                  52 Second Avenue                            01803-4411
                   Burlington, MA                             (Zip Code)
       (Address of principal executive offices)

      Registrant's telephone number, including area code: (781) 265-7100

       Securities registered pursuant to Section 12(b) of the Act: None

         Securities registered pursuant to Section 12 (g) of the Act:
                         Common Stock, $.01 par value

  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
                  Yes   X               No ___
                       ---

  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___

  As of March 12, 2001 there were 6,466,970 shares of the Registrant's Common
Stock outstanding. As of that date, the aggregate market value of the voting
stock held by non-affiliates of the registrant was $6,466,970 based on the last
reported sale price of the registrant's Common Stock on the Nasdaq National
Market as of the close of business on March 12, 2001.

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                      DOCUMENTS INCORPORATED BY REFERENCE

  Portions of the Registrant's definitive Proxy Statement for the 2001 Annual
Meeting of Stockholders to be held on Wednesday, May 16, 2001 are incorporated
by reference in items 10, 11, 12 and 13 of Part III of this Form 10-K.

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                              GENSYM CORPORATION

                               Explanatory Note

     This Amendment No. 1 to the Annual Report for the fiscal year ended
December 31, 2000 of Gensym Corporation (the "Company") is being filed by the
Company to amend and restate Item 1 of Part I, Items 6, 7 and 8 of Part II,
Item 12 of Part III and Item 14 of Part IV. In accordance with Rule 12b-15
promulgated under the Securities Exchange Act of 1934, as amended, the text of
the amended items are amended and restated in their entirety as set forth in
this Amendment No. 1.

     Item 1 of this Amendment No. 1 includes additional disclosure concerning
the Company's research and development and proprietary rights.

     Item 6 of this Amendment No. 1 includes additional disclosure concerning
the Company's revenues related to products and services.

     Item 7 of this Amendment No. 1 includes additional disclosure concerning
(1) the Company's revenues related to products and services, (2) the Company's
costs of revenues related to products and services, (3) the Company's operating
expenses, (4) fluctuations relating to the Company's quarterly operating
results and (5) the Company's plan for achieving profitability.

     Item 8 of this Amendment No. 1 includes additional disclosure concerning
(1) the Company's cost of revenues related to products and services, (2) the
Company's revenue recognition policy and (3) the Company's accrued expenses.

     Item 12 of this Amendment No. 1 includes revised disclosure concerning the
security ownership of certain beneficial owners and management.

     Item 14 of this Amendment No. 1 includes a new consent of Arthur Andersen
LLP, independent public accountants, as an exhibit hereto.

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PART I.

ITEM 1. BUSINESS

  Gensym Corporation ("Gensym" or "the Company") develops, markets and supports
adaptive software products for managing e-business infrastructure. The Company
has built a unique foundation of reasoning technologies through its flagship
product, G2a, and a family of G2-based products. These products are used for
communications and data network management; strategic supply-chain design; and
expert manufacturing in many different industries, including chemical, oil, gas
and pharmaceuticals. In 2000 Gensym began to transition itself from being
primarily a developer of customizable software and services to being a developer
of out-of-the-box software products and robust, extensible software platforms.
Gensym embarked on this new strategic direction in April 2000. During the course
of the year, the company introduced its first two out-of-the box products -- e-
SCOR, for strategic supply-chain design, and NetSleuth(TM), a network management
product.

  Gensym uses its direct sales force, coupled with OEM's and systems
integrators, to market its e-infrastructure products for network management and
supply chain design. In January 2001, the Company adopted an indirect sales
strategy for its expert manufacturing software platforms. The Company continues
to provide direct support to its installed base of manufacturing customers in
the manufacturing industry. Gensym now works with its network of value added
resellers, system integrators, original equipment manufacturers and other
partners, who include Gensym software in the products they develop to sell its
software and services to new end-user customers at leading companies around the
world. Gensym also is working to develop relationships with new original
equipment manufacturers and value-added reseller partners who have domain
expertise in the many different fields of manufacturing.

STRATEGY

  Gensym's strategy is to build a leadership position in the business-to-
business e-infrastructure market (network management and supply-chain design)
while continuing to build on our technology leadership in expert manufacturing.

  The rapid growth of the e-business marketplace and, most importantly,
business-to-business applications are directly dependent on the quality of the
information infrastructure and its ability to adapt to the fast pace of change.
Gensym's broad expertise in applying real-time reasoning technology to complex
problems creates a unique opportunity to deliver easy-to-use products that
manage the complex, fast-changing networks and systems infrastructure of e-
business. Gensym delivers high value, adaptive products that can provide
immediate return on investment by improving e-business infrastructure up time,
while expanding staff efficiency.

PRODUCTS

  Gensym's core technology is an extensible, customizable software platform
known as G2. The Company sells G2 and a growing number of products based on it.
Since April 2000, the Company has pursued a strategic direction based upon the
development of off-the-shelf products that are intended to bring the benefits of
Gensym technology to more customers more quickly than ever before. As part of
its new strategic direction, the Company adopted new product-packaging and
customer-service programs designed to make it easier for customers to do
business with the Company and enable Gensym to align its business practices with
software industry norms. The Company introduced these new programs in July 2000,
and they were formally implemented in September 2000. The packaged version of G2
that Gensym markets is known as G2 Classic.

G2 Classic

   G2, Gensym's core technology, is a comprehensive development and deployment
   environment for intelligent management and optimization of complex, dynamic
   operations. G2 applies knowledge that represents the experience of the best
   operations personnel, combined with analytical models constructed by
   engineers and business professionals and models derived from past
   performance, to real-time or model data, in order to reach conclusions,
   provide advice, and take real or simulated actions in a timely fashion. G2
   can follow multiple lines of reasoning based on this knowledge and consider
   multiple problems concurrently. G2 maintains an understanding of the behavior
   of processes over time and the timeliness of information, both of which are

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      important for real-time management of operations. G2 incorporates a broad
      array of integrated technologies that enable application developers to
      implement object-oriented applications without the need for conventional
      computer programming.

      G2 enables an application developer to express objects, rules, models and
      procedures using structured natural language so that they can be readily
      understood and modified. The G2 development environment enables a
      developer to test an application using simulated data and to view the
      results graphically.  In this way, an application can be tested under
      various scenarios before deployment. Rapid incremental application
      development can be done interactively to facilitate application
      improvements during prototyping, during development and even while in
      deployment. Using G2's ability to support rapid application development, a
      developer can show a dynamic, graphically animated prototype of an
      application to an end-user at an early stage.

      Using G2, an application developer can model a process in terms of
      interrelated objects, which may be in graphical or schematic diagram form.
      These object-based graphical connections enable G2 to reason about the
      interdependent behavior of connected process objects. G2's high-level
      representation of knowledge enables persons in many positions and roles in
      an organization to develop applications more quickly and easily, while
      aiding the ability to maintain and reuse the applications.  Using
      Telewindows, a component of G2, developers at multiple geographic
      locations can work in teams to concurrently develop applications.

      Applications built on G2 are portable and interoperable across a number of
      computer platforms, so solutions can be offered on a wide range of
      platforms and later migrated to new and more powerful computers and
      operating systems. G2 currently runs on PCs running Windows NT and on
      workstations from Compaq/Digital, Hewlett-Packard, IBM, Sun Microsystems
      and others. G2 currently runs under Windows NT, as well as the UNIX and
      VMS operating systems.

      G2 enables many procedures or rules to be active concurrently. A procedure
      or rule can be executing, suspended to allow other computations to occur,
      or waiting for a triggering event. G2 enhances the reliability of online
      applications by its facility to save "snapshots" of a process state and
      "warm boot" to the last saved state, so that an intelligent real-time
      system can resume after power failures or other interruptions.
      Applications can also be modified without interrupting the running of the
      application.

      G2 can support concurrent access to multiple sources of data and high-
      performance data exchange.  Once an application is deployed, Gensym
      products such as Telewindows and Gensym's G2 WebLink enable multiple users
      to share that application concurrently. Telewindows and G2 WebLink are
      available on all G2 platforms as well as on PCs running Windows.

NeurOn-Line

      NeurOn-Linea(R) is an extensible software platform that enables non-
      programmers who have little or no experience with neural networks to take
      advantage of this technology, particularly for online, dynamic
      applications.  NeurOn-Line can identify and generate models of the
      physical behavior of processes and of relationships among process
      variables, when given a sufficient set of data.  These models can then be
      used online to compare process behavior with the model's prediction and to
      control processes.  The development of neural network applications in
      NeurOn-Line is done graphically by selecting objects from menus,
      connecting them, and entering attribute and control information. NeurOn-
      Line Studio is a Windows desktop tool for offline analysis, modeling, and
      design optimization of processes, based on data from a data historian or
      spreadsheet data arrays. To make the tool easy for process engineers to
      use, many technical decisions such as selection of relevant inputs, time
      delays, and network architecture are automated. Once a model has been
      built for a process, NeurOn-Line Studio enables users to discover more
      profitable ways to run it through simulation and optimization. NeurOn-Line
      Studio models can be deployed either in a G2 environment or as Microsoft
      ActiveX objects in embedded Windows applications.

Optegrity

      Optegrity(TM) is an extensible software platform that delivers abnormal
      condition management applications for the process manufacturing
      industries.  Optegrity applications ensure sustained operational
      performance and continuous availability of production assets. Its
      applications detect and resolve abnormal process conditions early --
      before they disrupt productivity and threaten quality and profits.
      Optegrity enables process manufacturers to effectively manage their
      production processes. Applications based on the Optegrity platform turn
      data into information to quickly identify, isolate and solve operational
      problems. Optegrity applications also enable process manufacturers to
      increase the availability of production assets; reduce off-specification
      production; minimize or eliminate unplanned shutdowns; improve operator
      productivity; lower production costs; raise operational safety levels;
      increase process utilization and enable non-stop operation.

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Integrity

      Integrity (which was known as Operations Expert or OPEX until the second
      quarter of 2000) is an integrated and extensible platform for e-
      infrastructure management and root-cause intelligence.  Network service
      providers, network management companies, telecommunications equipment
      manufacturers and end-user corporations use Integrity to manage the
      performance of many different types of networks.  Applications based on
      Integrity can interoperate with a number of other network management
      programs, such as HP OpenView and IBM NetView, and provide intelligent
      operations support capable of addressing today's complex communications
      operations problems.  With Integrity, users have an enhanced ability to
      meet service-level agreements, to manage growth cost-effectively, to
      minimize the risks of implementing new services and technologies, and to
      gain competitive advantage.  Key functional uses include early detection
      of network problems, alarm/message/event filtering, alarm correlation
      across disparate platforms, root-cause analysis, anticipating effects of
      network failures, and recommending and/or automating appropriate
      corrective actions.

e-SCOR

      e-SCOR is Gensym's supply-chain design software product. e-SCOR was the
      first out-of-the-box product introduced by the Company in April 2000.
      Gensym developed e-SCOR based on the Supply Chain Council's Supply Chain
      Operations Reference (SCOR) model. e-SCOR enables businesses to simulate
      various supply-chain configurations, test the robustness of a supply chain
      and identify the service levels required of itself and its partners.
      Gensym designed e-SCOR to enable customers to perform "what-if" analyses
      of their supply-chain options, before they make changes that could affect
      the performance of their supply chain and their business. e-SCOR is
      intended to help businesses keep up with today's fast-paced Internet-
      driven world of e-business.

NetSleuth

      NetSleuth(TM) is a network discovery and Internet Protocol (IP)
      availability analysis software product. NetSleuth, which Gensym began
      shipping in October 2000, was the Company's second out-of-the-box software
      product. Gensym sells NetSleuth primarily through an e-commerce Web site
      (www.getnetsleuth.com). NetSleuth automatically constructs an accurate
      ----------------------
      model of a network and all of its devices and performs IP availability
      analysis to quickly reveal the root cause of a network outage. NetSleuth
      delivers benefits to corporate network managers and network service
      providers. With NetSleuth, they can experience increased confidence in the
      stability of their network, handle larger networks without adding staff,
      save time and money by minimizing the effects of outages and provide
      higher levels of service.

   TARGET MARKET AND CUSTOMERS

     The Company's customers include end-users, value-added resellers, systems
   integrators and OEMs. Many of the largest industrial corporations in the
   world are customers of Gensym. The use of Gensym's products in many large
   industrial corporations is a key asset to the Company in its ability to build
   its new e-infrastructure business.  The Company's customers span virtually
   every industry -- ranging from NASA to Pfizer to Fidelity Investments.  All
   of these customers use Gensym software to analyze and resolve complex
   problems related to running their critical business processes. Gensym
   platforms and products are designed to help businesses in many different
   industries successfully navigate the rapidly changing world of e-business.

     Gensym markets its platforms, products and services to three related
   markets: 1) expert manufacturing, 2) network management, and 3) the strategic
   supply-chain design segments of the overall e-infrastructure marketplace.
   Our target market in expert manufacturing continues to be companies looking
   to manage complex processes in order to improve product quality,
   manufacturing systems availability, or increase the safe operation of their
   facilities. Working with our network of VARs, systems integrators and through
   our own consulting organization customers deploy custom applications based on
   Gensym technology that fit their particular requirements.

     Our strategic supply-chain design product, e-SCOR, is targeted at
   enterprises or enterprise groups that understand the critical need to
   constantly evaluate and modify their supply chain.  Gensym developed e-SCOR
   based on the Supply Chain Council's Supply Chain Operations Reference (SCOR)
   model.  e-SCOR enables senior supply-chain and executive managers to evaluate
   the state of

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   their supply chain and perform "what-if" analyses of their supply-chain
   options, before they make changes that could affect the performance of their
   supply chain and their business. e-SCOR is designed to help businesses keep
   up with today's fast-paced Internet-driven world of e-business.

     Gensym has been delivering technology platforms and solutions to network
   equipment manufacturers and service providers for many years.  Companies such
   as AT&T and Computer Sciences Corp. use Gensym technology platforms in their
   network operations centers to help increase system availability by
   deciphering and resolving complex network problems. Motorola, Ericsson, and
   Nokia all have original equipment manufacturer partnerships with Gensym and
   include the Company's software in their own network management solutions.
   Service providers and original equipment manufacturers continue to be
   principal target markets for Gensym.  NetSleuth, the Company's first out-of-
   the-box network-management product, has enabled Gensym to introduce its
   technology to enterprise customers and service providers who have not
   historically been a target audience for the Company's customizable platforms,
   such as Integrity. The functionality in NetSleuth previously was only
   available to customers as part of a more expensive, customized solution.
   Gensym's original equipment manufacturer partners embed the Company's
   software within their own product offerings.  Gensym has established
   relationships with several original equipment manufacturers, including
   Motorola and Ericsson Hewlett-Packard Telecommunications, an independent
   software company established by Ericsson Hewlett-Packard Telecommunications.
   Motorola uses Gensym's G2 technology for the intelligence within their
   Network Health Analyzer, a product within their cellular infrastructure
   family. Ericsson Hewlett-Packard Telecommunications has chosen Gensym's G2
   software as the foundation for its Fault Management eXpert product that
   intelligently handles network faults.

   SALES AND MARKETING

     The Company uses both a direct sales force and selected distribution
     partners to bring its products and services to end-users.

     As of December 31, 2000, the Company had sales offices in major U.S. and
   European cities.  In 2000, 1999 and 1998, the Company received 44%, 46% and
   47% of its total revenues, respectively, from international operations.  See
   Note 7 of Notes to Consolidated Financial Statements for financial
   information by geographic area.

     The Company's direct sales force sells to major accounts and provides
   personal contact with customers, both directly and through partners.
   Solutions engineers perform demonstrations at customer sites and assist
   customers in evaluating their technical requirements and in implementing
   Gensym technology. Regular seminars and workshops are hosted at the Company's
   larger offices and via Web seminars to demonstrate the Company's products.
   The Company offers basic and advanced training courses that teach prospective
   and new customers how to build and deploy applications using Gensym software.

     The Company also distributes its products through a network of systems
   integrators and value-added resellers, who are selected for their capability
   to provide end users with focused application solutions built on G2 and the
   Company's other software platforms. These systems integrators and value-added
   resellers currently include organizations such as ABB Automation, Electronic
   Data Systems, Foxboro Company, Siemens, Science Systems, and L3
   Communications. Product revenues from systems integrators and value-added
   resellers represented over 28%, 25% and 25% of the Company's product revenues
   for 2000, 1999 and 1998, respectively.

     Gensym markets its products in Japan, Brazil, South Africa and certain
   other countries through distributors. These distributors have technical
   competence in the application of G2 and other Gensym technologies, market the
   Company's products, provide local training and support assistance to
   customers, translate documentation, help localize software, and provide
   systems integration services.

     The Company's marketing personnel engage in a variety of activities,
   including lead generation, in-person and Web-based seminars, trade shows,
   public relations, direct marketing, advertising, and promotion of customer
   applications for publication in industry magazines and journals. More than
   300 case studies of successful applications have been documented.

   SERVICE AND SUPPORT

     Gensym believes that a high level of customer service and support is
   critical to customer satisfaction and project and application success.  Most
   Gensym customers attend one to three weeks of training and implement their
   applications using the development features of Gensym software. The Company
   offers a regular schedule of courses in its offices in North America and
   Europe, and

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   special on-site training courses are offered around the world on an as-needed
   basis. Direct application-engineering services are available to customers
   internationally, to support end users as well as Gensym marketing partners.

     The Company offers several customer service options that all include
   various levels of telephone support, software updates, FTP bulletin board
   access, membership in the Gensym Users Society and access to HelpLink, a
   workflow-enabled Web application that greatly enhances the service
   experience. The highest level of customer service support includes 24x7
   callback service. Maintenance is mandatory for the first year after purchase
   and may be renewed in subsequent years. Gensym typically charges a percentage
   of the list price bundled fee for customer service.  The Company has service
   centers in North America and Europe.  Local marketing partners provide
   service in Asia and other areas of the world.

     Gensym offers a variety of application engineering and consulting services
   on a fee-for-service basis.  Gensym has expertise in applying its software in
   a variety of areas, including network and systems management; manufacturing
   process management; process design, modeling and simulation; pharmaceutical
   process design and control; water treatment; logistics; transportation; and
   finance. A key mission of the consulting staff is to assist partners, as well
   as end users, in the successful development and deployment of intelligent
   systems applications based on G2 and the company's other platforms.

     The Company offers a progressive series of introductory, intermediate and
   advanced training courses for customers, partners and potential users of its
   products. The courses are taught at the Company's corporate headquarters in
   Burlington, Massachusetts, at its worldwide sales offices, and at customer
   locations.

     Gensym provides continuing support to the Gensym Users Society, an
   organization consisting of users of the Company's software who are covered by
   current maintenance contracts.

   RESEARCH AND DEVELOPMENT

     The Company believes that its future success will depend upon its ability
   to enhance existing products as well as to develop and introduce new products
   that keep pace with technological developments in the marketplace and address
   the increasingly sophisticated needs of its customers. The Company intends to
   expand existing product offerings and to introduce new applications. While
   the Company expects that certain new products will be developed internally,
   the Company may, based on timing and cost considerations, acquire or license
   technology and/or products from third parties or consultants.

     New products and enhancements to existing products are typically developed
   in response to market analysis and feedback from customers obtained by the
   Company's customer support and consulting personnel. New product initiatives
   are also taken to address targeted markets and industry standards.

     As a follow-up to the Company's fourth quarter 2000 introduction of
   NetSleuthTM , an out-of-the-box product for network availability analysis and
   device discovery, the research and development group has reached an alpha
   stage in its product development for the next generation network management
   product which will incorporate advanced reasoning technology.

   COMPETITION

     Gensym faces competition for it's network management products, NetSleuth
   and Integrity, from a number of companies in this market. Micromuse, System
   Management Arts (SMARTS) and RiverSoft are a few of the more widely known
   competitors. Each of these companies offers products that differ from
   Gensym's products in a variety of ways. Customers select products based on
   the particular features and overall management approach to network
   availability each vendor delivers. Gensym offers products at both ends of a
   spectrum: NetSleuth, for example, has very fixed functionality designed to
   deliver network mapping and Internet Protocol availability analysis, while
   Integrity is a more comprehensive management platform that is customizable to
   meet each customer's particular network management requirements.

     Gensym differentiates Integrity from the competition by virtue of its
   customization capabilities, which is a key element for large organizations
   managing diverse complex networks such as those operated by Computer Sciences
   Corporation and AT&T. NetSleuth is chosen by large and small enterprises for
   the accuracy of its network mapping, the speed with which it locates devices
   and creates maps and its sophisticated event filtering to find the correct
   root cause of network problems. Gensym believes that its heritage of

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providing sophisticated reasoning technology to the market is a major
competitive advantage over the competition, as customers try to manage
increasingly complex networks.

  In the expert manufacturing market, a number of software companies offer
products that perform certain functions of G2 for specific applications. The
Company believes that its products offer, as a single seamlessly integrated
environment, the most comprehensive set of software technologies available to
successfully build a broad range of intelligent system applications. Competition
in the expert manufacturing market includes point solutions, real-time and
expert system products and traditional programming or internally developed
software.

  Companies such as Aspen Technology, Pavilion and Ilog S.A., sell solutions
that compete with the Company's products with respect to specific applications
or uses. An intelligent system based on point solutions, however, requires the
integration of various software packages from different vendors, and is often
difficult to maintain. Although the Company's competitors' systems may provide a
faster implementation, such systems may fail to provide the capabilities and
flexibility needed to satisfy the changing requirements of a dynamic complex
environment. Point solutions may also fail to provide the extensibility to add
rules and neural networks, and may be difficult to migrate to more powerful
computers.

  The principal competitive factors in all of the Company's markets are
functionality, ease of use, price, distribution capabilities, quality,
performance, customer support, and availability of application software
implementation services. In order to maintain its competitive position, the
Company must continue to enhance its existing products and introduce new
products that meet evolving customer requirements. There is no assurance that
the market position or the competitive advantages of the Company will continue.
See "Certain Factors That May Affect Future Results - Competition."

PROPRIETARY RIGHTS

  The Company relies primarily on a combination of patent law, copyright law and
trade secret law to protect its proprietary technology. The Company also has
internal policies and systems to limit access to and keep confidential its trade
secrets. The Company distributes its products under software license agreements
that contain various provisions to protect the Company's ownership of and the
confidentiality of the underlying technology. The Company also requires its
employees and other parties with access to its confidential information to
execute agreements prohibiting the unauthorized use or disclosure of the
Company's technology. In addition, the Company periodically reviews its
proprietary technology for its ability to be patented, and has one patent
covering specific aspects of G2. The Company has also placed technical
inhibitors in its software that prevent the software from running on
unauthorized computers. Despite these precautions, it may be possible for a
third party to misappropriate the Company's technology or to develop similar
technology independently. In addition, effective patent, copyright and trade
secret protection may not be available in every foreign county in which the
Company's products are distributed.

  Certain technology used in the Company's products is licensed from third
parties. The Company believes that, in general, comparable licenses are
available on commercially comparable terms from a number of licensors and does
not believe that any of the Company's products are significantly dependent upon
such licensed technologies.

  Despite the Company's efforts to protect its proprietary rights, attempts may
be made to copy or reverse engineer aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. There can be
no assurance that others will not develop products that infringe the Company's
proprietary rights or are similar or superior to those developed by the Company.
Policing the unauthorized use of the Company's products is difficult. Litigation
may be necessary in the future to enforce the Company's intellectual property
rights, to protect the Company's trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, results of operations and financial condition.
Also, there can be no assurance that third parties will not assert infringement
claims against the Company in the future with respect to current or future
products. Any such assertion could require the Company to enter into royalty
arrangements or result in costly litigation, which could have a material adverse
effect on the Company's business, results of operations and financial condition.

  Gensym(R), G2(R), NeurOn-Line(R), ReThink(R), and Operations Expert(R) are
registered trademarks of the Company. The Gensym logo, GDA, ReThink, G2 WebLink,
OPEX, NetSleuth and Optegrity are trademarks of the Company. The Company has
filed

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applications to register Gensym, G2, NeurOn-Line, and OPEX in certain foreign
jurisdictions. In addition, the Company has an exclusive, worldwide, royalty-
free, perpetual license from Microsoft Corporation to use the trademark
Telewindows.

BACKLOG

  The Company ships software products within a short period after receipt of an
order and typically does not have a material backlog of unfilled orders of
software products. Therefore, revenues from software licenses in any quarter are
substantially dependent on orders booked in that quarter.

EMPLOYEES

  As of December 31, 2000, the Company had 224 full-time employees, including 77
in sales and marketing, 48 in product development, 37 in consulting services, 36
in customer support, production and licensing, and educational services, and 26
in general and administrative functions. None of the Company's employees is
represented by a labor union, and the Company believes that its employee
relations are good.

<PAGE>

PART II.

ITEM 6. SELECTED FINANCIAL DATA

  The selected consolidated balance sheet data presented below as of December
31, 2000 and 1999 and the selected consolidated statement of operations data for
each of the three years in the period ended December 31, 2000 are derived from
the Company's Consolidated Financial Statements, included elsewhere in this
Annual Report on Form 10-K, and have been audited by Arthur Andersen LLP,
independent public accountants (the "Consolidated Financial Statements"). The
selected consolidated balance sheet data presented below as of December 31,
1998, 1997, and 1996, and the selected consolidated statement of operations data
for the years ended December 31, 1997 and 1996, are derived from the Company's
Consolidated Financial Statements, not included in this Annual Report on Form
10-K, all of which have been audited by Arthur Andersen LLP, independent public
accountants. These data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related Notes included elsewhere in
this Annual Report on Form 10-K.

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<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
CONSOLIDATED STATEMENT OF                                   2000            1999            1998            1997            1996
                                                       -------------   -------------   -------------   -------------   -------------
OPERATIONS DATA:
<S>                                                    <C>             <C>             <C>             <C>             <C>
Revenues:
   Product                                               $   11,992      $   19,628      $  16,911       $  18,433       $  21,358
   Services                                                  15,583          16,799         18,067          17,076          15,877
                                                       -------------   -------------   -------------   -------------   -------------
       Total revenues                                        27,575          36,427         34,978          35,509          37,235

Cost of revenues
   Product                                                    1,073           1,315          1,334           1,403           1,108
   Services                                                   7,323           7,259          7,364           7,949           6,277
                                                       -------------   -------------   -------------   -------------   -------------
       Total cost of revenue                                  8,396           8,574          8,698           9,352           7,385
Gross profit                                                 19,179          27,853         26,280          26,157          29,850

Operating expenses:
   Sales and marketing                                       17,379          18,214         18,276          18,802          17,433
   Research and development                                   7,614           6,470          6,023           6,977           5,984
   General and administrative                                 4,942           5,288          4,134           4,528           3,699
   Restructuring charge                                           -               -              -           1,558               -
                                                       -------------   -------------   -------------   -------------   -------------
       Total operating expenses                              29,935          29,972         28,433          31,865          27,116
                                                       -------------   -------------   -------------   -------------   -------------
Operating (loss) income                                     (10,756)         (2,119)        (2,153)         (5,708)          2,734
Other income (net)                                              211             503            715             779             518
                                                       -------------   -------------   -------------   -------------   -------------
(Loss) income before provision for income taxes             (10,545)         (1,616)        (1,438)         (4,929)          3,252
Provision for income taxes                                    2,271             336             50              40           1,204
                                                       -------------   -------------   -------------   -------------   -------------
Net (loss) income                                        $  (12,816)     $   (1,952)     $  (1,488)      $  (4,969)      $   2,048
                                                       =============   =============   =============   =============   =============
Basic (loss) income per share (1)                        $    (2.01)     $    (0.32)     $   (0.23)      $   (0.79)      $    0.35
                                                       =============   =============   =============   =============   =============
Diluted (loss) income per share (1)                      $    (2.01)     $    (0.32)     $   (0.23)      $   (0.79)      $    0.33
                                                       =============   =============   =============   =============   =============
Weighted average common shares outstanding (1)                6,365           6,149          6,371           6,310           5,910
                                                       =============   =============   =============   =============   =============
Weighted average common shares outstanding
 assuming dilution (1)                                        6,365           6,149          6,371           6,310           6,286
                                                       =============   =============   =============   =============   =============

CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments        $    3,355      $   11,685      $  14,534       $  15,801       $  19,590
Working capital                                                 285          12,814         14,650          15,149          20,470
Total assets                                                 15,540          26,934         28,268          31,517          36,258
Total stockholders' equity                                    2,412          14,922         17,483          19,828          24,068
</TABLE>


<PAGE>

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

OVERVIEW

  The Company was incorporated in 1986 to provide software products for
intelligent operations management. The Company's core product, G2, and G2-based
products are sold to customers for a broad array of intelligent operations
management applications in a wide range of industries, including manufacturing,
telecommunications, government, aerospace, transportation, and financial
services. In addition, the Company derives significant service revenues from
maintenance contracts, consulting services, and training courses related to its
software products.

  In order to reach the broadest possible market, the Company employs a direct
sales force and selected resellers to bring its products and services to end
users around the world. The Company sells to major accounts and provides
personal contact with customers, both directly and through partners. Solutions
engineers perform demonstrations at customer sites and assist customers in
evaluating their technical requirements and in implementing Gensym technology.
Regular seminars and workshops are hosted at the Company's larger offices and
via Web seminars to demonstrate the Company's products. The Company offers basic
and advanced training courses that teach prospective and new customers how to
build application solutions using Gensym products.

  The Company also distributes its products through a network of systems
integrators and value-added resellers, who are selected for their capability to
provide end users with focused application solutions built on G2 and the
Company's other software platforms.

  Gensym markets its products in Japan, Brazil, South Africa and certain other
countries through distributors. These distributors have technical competence in
the application of G2 and other Gensym technologies, market the Company's
products, provide local training and support assistance to customers, translate
documentation, help localize software, and provide systems integration services.

  This Annual Report on Form 10-K contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," "intends"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set forth below
under the caption "Certain Factors That May Affect Future Results".

<PAGE>

RESULTS OF OPERATIONS

     The following table sets forth, as a percentage of total revenues,
consolidated statements of operations data for the periods indicated:

                                                   Year ended December 31,
                                                2000      1999        1998
                                              -------   --------    --------
     Revenues:
        Product                                  43.5%      53.9%       48.3%
        Service                                  56.5       46.1        51.7
                                              -------   --------    --------
             Total revenues                     100.0      100.0       100.0

     Cost of revenues
        Product                                   3.9        3.6         3.8
        Service                                  26.5       19.9        21.1
                                              -------   --------    --------
             Total cost of revenue               30.4       23.5        24.9

     Gross margin                                69.6       76.5        75.1
                                              -------   --------    --------
     Operating expenses:
        Sales and marketing                      63.0       50.0        52.3
        Research and development                 27.6       17.8        17.2
        General and administrative               18.0       14.5        11.8
                                              -------   --------    --------
             Total operating expenses           108.6       82.3        81.3
                                              -------   --------    --------

     Operating loss                             (39.0)      (5.8)       (6.2)

     Other income, net                            0.8        1.4         2.0
                                              -------   --------    --------
     Loss before provision for income taxes     (38.2)      (4.4)       (4.2)

     Provision for income taxes                   8.3        0.9         0.1
                                              -------   --------    --------
     Net loss                                   (46.5)%     (5.3)%      (4.3)%
                                              =======   ========    ========


YEARS ENDED DECEMBER 31, 2000 AND 1999

Revenues


  The Company's operating revenues are derived from two sources: product
licenses and services. Product revenues include revenues from sales of licenses
for use of the Company's software products. Service revenues consist of fees for
maintenance contracts, consulting services, and training courses related to the
Company's products.

  Total revenues were $27.6 million for the year ended December 31, 2000 and
$36.4 million for the same period in 1999, a decrease of $8.9 million, or 24.3%.
The decrease in total revenues was attributable to both a decrease in sales of
product licenses and application consulting services. International revenues
accounted for 44% and 46% of total revenues in 2000 and 1999; respectively.

  Product. Product revenues decreased $7.6 million, or 38.9%, to $12.0 million
for the year ended December 31, 2000 from $19.6 million in 1999. The decrease in
product revenues was across all product lines and occurred in both domestic and
international


<PAGE>

markets. Much of the decrease is attributable to the Company's new pricing and
product line packaging policies implemented in 2000. As part of its new
strategic direction, the Company introduced new product-packaging and customer
service programs designed to make it easier for customers to do business with
the Company and enable Gensym to align its business practices with software
industry norms. Implementing the new strategic direction was disruptive to the
Company's business in the second half of the year. Also, in 1999, product
revenue included $2.9 million from a single customer, BMC Software, Inc.

  Service. Service revenues decreased $1.2 million, or 7.2%, to $15.6 million
for the year ended December 31, 2000 from $16.8 million in 1999. The decrease in
service revenues was primarily due to decreases in application consulting
revenues and training fees. Application consulting fees declined $1.4 million
for the year ended December 31, 2000 as compared to 1999 primarily due to the
completion of a large 1999 consulting project with BMC Software Inc., which
resulted in $0.3 million of revenue in 2000 and $1.4 million in 1999. Customer
support revenues for the year ended December 31, 2000 increased $400,000, from
$9.4 million to $9.8 million in 2000. Strong maintenance contract renewals
attributed to the increase.

Cost of Revenues

  Cost of revenues primarily consists of consulting labor, technical support
costs, and the costs of material and labor involved in producing and
distributing the Company's software. Cost of revenues remained virtually
unchanged in 2000. Cost of revenues were $8.4 million for the year ended
December 31, 2000 and $8.6 million for the same period in 1999, a decrease of
$0.2 million, or 2.1%. Product cost was $1.1 million in 2000, a decrease of $0.2
million from 1999. A decrease in payroll related costs of $0.4 million was
partially offset by higher royalty and product costs. Service cost was $7.3
million in 2000 and remained unchanged from 1999. Gross margin on revenues for
the year ended December 31, 2000 was 69.6%, as compared to 76.5% in 1999. The
decrease in gross profit resulted primarily from lower revenue in 2000 compared
to 1999.

Operating Expenses

  Total operating expenses remained consistent with 1999. Total operating
expenses were $29.9 million for the year ended December 31, 2000, a decrease of
0.1%, from $30.0 million in 1999. Research and development costs increased
during 2000 consistent with the Company's plan to develop new products. The
increase in research and development costs was almost entirely offset by
decreased spending in sales and administrative costs.

  Sales and Marketing. Sales and marketing expenses consist primarily of costs
associated with personnel involved in the sales and marketing process, sales
commissions, sales facilities, travel and lodging, trade shows and seminars,
advertising, and promotional materials. For the year ended December 31, 2000,
sales and marketing expenses decreased $835,000, or 4.6%, to $17.4 million
(63.0% of total revenues) from $18.2 million (50.0% of total revenues) in 1999.
The decrease was primarily a result of lower sales commissions of approximately
$1.3 million resulting from lower sales in 2000, plus cost savings resulting
from the consolidation of field sales offices estimated to be approximately $0.2
million. The decrease in costs was partially offset by an increase in trade show
expense of $0.6 million. Sales and marketing expenses increased as a percent of
total revenue, as a result of lower revenue in 2000 from 1999.

  Research and Development. Research and development expenses consist primarily
of costs of personnel, equipment, and facilities. These expenses increased $1.1
million or 17.7% to $7.6 million (27.6% of total revenue) for the year ended
December 31, 2000 from $6.5 million (17.8% of total revenue) in 1999. The
increase is primarily attributable to an increase in subcontracted research and
development labor costs of approximately $0.7 million and recruitment costs for
product development engineers of approximately $0.2 million. The increase in
research and development as a percent of total revenue is twofold; research and
development expense increased and total revenue was lower in 2000 as compared to
1999.

  General and Administrative. General and administrative expenses consist
primarily of personnel costs for finance, administration, operations, and
general management, as well as legal and accounting expenses. These expenses
decreased $346,000, or 6.5% to $4.9 million (17.9% of total revenue) for the
year ended December 31, 2000 from $5.3 million (14.5% of total revenue) in 1999.
The decrease in expenses was primarily due to fewer general and administrative
personnel, in 2000 over 1999 which resulted in a decrease of salary and related
costs of approximately $0.4 million. General and administrative expenses
increased as a percent of total revenue, due to lower revenue in 2000 as
compared to 1999.

Other Income

<PAGE>

  Other income consists primarily of interest income partially offset by foreign
exchanges transaction gains and losses. For the year ended December 31, 2000,
other income decreased $292,000 or 58.1% to $211,000 from $503,000 for 1999. The
decrease in other income was due to decreased interest income resulting from
lower cash balances and foreign exchange fluctuations.

Income Taxes

  The Company recorded a provision for income taxes of $2,271,000 and $336,000,
for the years ended December 31, 2000 and 1999, respectively. The provision for
the year ended December 31, 2000 included a charge of $1,873,000 in accordance
with the increase in the tax valuation allowance to equal the entire deferred
tax asset as discussed below. The balance of the tax provision for 2000 of
$398,000 and the 1999 provision of $336,000 represents income taxes on income
generated in certain foreign jurisdictions (where the Company does not have
operating loss carryforwards) and revenue withholding tax on sales in certain
foreign jurisdictions. The Company generated significant U.S. tax loss
carryforwards during the years ended December 31, 2000 and 1999.

  Under SFAS No. 109, a deferred tax asset related to the future benefit of a
tax loss carryforward should be recorded unless the Company makes a
determination that it is "more likely than not" that such deferred tax asset
would not be realized. Accordingly, a valuation allowance would be provided
against the deferred tax asset to the extent that the Company cannot demonstrate
that it is "more likely than not" that the deferred tax asset will be realized.
In determining the amount of valuation allowance required, the Company considers
numerous factors, including historical profitability, estimated future taxable
income, the volatility of the historical earnings, and the volatility of
earnings of the industry in which it operates. The Company periodically reviews
its deferred tax asset to determine if such asset is realizable. In 2000, the
Company concluded, in accordance with SFAS No. 109, that the Company should not
recognize the value of its deferred tax asset under the "more likely than not"
test and therefore increased the amount of its valuation allowance to equal the
entire deferred tax asset. The increase in the valuation allowance resulted in a
charge to the provision for income taxes of $1,873,000 during the year ended
December 31, 2000. The primary factors considered in evaluating the
realizability of the deferred tax asset and the level of valuation allowance
were the operating losses through December 31, 2000. See Note 4 of Notes to
Consolidated Financial Statements

YEARS ENDED DECEMBER 31, 1999 AND 1998

Revenues

  Total revenues were $36.4 million for the year ended December 31, 1999 as
compared to $35.0 million for 1998, an increase of $1.4 million or 4.1%. The
increase in total revenues was attributable to increased sales of product
licenses, partially offset by a decrease in service revenues. International
revenues accounted for 46% and 47% of total revenue in 1999 and 1998,
respectively.

  Product.  Product revenues increased to $19.6 million for the year ended
December 31, 1999 from $16.9 million in 1998, an increase of 16.1%. The increase
in product revenues primarily reflects an increased demand for the Company's
products in the telecommunications industry. Product revenues increased year
over year in both North America (up $1.1 million) and Europe (up $1.5 million);
product revenues were unchanged year over year in the Asia-Pacific region.

  Service. Service revenues decreased to $16.8 million for the year ended
December 31, 1999 from $18.1 million in the same period in 1998, a decrease of
7.0%. The decrease in service revenues was primarily due to a decrease in
application consulting revenues and, to a lesser extent, decreased educational
service fees. Maintenance revenues increased to $9.4 million for the year ended
December 31, 1999 from $9.2 million in the same period in 1998, an increase of
2.2%. Consulting revenue decreased to $6.4 million for the year ended December
31, 1999 from $7.6 million in the same period in 1998, a decrease of 15.8%. Fees
for educational services decreased to $1.1 million for the year ended December
31, 1999 from $1.3 million in the same period in 1998, a decrease of 15.4%.

Cost of Revenues

<PAGE>

  Total cost of revenues decreased slightly for 1999 to $8.6 million (23.5% of
total revenue) compared to $8.7 million (24.9% of total revenue) for 1998. Gross
margin on revenue increased to 76.5% for the period ended December 31, 1999 from
75.1% in the same period for 1998. The increase in gross margin resulted from
greater product revenue and lower infrastructure costs.

Operating Expenses

  Total operating expenses increased to $30.0 million (82.3% of total revenue)
for the year ended December 31, 1999 from $28.4 million (81.3% of total revenue)
in the same period in 1998, an increase of 5.4%. The increase in spending was in
general and administrative and research and development.

  Sales and Marketing. Total expenses remained relatively unchanged at $18.2
million (50.0% of total revenue) for year ended December 31 1999, from $18.3
million (52.3% of total revenue) for the comparable period in 1998. The decrease
as a percent of revenue was due to higher revenues in 1999 compared to 1998.

  Research and Development. Research and development expenses increased 7.4% to
$6.5 million (17.8% of total revenues) for the year ended December 31, 1999 from
$6.0 million (17.2% of total revenues) for the comparable period in 1998. The
increase in spending was primarily due to recruiting cost associated with the
hiring and retaining of engineering personnel of approximately $0.4 million.

  General and Administrative. These expenses increased 27.9% to $5.3 million
(14.5% of total revenues) for the year ended December 31, 1999 from $4.1 million
(11.8% of total revenues) for the comparable period in 1998. The increase in
expense was primarily due to increased bonus $0.2 million recruiting $0.1
million,severance $0.3 million, professional services of $0.4 million.

Other Income

  For the year ended December 31, 1999, other income was $503,000 compared to
$715,000 for the comparable period in 1998. The decrease was due to decreased
interest income due to lower cash balances. The Company has historically
experienced nominal net foreign exchange transaction gains or losses.

Income Taxes

  The Company recorded a provision for income taxes of $336,000 and $50,000, for
the years ended December 31, 1999 and 1998, respectively. The provision in both
years represents income taxes on income generated in foreign jurisdictions
(where the Company does not have operating loss carryforwards) and revenue
withholding tax on sales in certain foreign jurisdictions. The Company generated
significant U.S. tax loss carryforwards during the years ended December 31, 1999
and 1998.

Selected Quarterly Operating Results

  The Company's operating results have fluctuated in the past and may fluctuate
significantly in the future. Because the Company ships software products within
a short period after receipt of an order, the Company typically does not have a
material backlog of unfilled orders for software products. Accordingly, revenues
from software licenses in any quarter are substantially dependent on orders for
software products booked in the quarter.

  The revenues for a quarter typically include a number of large orders. If the
timing of any of these orders is delayed, it could result in a substantial
reduction in revenues for that quarter. Historically, a majority of each
quarter's revenues from software licenses has come from license contracts that
have been effected in the final weeks of that quarter. Since the Company's
expense levels are based in part on its expectations as to future revenues, the
Company may be unable to adjust spending in a timely manner to compensate for
any revenue shortfall. Accordingly, any revenue shortfalls would likely have a
disproportionate adverse effect on net income.

  In the quarter ended September 30, 2000, the Company recorded a provision for
income taxes of $1,963,000. The provision included a charge of $1,873,000 in
accordance with the increase in the tax valuation allowance to equal the entire
deferred tax asset.

  Under SFAS No. 109, a deferred tax asset related to the future benefit of a
tax loss carryforward should be recorded unless the company makes a
determination that it is "more likely than not" that such deferred tax asset
would not be realized. Accordingly, a valuation allowance would be provided
against the deferred tax asset to the extent that the Company cannot demonstrate
that it is

<PAGE>

"more likely than not" that the deferred tax asset will be realized. In
determining the amount of valuation allowance required, the Company considers
numerous factors, including historical profitability, estimated future taxable
income, the volatility of the historical earnings, and the volatility of
earnings of the industry in which it operates. The Company periodically reviews
its deferred tax asset to determine if such asset is realizable. At September
30, 2000, the Company concluded, in accordance with SFAS No. 109, that the
Company should not recognize the value of its deferred tax asset under the "more
likely than not' test and therefore increased the amount of its valuation
allowance to equal the entire deferred tax asset. The increase in the valuation
allowance resulted in a charge to the provision for income taxes of $1,873,000
in the period ended September 30, 2000. The primary factors considered in
evaluating the realizability of the deferred tax asset and the level of
valuation allowance were the continued operating losses through September 30,
2000 and that the Company expected a loss for the fourth quarter and for the
year ending December 31, 2000. Also included in the Company's provision for
income taxes are income taxes in foreign jurisdictions, where the Company does
not have operating loss carryforwards.

  The following tables present unaudited financial information for the Company's
eight most recent quarters. The following selected quarterly information
includes all adjustments (consisting only of normal recurring adjustments) that
the Company considers necessary for a fair presentation. The Company believes
that quarter-to-quarter comparisons of its financial results are not necessarily
meaningful and that such comparisons should not be relied upon as an indication
of future performance.

The significant quarter to quarter fluctuations were as follows:

     General and Administrative expenses increased $1.2 million to $2.1 million
for the three months ended December 31, 1999 from $0.9 million for the three
months ended September 30, 1999. The increase was primarily due to severance
costs of $0.5 million, fourth quarter bonuses of $0.2 million and an additional
bad debt provision of $0.2 million.

     Total revenue decreased $1.8 million to $5.5 million for the three months
ended September 30, 2000 from $7.3 million for the three months ended June 30,
2000. Product revenues decreased $1.1 million due primarily to customers
delaying purchasing decisions while they assessed the Company's new pricing and
product line packaging policy implemented in September 2000. The decrease was
mainly reflected in the manufacturing and telecommunications business segment.
Service revenue decreased $0.7 million and was primarily due to lower consulting
activity relating to the decrease in product sales.

     Total revenue increased $2.2 million to $7.7 million for the three months
ended December 31, 2000 from $5.5 million for the three months ended September
30, 2000. The increase in product revenue of $1.5 million was primarily due to
customers placing orders delayed from the third quarter due to the Company's new
pricing policy implemented in that quarter. The increase was reflected in the
telecommunications and aerospace/government industries. Service revenue
increased $0.7 million primarily due to higher consulting activity relating to
increased product sales.

<PAGE>

<TABLE>
<CAPTION>
                                                                             Quarter Ended
                                    Dec. 31,     Sept. 30,    June 30,    Mar. 31,    Dec. 31,   Sept. 30,     June 30,   Mar. 31,
                                     2000          2000        2000         2000        1999       1999         1999        1999
                                  ------------------------------------------------------------------------------------------------
<S>                               <C>         <C>          <C>           <C>        <C>         <C>         <C>         <C>
Revenues:
 Product                            $  3,619   $   2,139   $   3,268     $   2,966   $  5,026   $   5,205   $   5,337   $  4,060
 Services                              4,102       3,341       4,005         4,135      4,119       3,980       4,404      4,296
                                    --------   ---------   ---------     ---------   --------   ---------   ---------   --------
  Total revenues                       7,721       5,480       7,273         7,101      9,145       9,185       9,741      8,356

Cost of revenues
 Product                                 322         231         226           294        332         329         327        327
 Services                              1,783       1,698       1,770         2,072      1,804       1,784       1,853      1,818
                                    --------   ---------   ---------     ---------   --------   ---------   ---------   --------
  Total cost of revenue                2,105       1,929       1,996         2,366      2,136       2,113       2,180      2,145
                                    --------   ---------   ---------     ---------   --------   ---------   ---------   --------

Gross profit                           5,616       3,551       5,277         4,735      7,009       7,072       7,561      6,211
                                    --------   ---------   ---------     ---------   --------   ---------   ---------   --------
Operating expenses:
 Sales and marketing                   4,796       4,199       4,057         4,327      4,786       4,421       4,529      4,478
 Research and development              1,893       1,959       1,957         1,805      1,514       1,631       1,768      1,557
 General and administrative            1,274       1,062       1,102         1,504      2,081         926       1,121      1,160
                                    --------   ---------   ---------     ---------   --------   ---------   ---------   --------
  Total operating expenses             7,963       7,220       7,116         7,636      8,381       6,978       7,418      7,195
                                    --------   ---------   ---------     ---------   --------   ---------   ---------   --------

Operating (loss) income               (2,347)     (3,669)     (1,839)       (2,901)    (1,372)         94         143       (984)
Other income (net)                        53          98          (9)           69        161         114         117        111
                                    --------   ---------   ---------     ---------   --------   ---------   ---------   --------
(Loss) income before provision for
 income taxes                         (2,294)     (3,571)     (1,848)       (2,832)    (1,211)        208         260       (873)
Provision for income taxes               233       1,963          15            60        209          45          37         45
                                    --------   ---------   ---------     ---------   --------   ---------   ---------   --------
Net (loss) income                   $ (2,527)  $  (5,534)  $  (1,863)    $  (2,892)  $ (1,420)  $     163   $     223   $   (918)
                                    ========   =========   =========     =========   ========   =========   =========   ========
Basic and diluted (loss) earnings
 per share                          $  (0.39)  $   (0.86)  $   (0.29)    $   (0.46)  $  (0.23)  $    0.03   $    0.04   $  (0.15)
                                    ========   =========   =========     =========   ========   =========   =========   ========
Weighted average shares
 outstanding - Basic                   6,433       6,400       6,367         6,260      6,202       6,146       6,099      6,150
                                    ========   =========   =========     =========   ========   =========   =========   ========
Weighted average shares
 outstanding - Diluted                 6,433       6,400       6,367         6,260      6,202       6,153       6,103      6,150
                                    ========   =========   =========     =========   ========   =========   =========   ========
</TABLE>

<TABLE>
<CAPTION>
                                                                              Quarter Ended
                                       Dec. 31,   Sept. 30,    June 30,   Mar. 31,     Dec. 31,    Sept. 30,   June 30,    Mar. 31,
                                         2000       2000        2000       2000          1999        1999       1999          1999
                                       --------------------------------------------------------------------------------------------
                                                                        (as a percentage of total revenues)
<S>                                    <C>         <C>          <C>         <C>       <C>         <C>         <C>           <C>
Revenues:
 Product                                 46.9%       39.0%         44.9%      41.8%      55.0%       56.7%      54.8%         48.6%
 Services                                53.1        61.0          55.1       58.2       45.0        43.3       45.2          51.4
                                    ---------  ----------     ---------   --------   --------    --------   --------       -------
  Total revenues                        100.0       100.0         100.0      100.0      100.0       100.0      100.0         100.0

Cost of revenues
 Product                                  4.2         4.2           3.1        4.1        3.6         3.6        3.4           3.9
 Services                                23.1        31.0          24.3       29.2       19.7        19.4       19.0          21.8
                                    ---------  ----------     ---------   --------   --------    --------   --------       -------
 Total cost of revenues                  27.3        35.2          27.4       33.3       23.4        23.0       22.4          25.7
                                    ---------  ----------     ---------   --------   --------    --------   --------       -------

Gross profit                             72.7        64.8          72.6       66.7       76.6        77.0       77.6          74.3
                                    ---------  ----------     ---------   --------   --------    --------   --------       -------
Operating expenses:
 Sales and marketing                     62.1        76.6          55.8       60.9       52.3        48.1       46.5          53.6
 Research and development                24.5        35.8          26.9       25.4       16.5        17.8       18.1          18.6
 General and administrative              16.5        19.4          15.2       21.2       22.8        10.1       11.5          13.9
                                    ---------  ----------     ---------   --------   --------    --------   --------       -------
  Total operating expenses              103.1       131.8          97.9      107.5       91.6        76.0       76.1          86.1
                                    ---------  ----------     ---------   --------   --------    --------   --------       -------

Operating (loss) income                 (30.4)      (67.0)        (25.3)     (40.8)     (15.0)        1.0        1.5         (11.8)
Other income (net)                        0.7         1.8          (0.1)       1.0        1.8         1.3        1.2           1.3
                                    ---------  ----------     ---------   --------   --------    --------   --------       -------
(Loss) income before provision for
 income taxes                           (29.7)      (65.2)        (25.4)     (39.8)     (13.2)        2.3        2.7         (10.5)
Provision for income taxes                3.0        35.8           0.2        0.8        2.3         0.5        0.4           0.5
                                    ---------  ----------     ---------   --------   --------    --------   --------       -------
Net (loss) income                       (32.7)%    (101.0)%       (25.6)%    (40.6)%    (15.5)%       1.8%       2.3%        (11.0)%
                                    =========  ==========     =========   ========   ========    ========   ========       =======
</TABLE>

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     The Company currently finances its operations, along with capital
expenditures, primarily through cash flows from operations and its current cash
and short-term investment balances. The Company's lease commitments consist of
operating leases primarily for the Company's facilities and computer equipment.

     At December 31, 2000, cash, cash equivalents, and short-term investments
had decreased by $8.3 million to $3.4 million. The Company regularly invests
excess funds in highly-rated money market funds, government securities, and
commercial paper.

     Cash and cash equivalents decreased $3.0 million from $5.7 million at
December 31, 1999 to $2.7 million at December 31, 2000.

     Cash used for operations in 2000 was $7.1 million: $10.0 million was used
for the funding of the Company's operating loss, $420,000 was used in the
recognition of deferred revenue, $780,000 was provided by a decrease in accounts
receivables, $727,000 was provided by an increase in accrued expenses, $1.2
million was provided by a decrease in prepaid expenses, and $670,000 was
provided by an increase in accounts payable.

     For the balance sheet date as of December 31, 2000, compared to December
31, 1999 prepaid expenses decreased $1.1 million, from $2.4 in 1999 to $1.3
million in 2000. In general, prepaid expenses dropped during 2000 as the Company
sought to reduce advance payments in areas such as trade shows, rents, insurance
and board of directors fees. Prepaid income taxes were lower as the Company's
tax obligations decreased year over year, and there was a reduction in the
amount of prepaid value added tax related to foreign operations.

     Accounts payable increased $0.7 million from 1999 to 2000, from $0.4
million at December 31, 1999 to $1.1 million at December 31, 2000. The Company
incurred a significant operating loss in the year ended December 31, 2000, and
its combined cash and short-term investments balance decreased $8.3 million from
December 31, 1999 to December 31, 2000. As a result, the Company delayed
payments to certain vendors resulting in an increase its accounts payable.

     Cash provided by investing activities was $3.6 million: $5.3 million was
provided by sales of short-term investments, $1.2 million was used to purchase
equipment, and $523,000 resulted from the increase in other assets.

     Cash provided in financing activities in 2000 was $700,000 and resulted
from the exercise of incentive stock options and from the exercise of stock
issued under the employee stock purchase plan.

     Cash decreased $253,000 in 2000 due to the effect of currency fluctuation.

     The Company has incurred operating losses for each of the three years in
the period ended December 31, 2000 and may need to obtain additional funding or
alternative means of financial support, or both, in order to continue as a going
concern. The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. Management's plan to
continue as a going concern relies heavily on achieving profitability in the
third quarter of 2001 and beyond. This return to profitability is based on
expense control, projected annual cost reductions (excluding restructuring
charges) of approximately $ 10.4 million related to reduced headcount, office
closings, travel and general costs of doing business, and increased revenues
from new and existing products in the e-Infrastructure marketplace. Management
is also seeking to identify additional funding sources of an equity and/or debt
nature. However, there can be no assurance that such plans will be successful or
that such funding or financial support will be available or adequate to allow
the Company to continue as a going concern. These factors raise substantial
doubt concerning the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

     On March 28, 2001, the Company entered into a credit facility with Silicon
Valley Bank. The credit facility provides the Company the ability to borrow up
to 80% of the Company's qualified and eligible gross domestic accounts
receivable up to a maximum of $2.5 million. Borrowings under this agreement will
be at an interest rate of 2% per month of the average gross daily purchase
account balance, plus an administration fee of 1% of gross purchased account
receivables. This agreement is subject to certain restrictive covenants,
including an adjusted quick ratio. Amounts under this credit facility are
secured by substantially all of the corporate assets of Gensym Corporation. At
March 31, 2001, the Company may not be in compliance with the adjusted quick
ratio covenant.

<PAGE>

Stock Repurchase Program

     In the third quarter of 1998, the Company began a program to repurchase up
to 650,000 shares of its Common Stock on the open market. As of December 31,
2000, 501,300 shares had been repurchased at a cost of $1,869,000. There has
been no repurchase of shares since March 31, 1999.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board, (FASB), issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133, as amended by SFAS Nos. 137 and 138, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
SFAS No. 133 is not expected to have a material impact on the Company's
consolidated financial statements.

     The Securities and Exchange Commission released Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements, on December 3, 1999.
This SAB provides additional guidance on the accounting for revenue recognition,
including both broad conceptual discussions as well as certain industry-specific
guidance. The guidance was effective for the fourth quarter 2000. The Company's
adoption of SAB 101 did not have a material impact on the Company's results of
operations.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

     A number of uncertainties exist that could affect the Company's operating
results, including, without limitation, the following:

     Liquidity. The Company has incurred operating losses for each of the three
years in the period ended December 31, 2000 and may need to obtain additional
funding or alternative means of financial support, or both, in order to continue
as a going concern. The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern. Management's
plan to continue as a going concern relies heavily on achieving profitability in
the third quarter of 2001 and beyond. This return to profitability is based on
expense control, cost reductions, and increased revenues from new and existing
products in the e-Infrastructure marketplace. Management is also seeking to
identify additional funding sources of an equity and/or debt nature. However,
there can be no assurance that such plans will be successful or that such
funding or financial support will be available or adequate to allow the Company
to continue as a going concern. These factors raise substantial doubt concerning
the Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

     Possible Delisting from the Nasdaq National Market. The Company has
received a notice from the Nasdaq National Market that its common stock has
failed to maintain the required minimum market value public float of $5,000,000
over a period of 30 consecutive trading days. As a result, the Nasdaq National
Market has provided us with 90 calendar days, or until June 25, 2001, to regain
compliance with this requirement or be delisted from trading. If we are unable
to regain compliance with this requirement during this time, and any appeal to
the Nasdaq National Market for relief from this requirement is unsuccessful, the
Company's common stock will be delisted from trading by the Nasdaq National
Market. If the Company's common stock is delisted from the Nasdaq National
Market, its liquidity and trading price could be negatively impacted.

     Emerging Market for Intelligent Operations Management Systems.
Substantially all of the Company's revenues are derived from the licensing and
support of software platforms and products for expert manufacturing, network
management and supply-chain design. Although many organizations have begun to
deploy, or have announced plans to deploy, such e-business infrastructure
systems, these systems are different from the basic monitoring and control
systems that are traditionally employed by these organizations. There can be no
assurance that these organizations will be able to introduce e-business
infrastructure management systems successfully, nor that such systems will gain
widespread acceptance. In addition, the timing of the implementation of e-
business infrastructure management systems by organizations may be affected by
economic factors, government regulations, and other factors. Delays in the
introduction of intelligent operations management systems or the failure of
these systems to gain widespread market acceptance would materially and
adversely affect the Company's business, results of operations, or financial
condition. In addition, the Company believes that end-users in its markets are
increasingly seeking application-specific products and

<PAGE>

components as well as complete solutions, rather than general software tools
with which to develop application-specific functionality and solutions. Meeting
this demand has required the Company to modify its sales approach. The Company
is also increasingly reliant on value-added resellers and systems integrators to
satisfy market requirements. The modified sales approach may also lengthen the
Company's average sales cycle. Failure by the Company to respond appropriately
to shifts in market demand could have a material adverse effect on the Company's
business, results of operations, or financial condition.

     Reliance Upon Indirect Distribution Channels and Risks Associated with
Strategic Partner Relationships. The Company sells its products in part through
value-added resellers, systems integrators, original equipment manufacturers and
distributors, which are not under the control of the Company. Sales of the
Company's products by value-added resellers and systems integrators represented
28%, 25%, and 25% of the Company's product revenues in 2000, 1999, and 1998,
respectively. In January 2001, the Company significantly reduced its direct
sales force for its expert manufacturing products. The Company continues to
manage its relationships with existing expert manufacturing customers. But
Gensym now relies solely on its indirect sales partners for sales of its expert
manufacturing products to new customers. The loss of major original equipment
manufacturers or resellers of the Company's products, a significant decline in
their sales, or difficulty on the part of such third-party developers or
resellers in developing successful G2-based or other Company core technology
products and applications could have a material adverse effect on the Company's
business, results of operations, or financial condition. There can be no
assurance that the Company will be able to attract or retain additional
qualified third-party resellers, or that third-party resellers will be able to
effectively sell and implement the Company's products. In addition, the Company
relies on third-party resellers to provide post-sales service and support to its
customers, and any deficiencies in such service and support could adversely
affect the Company's business, results of operations, or financial condition.

     Dependence Upon Development of Sales and Marketing Force. The Company's
future success in the e-business infrastructure marketplace will depend, in
part, upon the productivity of its sales and marketing personnel and the ability
of the Company to continue to attract, integrate, train, motivate and retain new
sales and marketing personnel. There can be no assurance that the Company's
investment in sales and marketing will ultimately prove to be successful. In
addition, there can be no assurance that the Company's sales and marketing
personnel will be able to compete successfully against the significantly more
extensive and better funded sales and marketing operations of many of the
Company's current and potential competitors. The Company's inability to manage
its sales and marketing personnel effectively could have a material adverse
effect on the Company's business, operating results and financial condition.

     Variability of Quarterly Operating Results. The Company has experienced,
and may experience in the future, significant quarter-to-quarter fluctuations in
its operating results. The Company has recorded quarterly losses in each quarter
in 2000, and there can be no assurance that revenue growth or profitable
operations can be attained on a quarterly or annual basis in the future. The
Company's sales cycle typically ranges from six to 12 months, and the cost of
acquiring the Company's software, building and deploying applications, and
training users represents a significant expenditure for customers. The Company's
relatively long sales cycle and high license fees, together with fixed short-
term expenses, can cause significant variations in operating results from
quarter to quarter, based on a relatively small variation in the timing of major
orders. Factors such as the timing of new product introductions and upgrades and
the timing of significant orders could contribute to this quarterly variability.
In addition, the Company ships software products within a short period after
receipt of an order and typically does not have a material backlog of unfilled
orders of software products. Therefore, revenues from software licenses in any
quarter are substantially dependent on orders booked in that quarter.
Historically, a majority of each quarter's revenues from software licenses has
come from license contracts that have been effected in the final weeks of that
quarter. The revenues for a quarter typically include a number of large orders.
If the timing of any of these orders is delayed, it could result in a
substantial reduction in revenues for that quarter. The Company's expense levels
are based in part on expectations of future revenue levels. A shortfall in
expected revenues could therefore result in a disproportionate decrease in the
Company's net income. The Company's financial performance has generally been
somewhat weaker in the first quarter than in the other fiscal quarters, due to
customer purchasing patterns.

     Economic Factors. Because capital expenditures are often viewed as
discretionary by organizations, sales of the Company's products for capital
budget projects are subject to general economic conditions. Future recessionary
conditions in the industries that use the Company's products may adversely
affect the Company's business, results of operations, or financial condition.

     Product Concentration. The Company's main product offerings are G2, a
customizable object-oriented development and deployment platform for building
intelligent expert manufacturing systems, and software application products
based on G2 and other core technologies. Accordingly, the Company's business and
financial results are substantially dependent upon the continued customer
acceptance and deployment of G2 and its other products. The timing of major G2
releases may affect the timing of

<PAGE>

purchases of the Company's products. The Company has introduced several G2-based
products for building applications and is developing others. The Company
believes that market acceptance of these products will be important to the
Company's future growth. There can be no assurance that such products will
achieve market acceptance or that new products will be successfully developed.
In addition, the Company relies on many of its distribution partners to develop
G2-based products for specialized markets. Accordingly, the Company's business
and financial results are also linked to the continued successful product
development by its partners and market acceptance of such G2-based products. Any
decline in the demand for G2 and its other products, whether as a result of
competitive products, price competition, the lack of success of the Company's
partners, technological change, the shift in customer demand toward complete
solutions, or other factors, could have a material adverse effect on the
Company's business, results of operations, or financial condition.

     New Products and Rapid Technological Change. The market for the Company's
products is relatively new and is characterized by rapid technological change,
evolving industry standards, changes in end-user requirements, and frequent new
product introductions and enhancements. The Company's future success will depend
in part upon its ability to enhance its existing products, to introduce new
products and features to meet changing customer requirements and emerging
industry standards, and to manage transitions from one product release to the
next. The Company has from time to time experienced delays in introducing new
products and product enhancements. There can be no assurance that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products and product
enhancements. There also can be no assurance that the Company will successfully
complete the development of new or enhanced products, that the Company will
successfully manage the transition to future versions of G2, or to successor
technology, or that the Company's future products will achieve market
acceptance. In addition, the introduction of products embodying new technologies
and the emergence of new industry standards could render the Company's existing
products and products currently under development obsolete and unmarketable.
From time to time, new products, capabilities, or technologies may be announced
that have the potential to replace or shorten the life cycle of the Company's
existing product offerings. There can be no assurance that announcements of
currently planned or other new product offerings will not cause customers to
defer purchasing existing Company products. See "Emerging Market for Intelligent
Operations Management Systems."

     Risks Associated With International Operations. The Company's international
revenues represented 44%, 46%, and 47%, of total revenues in 2000, 1999, and
1998, respectively. Revenues are categorized by the Company according to product
shipment destination and therefore do not necessarily reflect the ultimate
country of installation. The international portion of the Company's business is
subject to a number of inherent risks, including difficulties in building and
managing international operations, difficulties in localizing products and
translating documentation into local languages, fluctuations in the value of
international currencies including the euro, fluctuating import/export duties
and quotas, and unexpected regulatory, economic, or political changes in
international markets. In particular, the continuing economic problems in Asia
pose challenges to the Company's sales and marketing operations in that region.
There can be no assurance that these factors will not adversely affect the
Company's business, results of operations, or financial condition.

     Competition. Although the Company believes that there are no other
commercially available products that offer the full range of high-level
capabilities embodied in the Company's network management products, a number of
companies offer products that perform certain functions of G2 for specific
applications. In all of the Company's markets, there is competition from "point
solutions", real-time and expert system products, and internally developed
software. At the fundamental level, there are commercially available software
development tools that software application developers or potential customers
could use to build software having functionality similar to the Company's
products.

     Certain companies, such as Objective Systems Integrators, Inc., Micromuse,
RiverSoft and Systems Management Arts (SMARTS), sell "point solutions" that
compete with the Company's network management products with respect to specific
applications or uses. Several companies, including Aspen Tech, Ilog S.A.,
Pavilion and System Management Arts, offer expert manufacturing products with
limited real-time, expert system, or fault isolation capabilities at lower price
points than those provided by the Company. Many of these products often require
extensive programming with languages such as C or C++ for complete
implementation. Although the Company believes that these products offer a less
productive development environment than G2 and that they lack the comprehensive
capabilities of G2-based products, certain competitors in this category have
greater financial and other resources than Gensym and might introduce new or
improved products to compete with G2, possibly at lower prices.

     The Company's software is also integrated into industry-specific solutions
by value-added resellers. A number of software companies offer products that
compete in specific application areas addressed by these value-added resellers,
such as cement kiln control and refinery scheduling, and they could be
successful in supplying alternatives to products based on the Company's
software.

<PAGE>

     Many of the Company's customers have significant investments in their
existing solutions and have the resources necessary to enhance existing products
and to develop future products. These customers may develop and incorporate
competing technologies into their systems or may outsource responsibility for
such systems to others who do not use the Company's products. There is no
assurance that the Company can successfully persuade development personnel
within these customers' organizations to use G2-based products that can cost
effectively compete with their internally developed products. This would reduce
the need for the Company's products and services and limit future opportunities
for the Company.

     The Company believes that continued investment in research and development
and sales and marketing will be required to maintain its competitive position.
There can be no assurance that competitors will not develop products or provide
services that are superior to the Company's products or services or achieve
greater market acceptance. Competitive pressures faced by the Company could
force the Company to reduce its prices, which could result in reduced
profitability. There can be no assurance that the Company will be able to
compete successfully against current and future sources of competition or that
such competition will not have a material adverse effect on the Company's
business, results of operations, or financial condition.

     Potential for Undetected Errors. Complex software products such as those
offered by the Company may contain unintended errors or failures commonly
referred to as "bugs". There can be no assurance that, despite significant
testing by the Company and by current and potential customers, errors will not
be found in new products after commencement of commercial shipments. Although
the Company has not experienced material adverse effects resulting from any such
errors or defects to date, there can be no assurance that errors or defects will
not be discovered in the future that could cause delays in product introduction
and shipments or require design modifications that could adversely affect the
Company's business, results of operations, or financial condition.

     Dependence Upon Proprietary Technology. The Company's success is heavily
dependent upon its proprietary technology. The Company relies upon a combination
of trade secret, contract, copyright, patent, and trademark law to protect its
proprietary rights in its products and technology. The Company enters into
confidentiality and/or license agreements with its employees, third-party
resellers, and end-users and limits access to and distribution of its software,
documentation, and other proprietary information. In addition, the Company has
placed technical inhibitors in its software that prevent such software from
running on unauthorized computers. However, effective patent, copyright, and
trade secret protection may not be available in every country in which the
Company's products are distributed. There can be no assurance that the steps
taken by the Company to protect its proprietary technology will be adequate to
prevent misappropriation of its technology by third parties, or that third
parties will not be able to develop similar technology independently. In
addition, there can be no assurance that third parties will not assert
infringement claims in the future or that such claims will not be successful.

     Dependence on Key Personnel. The Company's success depends in large part
upon certain key employees, including its executive officers, the loss of any of
whom could have a material adverse effect on the Company. The Company's key
employees are not bound by employment agreements that require them to remain
with the Company. The Company's success will depend in significant part upon its
ability to attract and retain highly skilled management, technical, and sales
and marketing personnel. Competition for such personnel in the software industry
is intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel, or that new key personnel will
integrate successfully into the senior management team. The loss of certain key
employees or the Company's inability to attract and retain other qualified
employees or to adequately replace key personnel who depart the Company could
have a material adverse effect on the Company's business, results of operations,
or financial condition.

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                      GENSYM CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                       (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                            2000                    1999
                                                                         -----------             -----------
<S>                                                                       <C>                    <C>
                         ASSETS
Current Assets:
   Cash and cash equivalents                                               $ 2,657                 $ 5,710
   Short-term investments                                                      698                   5,975
   Accounts receivable, less reserves of $385
     in 2000 and $364 in 1999                                                8,800                   9,528
   Prepaid expenses                                                          1,258                   2,352
   Deferred income taxes                                                         -                   1,261
                                                                           -------                 -------
     Total current assets                                                   13,413                  24,826
                                                                           -------                 -------
Property and equipment, at cost
   Computer equipment and software                                           8,955                   8,264
   Furniture and fixtures                                                    1,950                   1,932
   Leasehold improvements                                                      428                     423
                                                                           -------                 -------
                                                                            11,333                  10,619
   Accumulated depreciation and amortization                                (9,936)                 (9,324)
                                                                           -------                 -------
                                                                             1,397                   1,295
                                                                           -------                 -------

Long-term deferred income taxes                                                  -                     612
Deposits and other assets                                                      730                     201
                                                                           -------                 -------
                                                                           $15,540                 $26,934
                                                                           =======                 =======

        LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Accounts payable                                                        $ 1,068                 $   387
   Accrued expenses                                                          5,541                   4,694
   Deferred revenue                                                          6,519                   6,931
                                                                           -------                 -------
       Total current liabilities                                            13,128                  12,012
                                                                           -------                 -------

Commitments (Note 5)

Stockholders' Equity:
    Preferred Stock, $.01 par value - Authorized 2,000,000 shares
     Issued and outstanding - none                                               -                       -
    Common Stock, $.01 par value - Authorized - 20,000,000 shares
     Issued - 6,968,270 and 6,744,565 shares in 2000 and 1999,
       respectively
     Outstanding - 6,466,970 and 6,243,265 shares in 2000 and 1999,
       respectively                                                             70                      67
Capital in excess of par value                                              21,620                  20,923
Treasury stock - 501,300 shares in 2000 and 1999, at cost                   (1,869)                 (1,869)
Accumulated deficit                                                        (15,869)                (13,053)
Cumulative translation adjustment                                           (1,540)                 (1,146)
                                                                           -------                 -------
     Total stockholders' equity                                              2,412                  14,922
                                                                           -------                 -------
                                                                           $15,540                 $26,934
                                                                           =======                 =======
</TABLE>

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

<PAGE>

                      GENSYM CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)


<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                                                         2000        1999        1998
                                                                      ---------   ---------   ---------
<S>                                                                   <C>         <C>         <C>
Revenues:
  Product                                                            $11,992      $19,628      $16,911
  Services                                                            15,583       16,799       18,067
                                                                     -------      -------      -------
     Total revenues                                                   27,575       36,427       34,978

Cost of revenues
  Product                                                              1,073        1,315        1,334
  Services                                                             7,323        7,259        7,364
                                                                     -------      -------      -------
     Total cost of revenues                                            8,396        8,574        8,698
                                                                     -------      -------      -------
Gross profit                                                          19,179       27,853       26,280
                                                                     -------      -------      -------

Operating expenses:
  Sales and marketing                                                 17,379       18,214       18,276
  Research and development                                             7,614        6,470        6,023
  General and administrative                                           4,942        5,288        4,134
                                                                     -------      -------      -------
     Total operating expenses                                         29,935       29,972       28,433
                                                                     -------      -------      -------

Operating loss                                                       (10,756)      (2,119)      (2,153)

Other income:
  Interest income                                                        380          505          678
  Other income (expense)                                                (169)          (2)          37
                                                                     -------      -------      -------
                                                                         211          503          715
                                                                     -------      -------      -------

Loss before provision for income taxes                               (10,545)      (1,616)      (1,438)

Provision for income taxes                                             2,271          336           50
                                                                     -------      -------      -------

Net loss                                                            $(12,816)    $ (1,952)    $ (1,488)
                                                                    ========     ========     ========

Basis and diluted loss per share                                    $  (2.01)    $  (0.32)    $  (0.23)
                                                                    ========     ========     ========

Weighted average common shares outstanding                             6,365        6,149        6,371
                                                                    ========     ========     ========
</TABLE>

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



<PAGE>

                      GENSYM CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       (In thousands, except share data)


<TABLE>
<CAPTION>
                                    Common Stock       Capital in            Accumulated     Cumulative        Total     Compre-
                                 -------------------
                                 Number of    $0.01    Excess of  Treasury    Earnings     Translation    Stockholders'  hensive
                                  Shares    Par Value  Par Value   Stock     (Deficit)      Adjustment       Equity      loss
                                 ---------   -------    -------    -------   ----------   ------------     -------      -------
<S>                              <C>        <C>          <C>       <C>       <C>           <C>            <C>        <C>
BALANCE, DECEMBER 31, 1997       6,409,397       $64     $19,941    $     -     $   387     $  (564)      $ 19,828
Exercise of stock options           18,050         -          82          -           -           -             82
Issuance of common stock under
 Employee Stock Purchase Plan
 (ESPP)                            129,821         1         404          -           -           -            405
Treasury Stock - 345,200 shares          -         -           -     (1,278)          -           -         (1,278)
Translation adjustment                   -         -           -          -           -         (66)           (66)       (66)
Net loss                                 -         -           -          -      (1,488)          -         (1,488)    (1,488)
                                                                                                                     --------
Comprehensive net loss for the
 year ended December 31, 1998                                                                                        $ (1,554)
                                  ---------      ---     -------    -------    --------     -------       --------   ========
BALANCE, DECEMBER 31, 1998        6,557,268       65      20,427     (1,278)     (1,101)       (630)        17,483
Exercise of stock options            24,156        -          74          -           -           -             74
Issuance of common stock under
 ESPP                               163,141        2         422          -           -           -            424
Treasury Stock - 156,100 shares           -        -           -       (591)          -           -           (591)
Translation adjustment                    -        -           -          -           -        (516)          (516)      (516)
Net loss                                  -        -           -          -      (1,952)          -         (1,952)    (1,952)
Comprehensive net loss for the                                                                                       --------
 year ended December 31, 1999                                                                                        $ (2,468)
                                  ---------      ---     -------    -------    ---------    -------       --------   ========
BALANCE, DECEMBER 31, 1999        6,744,565       67      20,923     (1,869)     (3,053)     (1,146)        14,922
Exercise of stock options            93,744        1         389          -           -           -            390
Issuance of common stock under
 ESPP                               129,961        2         308          -           -           -            310
Translation adjustment                    -        -           -          -           -        (394)          (394)      (394)
Net loss                                  -        -           -          -     (12,816)          -        (12,816)   (12,816)
Comprehensive net loss for the                                                                                       --------
 year ended December 31, 2000                                                                                        $(13,210)
                                  ---------      ---     -------    -------    --------     -------       --------   ========
BALANCE, DECEMBER 31, 2000        6,968,270      $70     $21,620    $(1,869)   $(15,869)    $(1,540)      $  2,412
                                  =========      ===     =======    =======    ========     =======       ========
</TABLE>

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

<PAGE>

                      GENSYM CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                          Year ended December 31,
                                                                                       2000        1999        1998
                                                                                    ---------   ---------   ---------
<S>                                                                                 <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                                         $ (12,816)  $  (1,952)  $  (1,488)
   Adjustments to reconcile net loss to net
     cash used in operating activities:
       Depreciation and amortization                                                      911       1,123       1,245
       Deferred taxes                                                                   1,873         287           -
       Changes in assets and liabilities:
         Accounts receivable                                                              780      (2,055)        747
         Prepaid expenses                                                               1,177        (720)       (214)
         Accounts payable                                                                 670        (112)       (400)
         Accrued expenses                                                                 727         982      (1,155)
         Deferred revenue                                                                (420)        527         611
                                                                                    ---------   ---------   ---------

         Net cash used in operating activities                                         (7,098)     (1,920)       (654)
                                                                                    ---------   ---------   ---------


CASH FLOW FROM INVESTING ACTIVITIES:
   Sales (purchases) of short-term investments                                          5,277      (5,137)      4,005
   Sales of long-term investments                                                           -           -       1,041
   Purchases of property and equipment                                                 (1,156)       (436)       (843)
   (Increase) decrease in other assets                                                   (523)         38          32
                                                                                    ---------   ---------   ---------

         Net cash provided by (used in) investing activities                            3,598      (5,535)      4,235
                                                                                    ---------   ---------   ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Purchase of treasury stock                                                               -        (591)     (1,278)
   Proceeds from exercise of stock options and issuance of
     common stock under stock plans                                                       700         498         487
                                                                                    ---------   ---------   ---------
         Net cash provided by (used in) financing activities                              700         (93)       (791)
                                                                                    ---------   ---------   ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                  (253)       (437)        (53)
                                                                                    ---------   ---------   ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                   (3,053)     (7,985)      2,737

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                          5,710      13,695      10,958
                                                                                    ---------   ---------   ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                            $   2,657   $   5,710   $  13,695
                                                                                    =========   =========   =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid during the period for -
      Income taxes                                                                  $     214   $     221   $     424
                                                                                    =========   =========   =========
</TABLE>


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

<PAGE>

                      GENSYM CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

The Company is a supplier of software products and services for developing and
deploying intelligent systems that manage and improve complex, dynamic
operations for a broad range of industrial, scientific, commercial, and
government applications.

The Company has incurred operating losses for each of the three years in the
period ended December 31, 2000 and may need to obtain additional funding or
alternative means of financial support, or both, in order to continue as a going
concern. The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. Management's plan to
continue as a going concern relies heavily on achieving profitability in the
third quarter of 2001 and beyond. This return to profitability is based on
expense control, cost reductions, and increased revenues from new and existing
products in the e-Infrastructure marketplace. Management is also seeking to
identify additional funding sources of an equity and/or debt nature. However,
there can be no assurance that such plans will be successful or that such
funding or financial support will be available or adequate to allow the Company
to continue as a going concern. These factors raise substantial doubt concerning
the Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

The accompanying consolidated financial statements reflect the application of
certain significant accounting policies, as described in this note and elsewhere
in the accompanying consolidated financial statements and notes.

(a) Principles of Consolidation

    The accompanying consolidated financial statements include the accounts of
    the Company and its wholly owned subsidiaries. All material intercompany
    transactions and balances have been eliminated in consolidation.

(b) Cash Equivalents and Investments

    The Company accounts for investments under Statement of Financial Accounting
    Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and
    Equity Securities. The Company's investments are classified as held-to-
    maturity and are recorded at amortized cost at December 31, 2000 and 1999.
    Cash equivalents are short-term, highly liquid investments with original
    maturity dates of less than three months. Short-term investments held as of
    December 31, 2000 and 1999 consist of U.S. and municipal agency bonds and
    commercial paper with original maturity dates greater than three months that
    mature within one year.

<PAGE>

<TABLE>
<CAPTION>
(In thousands)                                                  December 31, 2000                 December 31, 1999
                                                            ----------------------------      -----------------------------
                                                                 Total             Total           Total              Total
                                           Contracted           Market         Amortized          Market          Amortized
Description                                  Maturity            Value              Cost           Value               Cost
----------------------------------   ----------------       ----------       -----------      ----------        -----------
<S>                                  <C>                    <C>              <C>              <C>               <C>
Cash and Cash Equivalents:
Cash and cash equivalents                         N/A         $  2,554          $  2,554        $  4,211           $  4,187
Commercial paper                           0-3 months                -                 -             990                994
Money market funds                         0-3 months              103               103             529                529
                                                            ----------       -----------      ----------        -----------
  Total cah and cash equivalents                                 2,657             2,657           5,730              5,710
                                                            ==========       ===========      ==========        ===========
Short-Term Investments:
Corporate bonds                            4-12 months             701               698             950                975
Commercial paper                           4-12 months               -                 -           1,999              2,000
Government agency                          4-12 months               -                 -           2,995              3,000
                                                            ----------       -----------      ----------        -----------
  Total short-term investments                                     701               698           5,944              5,975
                                                            ==========       ===========      ==========        ===========
                                                              $  3,358          $  3,355        $ 11,674           $ 11,685
                                                            ==========       ===========      ==========        ===========
</TABLE>

<PAGE>

(c) Depreciation and Amortization

    The Company provides for depreciation using the straight-line method over
    the estimated useful lives of the assets. Certain assets under capital
    leases are amortized using the straight-line method. The estimated useful
    lives by asset class are as follows:

<TABLE>
<CAPTION>
                                                                        Estimated
                                   Asset Classification                             Useful Lives
                                   --------------------                             ------------
<S>                                                                     <C>
                                   Computer equipment
                                    and software....................    3 Years
                                   Furniture and fixtures...........    5 Years
                                   Leasehold improvements...........    Shorter of lease term or useful life
</TABLE>

(d) Revenue Recognition


    The Company recognizes revenue from product sales upon product shipment
    provided that there are no uncertainties regarding acceptance, there is
    persuasive evidence of an arrangement, the sales price is fixed or
    determinable and collection of the related accounts receivable is probable.
    If there are uncertainties regarding customer acceptance, revenue is
    deferred until the uncertainties are resolved. The Company recognizes
    revenue in accordance with Statement of Position (SOP) 97-2, "Software
    Revenue Recognition". For arrangements that include the delivery of multiple
    elements, revenue is allocated to the various elements based on vendor
    specific objective evidence of fair value (VSOE). The Company establishes
    VSOE based on either the price charged for the element when sold separately
    or for elements not yet sold separately, the price established by management
    with the relevant authority to do so. Software maintenance VSOE represents a
    consistent percentage of the license fees charged to customers for
    maintenance renewals. Consulting and training services VSOE represents
    standard rates, which the Company charges its customers when it sells these
    services separately. In accordance with SOP 98-9, "Modification of SOP 97-2,
    Software Revenue Recognition, With Respect to Certain Transactions", the
    Company uses the residual method when fair value does not exist for one of
    the delivered elements in the arrangements. Under the residual method, the
    fair value of the undelivered element is deferred and recognized when
    delivered. The Company has established VSOE for consulting, training and
    software maintenance services. Accordingly, software license revenue is
    recognized under the residual method in arrangements in which software is
    licensed with consulting, training or software maintenance.

    Revenues from the sale of multicopy licenses are recognized upon the
    shipment of the product master or the first copy of the software product if
    the product master is not to be delivered. Under these arrangements,
    duplication is incidental to the arrangement and, if material, duplication
    costs are accrued when the revenue is recognized. Revenues from multiple
    single licenses are recognized as copies are delivered to the customer or
    copies are sold by the customer.

    Revenues from sales to resellers are recognized upon the delivery of the
    software, provided all other revenue recognition criteria, as specified
    above, have been satisfied. The Company does not grant rights of return to
    any customers, including resellers.

    Software maintenance fees are recognized as revenue ratably over the life of
    the software maintenance contract period. Software maintenance arrangements
    include unspecified rights to software updates. These services are typically
    sold for a one-year term and are sold either as part of a multiple element
    arrangement with software licenses or are sold separately at the time of
    renewal.

    Revenues derived from consulting and training are recognized upon
    performance of the services provided that the amounts due from customers are
    fixed or determinable and deemed collectible by management. Deferred revenue
    primarily represents advance billings for software services, which include
    software maintenance, consulting, training and license prepayment fees.

(e) Research and Development and Software Development Costs

    In accordance with SFAS No. 86, Accounting for the Costs of Computer
    Software to Be Sold, Leased, or Otherwise Marketed, the Company has
    evaluated the establishment of technological feasibility of its various
    products during the development phase. Due to the dynamic changes in the
    market, the Company has concluded that it cannot determine technological
    feasibility until the development phase of the project is nearly complete.
    The time period during which costs could be capitalized from the point of
    reaching technological feasibility until the time of general product release
    is very short and, consequently, the amounts that could

<PAGE>

    be capitalized are not material to the Company's financial position or
    results of operations. Therefore, the Company charges all research and
    development expenses to operations in the period incurred.

(f) Foreign Currency Translation

    Assets and liabilities of the foreign subsidiaries are translated in
    accordance with SFAS No. 52, Foreign Currency Translation. In accordance
    with SFAS No. 52, assets and liabilities of the Company's foreign operations
    are translated into U.S. dollars at current exchange rates, and income and
    expense items are translated at average rates of exchange prevailing during
    the year. Gains and losses arising from translation are accumulated as a
    separate component of stockholders' equity. Gains and losses arising from
    transactions denominated in foreign currencies are included in other income
    and were not material for the periods presented.

(g) Retirement Plan

    Effective January 1997, the Company amended the Gensym Corporation 401(k)
    Plan (the "Plan") to allow for employer matching contributions. The Company
    has elected to contribute an amount equal to 50% of the first 4%, and 25% of
    the next 4% of an employee's compensation (as defined) contributed to the
    Plan as an elective deferral. The Company's contributions to the Plan were
    $267,000 in 2000, $262,000 in 1999 and $316,000 in 1998.

(h) Concentration of Credit Risk

    Generally accepted accounting principles require disclosure of any
    significant off-balance-sheet and credit risk concentrations. Financial
    instruments, which potentially subject the Company to concentrations of
    credit risk, are principally cash, cash equivalents, investments and
    accounts receivable. The Company places its cash, cash equivalents and
    investments in highly rated institutions. For the fiscal years ended
    December 31, 2000 and 1998, no single customer accounted for more than 10%
    of the Company's total revenue. One customer accounted for 12% of the total
    revenue in 1999. No single customer accounted for greater than 10% of
    accounts receivable at December 31, 2000 or 1999. The Company has no
    significant off-balance-sheet risk such as foreign exchange contracts,
    options contracts, or other foreign hedging arrangements.

(i) Comprehensive Loss

    In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
    No. 130, Reporting Comprehensive Income. SFAS No. 130 requires disclosure of
    all components of comprehensive income on an annual and interim basis.
    Comprehensive income is defined as the change in equity of a business
    enterprise during a period from transactions, other events and circumstances
    from nonowner sources. Comprehensive loss is disclosed in the accompanying
    consolidated statements of stockholder's equity.

(j) Income (Loss) per Share

    In accordance with SFAS No. 128, Earnings per Share, basic income (loss) per
    share was computed by dividing net income (loss) by the weighted average
    number of common shares outstanding during the periods. Diluted income
    (loss) per share is the same as basic income (loss) per share due to the net
    loss recorded in all years presented. For the years ended December 31, 2000,
    1999, and 1998, the computation for diluted loss per share excludes the
    effect of 1,705,412 shares, 1,169,294 shares, and 729,639 shares,
    respectively, issuable from assumed exercise of options, as their effect
    would be antidilutive.

(k) Use of Estimates in the Preparation of Financial Statements

    The preparation of financial statements in conformity with generally
    accepted accounting principles requires management to make estimates and
    assumptions that affect the reported amounts of assets and liabilities and
    disclosure of contingent assets and liabilities at the date of the financial
    statements and the reported amounts of revenues and expenses during the
    reporting period. Actual results could differ from those estimates.

(l) New Accounting Pronouncements

<PAGE>

    In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
    Instruments and Hedging Activities. This statement establishes accounting
    and reporting standards for derivative instruments, including derivative
    instruments embedded in other contracts, and for hedging activities. SFAS
    No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of
    fiscal years beginning after June 15, 2000. SFAS No. 133 is not expected to
    have a material impact on the Company's consolidated financial statements.

    In March 2000, the FASB issued Interpretation No. 44, "Accounting for
    Certain Transactions Involving Stock Compensation -an Interpretation of APB
    Opinion No. 25." The interpretation clarifies the application of APB Opinion
    No. 25 in certain situations, as defined. The interpretation is effective
    July 1, 2000, but covers certain events occurring during the period after
    December 15, 1998. The adoption of this interpretation did not have an
    impact on the accompanying financial statements.

    The Securities and Exchange Commission released Staff Accounting Bulletin
    (SAB) No. 101, Revenue Recognition in Financial Statements, on December 3,
    1999. This SAB provides additional guidance on the accounting for revenue
    recognition, including both broad conceptual discussions as well as certain
    industry-specific guidance. The guidance was effective as of the beginning
    of 2000. The Company's adoption of SAB 101 did not have a material impact on
    the Company's results of operations.

(2) LINE OF CREDIT

  On March 28, 2001, the Company entered into a credit facility with a bank. The
credit facility provides the Company the ability to borrow up to 80% of the
Company's qualified and eligible gross domestic accounts receivable up to a
maximum of $2.5 million. Borrowing under this agreement will be at an interest
rate of 2% per month, plus an administration fee of 1% of gross account
receivables held as collateral. This agreement is subject to certain restrictive
covenants, including an adjusted quick ratio. Amounts under this credit facility
are secured by substantially all corporate assets of Gensym Corporation. At
March 31, 2001, the Company may not be in compliance with the adjusted quick
ratio covenant.

(3) STOCKHOLDERS' EQUITY

(a) Common Stock

    The Company's authorized capitalization consists of 20,000,000 shares of
    Common Stock and 2,000,000 shares of Preferred Stock.

(b) Stock Option Plans

    The following table shows the Company's stock option plans, the number of
    shares reserved for issuance by the Company's Board of Directors, and the
    number of shares available for future issuance as of December 31, 2000:

<TABLE>
<CAPTION>
                                                                                              Number of Shares
                                                                                            Available for Future
                                                               Number of Shares                Issuance as of
          Plan Name                                          Reserved for Issuance            December 31, 2000
          --------------------------------------         ----------------------------     ------------------------
<S>                                                      <C>                              <C>
           1987 Stock Plan                                           600,000                             -
           1994 Stock Option Plan                                    534,850                           787
           1995 Director Stock Option Plan                           100,000                        18,000
           1995 Employee Stock Purchase Plan                         700,000                       115,422
           1997 Stock Incentive Plan                                 500,000                        25,873
           2000 Stock Incentive Plan                                 800,000                       504,900
                                                         ----------------------------     ------------------------
                                                                   3,234,850                       664,982
                                                         ----------------------------     ------------------------
</TABLE>

<PAGE>

The 1987 Stock Plan provided for the grant of incentive stock options,
nonqualified stock options, stock awards, and direct sales of stock. The Board
of Directors has resolved not to grant any more options under the 1987 Stock
Plan. The 1994 Stock Option Plan provides for the grant of incentive stock
options and nonqualified stock options. The 1997 Stock Incentive Plan provides
for the grant of incentive stock options, nonqualified stock options, restricted
stock and other stock-based awards.  The 2000 Stock Incentive Plan, approved by
the stockholders in June 2000, provides for the grant of incentive stock
options, nonqualified stock options, restricted stock and other stock-based
awards. Under these plans, incentive stock options may be granted at an exercise
price not less than the fair market value of the Company's Common Stock on the
date of grant or, in the case of 10% stockholders, not less than 110% of the
fair market value. Nonqualified options may be granted by the Board of Directors
at its discretion.  The difference, if any, between the exercise price and the
fair value of the underlying Common Stock at the measurement date is charged to
operations over the vesting period of such options.  The terms of exercise of
options granted under these plans are determined by the Board of Directors.
Incentive stock options expire no later than 10 years after the date of grant.

The Board of Directors, on October 22, 1998, authorized the repricing of certain
incentive stock options. Under the repricing plan, option holders were permitted
to voluntarily exchange their old options for new options. The new options allow
the option holders to purchase 80% of the number of shares of Common Stock
represented by the old options at a price equal to the closing price of the
Company's Common Stock, or for officers, at a price equal to 110% of the closing
price, on November 20, 1998. All other terms and conditions of the new options
remain identical to the old options agreement. The closing price of the Common
Stock on November 20, 1998 was $3.88. Under the repricing plan, 670,160
incentive stock options were cancelled and 539,948 incentive stock options were
reissued.

The 1995 Director Stock Option Plan (the "Director Plan") was approved by the
stockholders in January 1996 and amended in May 1997. The Director Plan provides
for the grant of options to purchase Common Stock of the Company to non-employee
directors of the Company. On June 30 of each year, beginning in 1997, each non-
employee director is granted an option to purchase 3,000 shares of common stock
at an exercise price equal to the then current fair market value. These options
vest in equal portions over a five-year period and expire 10 years from the date
of grant.

During 1999, in conjunction with the hiring of the chief executive officer, the
company granted options to purchase 361,111 shares at an exercise price of
$3.25, outside of any existing stock option plans. During 2000, in conjunction
with the hiring of the vice president marketing and the hiring of the vice
president finance & administration and CFO, the company granted options to
purchase 10,000 and 34,845 shares, respectfully, at an exercise price of $5.44,
outside of any existing option plans. These stock options were issued at the
fair market value on the date of grant and are included in the table below.

The following table summarizes the stock option activity for each the three
years in the period ended December 31, 2000:

<PAGE>

<TABLE>
<CAPTION>
                                                         Number of       Option Price       Weighted Average
                                                          Shares           per Share          Option Price
                                                        ----------    ----------------    ------------------
<S>                                                     <C>           <C>                  <C>
Outstanding at December 31, 1997                          819,780      $1.60 - $20.00           $  6.65
Granted                                                   835,698         3.00 - 7.50              4.94
Exercised                                                 (18,050)        1.60 - 7.50              4.58
Canceled                                                 (907,789)       3.81 - 20.00              6.90
                                                        ---------      --------------           -------
Outstanding at December 31, 1998                          729,639      $3.00 - $10.00           $  4.44
Granted                                                   656,320         2.75 - 5.25              3.45
Exercised                                                 (24,156)        3.00 - 3.88              3.13
Canceled                                                 (192,509)        3.00 - 7.50              4.35
                                                        ---------      --------------           -------
Outstanding at December 31, 1999                        1,169,294      $2.75 - $10.00           $  3.92
Granted                                                   773,600         0.72 - 9.31              3.53
Exercised                                                 (93,744)        2.81 - 7.50              4.11
Canceled                                                 (143,738)        2.75 - 9.31              4.78
                                                        ---------      --------------           -------
Outstanding at December 31, 2000                        1,705,412      $0.72 - $10.00           $  3.66
                                                        =========      ==============           =======
Exercisable at December 31, 2000                          605,177      $2.75 - $10.00           $  4.17
                                                        =========      ==============           =======
Exercisable at December 31, 1999                          340,741      $3.00 - $10.00           $  4.53
                                                        =========      ==============           =======
Exercisable at December 31, 1998                          250,366      $3.00 - $10.00           $  4.59
                                                        =========      ==============           =======
</TABLE>

The range of exercise prices for options outstanding and options exercisable at
December 31, 2000 is as follows:

<TABLE>
<CAPTION>
                                             Options Outstanding              Options Exercisable
                                     --------------------------------      -------------------------------
                                       Weighted
                                        Average                                                Weighted
                                       Remaining          Weighted                              Average
Range of Exercise      Options        Contractual         Average            Options            Exercise
    Prices          Outstanding          Life         Exercise Price        Exercisable           Price
-----------------  -------------     -------------   ----------------      -------------     -------------
<S>                 <C>                  <C>           <C>                 <C>               <C>
$ 0.72-1.00            236,600           9.99             $  0.81                  0           $   0.00
$ 1.88-2.50             56,250           9.81                2.26                  0               0.00
$ 2.75-4.50          1,102,020           8.53                3.61            523,960               3.80
$ 4.75-6.38            233,143           8.65                5.53             38,210               5.05
$ 7.50-10.00            77,399           7.19                8.22             43,007               7.73
                     ---------           ----             -------            -------           --------
                     1,705,412           8.76             $  3.66            605,177           $   4.17
                     =========           ====             =======            =======           ========
</TABLE>

The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in November 1995 and approved by the
stockholders in January 1996. The Purchase Plan authorizes the sale of common
stock to participating employees.  In January 1998 the board of directors
amended the Purchase Plan to increase the number of shares of Common Stock
reserved for issuance under the Plan from 200,000 to 500,000. In June 2000 the
board of directors amended the Purchase Plan to increase the number of shares of
Common Stock reserved for issuance under the Plan from 500,000 to 700,000.

All employees of the Company meeting certain eligibility requirements are
eligible to participate in the Purchase Plan.  An employee may elect to have a
whole number percentage from 1% to 10% of his or her base pay withheld during
the payroll deduction period "Offering Period" for purposes of purchasing shares
under the Purchase Plan. The price at which shares may be purchased during each
offering will be 85% of the fair market value per share of the Common Stock on
either the first day or the last day of the Offering Period, whichever is lower.
The compensation committee of the board of directors may, at its discretion,
choose an Offering Period of 12 months or less for each of the offerings and
choose a different Offering Period for each offering. Under the Purchase Plan,
the Company has sold 584,578 shares as of December 31, 2000.

<PAGE>

(c) Stock-Based Compensation

SFAS No. 123 Accounting for Stock-Based Compensation, requires the measurement
of the fair value of stock options to be included in the statement of income of
disclosed in the notes to financial statements. The Company has determined that
it will continue to account for stock-based compensation for employees under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issue to
Employees, and elect the disclosure-only alternative under SFAS No. 123.

The Company has computed the pro forma disclosure required under SFAS No. 123
for all stock compensation plans during the three years ended December 31, 2000,
using the Black-Scholes option pricing model under the fair value method
prescribed by SFAS No. 123. The assumptions used are as follows:

<TABLE>
                                             2000              1999                 1998
                                         -------------    --------------       --------------
<S>                                       <C>               <C>                <C>
Risk-free interest rate                   5.24 - 6.6%      4.80 - 6.38%         4.65 - 5.71%
Expected dividend yield                             0                 0                    0
Expected lives of option grants             7.0 Years         7.0 Years            7.0 Years
Expected volatility                              160%               90%                  70%
Weighted average fair value of
options granted                              $   3.53          $   2.85            $    3.25
</TABLE>

For the purposes of pro forma disclosure, the estimated fair value of options is
amortized to expense over the vesting period. Had compensation costs for options
and Purchase Plan shares been determined based on the fair value at the grant
dates as prescribed by SFAS No. 123, the effect would have been as follows:

<TABLE>
                                                             2000            1999          1998
                                                         ------------     ----------    ----------
                                                          (In thousands, except per share amounts)
<S>                                                      <C>              <C>           <C>
Net loss as reported                                       $(12,816)       $(1,952)      $(1,488)
Pro forma net loss as adjusted                              (14,316)        (2,883)       (2,384)
Basic and diluted loss per share as reported                 ($2.01)        ($0.32)       ($0.23)
Pro forma basic and diluted loss per share as adjusted       ($2.52)        ($0.53)       ($0.43)
</TABLE>

(d) Stock Repurchase Program


In the third quarter of 1998, the Company began a program to repurchase up to
650,000 shares of its Common Stock on the open market.  No shares were
purchased in 2000.  As of December 31, 2000, 501,300 shares had been
repurchased at a cost of $1,869,000.

(4) INCOME TAXES

(Loss) income before provision for income taxes consists of the following (in
thousands):

<TABLE>
Years ended December 31,            2000          1999       1998
                                 --------       -------    --------
<S>                              <C>            <C>         <C>
Domestic                         (11,051)       (2,753)      (545)
Foreign                              506         1,137       (893)
                                 -------        ------     ------
Total                            (10,545)       (1,616)    (1,438)
</TABLE>

The components of the provision for income taxes for each of the three years in
the period ended December 31, 2000 are as follows:

<PAGE>

                                          2000           1999        1998
                                        --------       --------    --------
                                                 (In thousands)
      Federal
         Current                        $     (7)      $      -    $    (71)
         Deferred                         (4,159)        (1,680)       (675)
                                        ========       ========    ========
                                          (4,166)        (1,680)       (746)
                                        --------       --------    --------
      State
         Current                              17              6           7
         Deferred                            (66)           (36)        (31)
                                        --------       --------    --------
                                             (49)           (30)        (24)
                                        --------       --------    --------
      Foreign
         Withholding                          77            133          48
         Income                              311            203          66
                                        --------       --------    --------
                                             388            336         114
                                        --------       --------    --------

      Change in Valuation Allowance        6,098          1,710         706
                                        ========       ========    ========

                                        $  2,271       $    336    $     50
                                        ========       ========    ========


Foreign withholding taxes represent amounts withheld by foreign customers and
remitted to the applicable foreign tax authorities in connection with foreign
revenues. Foreign income taxes represent corporate income taxes relating to the
operations of the Company's foreign subsidiaries.

The components of the net deferred tax asset recognized in the accompanying
consolidated balance sheets with the approximate income tax effect of each type
of temporary difference are as follows:

                                                           2000         1999
                                                        ---------     --------
                                                             (In thousands)
      Net operating loss carryforward                   $   6,607     $  3,152
      Research and development tax credit carryforward      1,561        1,305
      Depreciation                                            199          201
      Deferred revenue                                        312          345
      Other temporary differences                           1,503          954
                                                        ---------     --------
                                                           10,182        5,957
      Valuation allowance                                 (10,182)      (4,084)
                                                        ---------     --------
      Net deferred tax asset                            $       -     $  1,873
                                                        =========     ========

The net operating loss carryforwards expire on various dates through 2020 and
are subject to review and possible adjustment by the Internal Revenue Service.

The Internal Revenue Code contains provisions that may limit the net operating
loss and credit carryforwards that the Company may utilize in any one year in
the event of certain cumulative changes in ownership over a three year period.
In the event that the Company has had a change in ownership, as defined,
utilization of the carryforwards may be restricted.

<PAGE>

The Company has established a valuation allowance against its deferred tax asset
to the extent that it cannot conclusively demonstrate that these assets "more
likely than not" will be realized. Under SFAS No. 109, a deferred tax asset for
the future benefit of a tax loss carryforward should be recorded unless a
company makes a determination that it is "more likely than not" that such
deferred tax asset would not be realized. Accordingly, a valuation allowance
would be provided against the deferred tax asset to the extent that the Company
cannot demonstrate that it is "more likely than not" that the deferred tax asset
will be realized. In determining the amount of valuation allowance required, the
Company considers numerous factors, including historical profitability,
estimated future taxable income, the volatility of the historical earnings, and
the volatility of earnings of the industry in which it operates. The Company
periodically reviews its deferred tax asset to determine if such asset is
realizable. In 2000, the Company concluded, in accordance with SFAS No. 109,
that the Company should not recognize the value of its deferred tax asset under
the "more likely than not" test and therefore increased the amount of its
valuation allowance to equal the entire deferred tax asset. The increase in the
valuation allowance resulted in a charge to the provision for income taxes of
$1,873,000 in the year ended December 31, 2000. The primary factors considered
in evaluating the realizability of the deferred tax asset and the level of
valuation allowance were the volatility of the historical earnings and the
operating losses through December 31, 2000.

The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate as follows:

                                                      2000      1999      1998
                                                     ------    ------    ------
     Provision at federal statutory rate             (34.0)%   (34.0)%   (34.0)%
     State income tax, net of federal benefits        (0.3)     (1.2)     (1.1)
     Foreign income and withholding taxes              1.8     (24.0)     27.9
     Change in valuation allowance                    57.8     105.8      49.1
     Utilization of tax credits                          -     (17.8)    (21.0)
     Other, net                                       (3.8)     (8.0)    (17.4)
                                                     -----     -----     -----
                                                      21.5%     20.8%      3.5%
                                                     =====     =====     =====

(5) COMMITMENTS

The Company leases its facilities and certain equipment under operating leases.
The future minimum annual payments under these leases at December 31, 2000 are
as follows:

                           For the
                         Year Ended                   Amounts
                         December 31,             (In thousands)
                         -----------              --------------
                            2001                   $      2,156
                            2002                          1,579
                            2003                          1,148
                            2004                            966
                            2005                            885
                         Thereafter                         379
                                                   ------------
                                                   $      7,113


Rent, office lease and equipment lease expense under the above leases, net of
rental income from sub-leases, was approximately $3,114,000 in 2000, $3,159,000
in 1999, and $2,931,000 in 1998.

<PAGE>

(6) ACCRUED EXPENSES

Accrued expenses consist of the following:

     (In thousands)
                                                      2000              1999
                                                    --------          --------
     Accrued payroll and related expenses           $  1,651          $  1,730
     Accrued commissions                                 467               624
     Accrued bonuses                                     246               286
     Accrued professional fees                           481               201
     Accrued taxes                                       568               826
     Accrued sales office closing                        522                 -
     Other accrued expenses                            1,606             1,027
                                                    --------          --------
                                                    $  5,541          $  4,694
                                                    ========          ========

In December 2000, there was a major emphasis on reducing the worldwide sales
infrastructure. At the time, the Company made the decision to close or reduce
the size of several sales offices, as some were not being fully utilized, due to
staff cuts, and others had cost structures that could not be supported by the
revenue generated by the office. The Company recorded a $522,000 liability in
December 2000 associated with these closings. It is anticipated that
substantially all of these sales offices will be closed by March 2001.

(7) FINANCIAL INFORMATION BY GEOGRAPHIC AREA

Domestic and international sales as a percentage of total revenues are as
follows:

                                2000          1999          1998
                               ------        ------        ------
          United States            56%           54%           53%
          Europe                   32            31            27
          Other                    12            15            20
                               ------        ------        ------
                                  100%          100%          100%
                               ======        ======        ======

Domestic and international long-lived assets are as follows:

                                              2000          1999
                                             ------        ------
               United States                $ 1,755       $ 1,037
               Europe                           347           355
               Other                             25           104
                                            -------       -------
                                            $ 2,127       $ 1,496
                                            =======       =======

(8) SEGMENT REPORTING

  On December 31, 1998, the Company adopted SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information. This pronouncement
established standards for public companies relating to the reporting of
financial and descriptive information about their operating segments in
financial statements. Operating segments are defined as components of an

<PAGE>

enterprise about which separate financial information is available that is
evaluated regularly by management in deciding how to allocate resources and in
assessing performance of the business.

     The Company views its business as having two main product lines: 1) the
Expert Manufacturing product line, which focuses on expanding Gensym's presence
in chemical, oil and gas, pharmaceutical, and other manufacturing industries;
and 2) the Network Management product line, which focuses on building Gensym's
entrance into the Business-to-Business electronic infrastructure of networks, e-
marketplace entrants, and Fortune 1000 companies. These product lines have their
own specialized sales strategies, but share business development, consulting,
and training resources to provide the level of application and industry specific
knowledge needed to achieve sustained growth and profitability in their
respective markets.

     In order to reach the broadest possible market, the Company employs a
direct sales force and selected resellers to bring its products and services to
end users around the world. The Company's direct sales force sells to major
accounts and provide personal contact with customers, both directly and through
partners.

     The Company also distributes its products through a network of systems
integrators and value-added resellers, who are selected for their capability to
provide end users with focused application solutions built on G2 and the
Company's other software platforms.

     Gensym markets its products in Japan, Brazil, South Africa and certain
other countries through distributors. These distributors have technical
competence in the application of G2 and other Gensym technologies, market the
Company's products, provide local training and support assistance to customers,
translate documentation, help localize software, and provide systems integration
services.

          The Company evaluates performance of its product line segments based
on revenues and segment profitability. Segment profitability is defined by the
Company as net contribution, which is computed based on gross profit less
identifiable operating costs--principally selling costs. Identifiable assets
consist primarily of: 1) accounts receivable in support of segment revenues, and
2) prepaid expenses, property and equipment, and deposits in support of
employees dedicated to the specific segments. Unallocated corporate costs
include operating expenses and assets not specifically identifiable to the
Company's operating segments. Information as to the operations of the different
segments is set forth below:

<TABLE>
<CAPTION>
                                                                               Unallocated
                                                 Expert          Network        Corporate
                                              Manufacturing     Management     Costs/Assets     Total
                                              -------------     ----------     ------------    -------
<S>                                          <C>                <C>            <C>             <C>
 Year ended December 31, 2000

  Revenues                                    $      11,965     $   15,610                     $  27,575
                                              =============     ==========                     =========
  Net contribution                            $         570     $    4,012     $   (15,338)    $ (10,756)
                                              =============     ==========     ===========     =========
  Identifiable assets                         $       4,454     $    6,537     $     4,549     $  15,540
                                              =============     ==========     ===========     =========
  Fixed asset depreciation                    $         206     $      245     $       460     $     911
                                              =============     ==========     ===========     =========
</TABLE>

<TABLE>
<CAPTION>
                                                                               Unallocated
                                                 Expert          Network        Corporate
                                              Manufacturing     Management     Costs/Assets     Total
                                              -------------                    ------------    -------
<S>                                           <C>               <C>            <C>             <C>
 Year ended December 31, 1999

  Revenues                                    $      17,196     $   19,231                     $  36,427
                                              =============     ==========                     =========
  Net contribution                            $       4,381     $    5,975     $   (12,475)    $  (2,119)
                                              =============     ==========     ===========     =========
  Identifiable assets                         $       6,690     $    5,398     $    14,846     $  26,934
                                              =============     ==========     ===========     =========
  Fixed asset depreciation                    $         284     $      296     $       543     $   1,123
                                              -------------     ----------     -----------     ---------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                                               Unallocated
                                                 Expert          Network        Corporate
                                              Manufacturing     Management     Costs/Assets     Total
                                              -------------                    ------------    -------
<S>                                           <C>               <C>            <C>             <C>
Year ended December 31, 1998

 Revenues                                     $      18,107     $   16,871                     $  34,978
                                              =============     ==========                     =========
 Net contribution                             $       4,438     $    4,008     $   (10,599)    $  (2,153)
                                              =============     ==========     ===========     =========
 Identifiable assets                          $       5,513     $    4,723     $    18,032     $  28,268
                                              =============     ==========     ===========     =========
 Fixed asset depreciation                     $         357     $      289     $       599     $   1,245
                                              =============     ==========     ===========     =========
</TABLE>

(9) VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                               Balance at                                     Balance at
                                              Beginning of                                      End of
Description                                      Period         Additions       Deductions      Period
-----------                                   -------------     ----------     -----------    ----------
<S>                                           <C>               <C>            <C>            <C>
Allowance for Doubtful Accounts:

Year ended December 31, 2000                  $         364     $      134     $       113     $     385
                                              =============     ==========     ===========     =========

Year ended December 31, 1999                  $         423     $      305     $       364     $     364
                                              =============     ==========     ===========     =========

Year ended December 31, 1998                  $         354     $      110     $        41     $     423
                                              =============     ==========     ===========     =========
</TABLE>

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

   To Gensym Corporation:

   We have audited the accompanying consolidated balance sheets of Gensym
   Corporation (a Delaware corporation) and subsidiaries as of December 31, 2000
   and 1999, and the related consolidated statements of operations,
   stockholders' equity, and cash flows for each of the three years in the
   period ended December 31, 2000.  These financial statements are the
   responsibility of the Company's management. Our responsibility is to express
   an opinion on these financial statements based on our audits.

   We conducted our audits in accordance with auditing standards generally
   accepted in the United States. Those standards require that we plan and
   perform the audit to obtain reasonable assurance about whether the financial
   statements are free of material misstatement.  An audit includes examining,
   on a test basis, evidence supporting the amounts and disclosures in the
   financial statements. An audit also includes assessing the accounting
   principles used and significant estimates made by management, as well as
   evaluating the overall financial statement presentation. We believe that our
   audits provide a reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly, in
   all material respects, the financial position of Gensym Corporation and
   subsidiaries as of December 31, 2000 and 1999, and the results of their
   operations and their cash flows for each of the three years in the period
   ended December 31, 2000, in conformity with accounting principles generally
   accepted in the United States.

   The accompanying financial statements have been prepared assuming that the
   Company will continue as a going concern.  The Company has incurred operating
   losses for each of the three years in the period ended December 31, 2000 and
   may need to obtain additional funding or alternative means of financial
   support, or both, in order to continue as a going concern.  These factors
   raise substantial doubt concerning the Company's ability to continue as a
   going concern. Management's plans in regard to these matters are discussed in
   Note 1. The accompanying financial statements do not include any adjustments
   that might result from the outcome of this uncertainty.

                                                        /s/ ARTHUR ANDERSEN LLP
                                                        -----------------------
                                                            ARTHUR ANDERSEN LLP

Boston, Massachusetts
March 30, 2001

<PAGE>

PART III

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information as of January 31, 2001,
except as otherwise noted, with respect to the beneficial ownership of shares of
Common Stock by (1) each person known to the Company to own beneficially more
than 5% of the outstanding shares of Common Stock, (2) the directors and
director nominees of the Company, (3) the Chief Executive Officer and the
Company's five other most highly compensated executive officers, four of whom
were serving as executive officers on December 31, 2000, and one of whom was not
serving as an executive officer on December 31, 2000 (the "Named Executive
Officers"), and (4) the directors and executive officers of the Company as a
group.


<TABLE>
<CAPTION>
                                                                                     AMOUNT AND NATURE OF
                                                                                   BENEFICIAL OWNERSHIP (1)
                                                                                 NUMBER OF          PERCENT OF
                 NAME AND ADDRESS OF BENEFICIAL OWNER                             SHARES            CLASS (2)
<S>                                                                     <C>                  <C>
Dimensional Fund Advisors Inc.(3).....................................              399,900             6.25%
     1299 Ocean Avenue
     11th Floor
     Santa Monica, CA 90401
Special Situations Fund III, L.P.(4)..................................              516,000              8.5%
MGP Advisors Limited Partnership(4)...................................              516,000              8.5%
Special Situations Cayman Fund, L.P.(4)...............................              184,400              3.0%
     c/o CIBC Bank and Trust Company (Cayman) Limited
     CIBC Bank Building
     P.O. Box 694, Grand Cayman
     Cayman Islands, British West Indies
AWM Investment Company, Inc.(4).......................................              184,400              3.0%
     153 East 53rd Street, 55th Floor
     New York, NY  10022
Austin W. Marxe(4)....................................................              700,400             11.6%
David M. Greenhouse(4)................................................              700,400             11.6%
     c/o AWM Investment Company, Inc.
     153 E. 53 Street, 51st Floor
     New York, NY 10022
Edward Fredkin(5).....................................................              389,600             6.24%
     Hyslop Road
     Brookline, MA
Johan H. Magnusson(6).................................................              397,600             6.21%
     c/o Rocket Software, Inc.
     2 Apple Hill Drive
     Natick, MA 01760
Laurence W. Lytton(7).................................................              485,400             7.60%
     28 Sherwood Plance
     Scarsdale, NY  10583

</TABLE>


<PAGE>

<TABLE>
<S>                                                                     <C>                  <C>
Lowell B. Hawkinson (8)(9)(10)........................................              387,000             5.98%
Robert L. Moore (8)(17)...............................................               50,000               *
Patrick Courtin (8)(16)...............................................              129,667             2.01%
John A. Shane (8)(11).................................................               54,298               *
Theodore G. Johnson (8)(14)...........................................              181,875               *
Thomas E. Swithenbank (8)(12).........................................               27,000               *
William H. Wood (8)(18)...............................................               42,400               *
Barry R. Gorsun (8)(15)...............................................               23,000               *
Robert A. Degan (8)(13)...............................................               23,000               *
Carl Davies (8)(19)...................................................               26,028               *
Jeffrey A. Weber (8)(17)..............................................               25,000               *
James J. Slane (8)(20)................................................               13,334               *
All executive officers and directors as a group (13 persons)..........              985,602            15.19%
</TABLE>

*  Less than 1%

(1)  The number of shares beneficially owned by each director and executive
     officer is determined under rules promulgated by the Securities and
     Exchange Commission, and the information is not necessarily indicative of
     beneficial ownership for any other purpose. Under such rules, beneficial
     ownership includes any shares as to which the individual has sole or shared
     voting power or investment power and also any shares which the individual
     has the right to acquire within 60 days after January 31, 2001 through the
     exercise of any stock option or other right. The inclusion herein of such
     shares, however, does not constitute an admission that the named
     stockholder is a direct or indirect beneficial owner of such shares. Unless
     otherwise indicated, each person or entity named in the table has sole
     voting power and investment power (or shares such power with his or her
     spouse) with respect to all shares of capital stock listed as owned by such
     person or entity.
(2)  Number of shares deemed outstanding includes 6,466,947 shares outstanding
     as of January 31, 2001 plus any shares subject to options held by the
     person in question which are currently exercisable or exercisable within 60
     days after January 31, 2001.
(3)  The information reported is based on a Schedule 13G, dated February 2,
     2001, filed with the Securities and Exchange Commission on February 2, 2001
     by Dimensional Fund Advisors Inc., a Delaware corporation ("Dimensional").
     Dimensional is an investment company registered under the Investment
     Advisors Act of 1940 that furnishes investment advice to four investment
     companies registered under the Investment Company Act of 1940 and serves as
     investment manager to certain other investment vehicles, including
     commingled group trusts.  These investment companies and investment
     vehicles are the "Portfolios."  In its role as investment advisor and
     investment manager, Dimensional possesses both voting and investment power
     over 399,900 shares.  The Portfolios own all securities reported in this
     statement and Dimensional disclaims beneficial ownership of all such
     securities.
(4)  The information is based on a Schedule 13D/A, dated December 10, 1999,
     filed with the Securities and Exchange Commission on December 10, 1999,
     collectively by Special Situations Fund III, L.P., a Delaware limited
     partnership ("SSF III"), MGP Advisers Limited Partnership, a Delaware
     limited partnership ("MGP"), Special Situations Cayman Fund, L.P., a Cayman
     Islands limited partnership (the "Cayman Fund"), AWM Investment Company,
     Inc., a Delaware corporation ("AWM"), Austin W. Marxe and David M.
     Greenhouse. AWM is the general partner of MGP and the general partner of
     and investment adviser to the Cayman Fund.  SSF III and MGP beneficially
     own 516,000 shares, and the Cayman Fund and AWM beneficially own 184,400
     shares.  Messrs. Marxe and Greenhouse are officers, directors and members
     or are principal shareholders of MGP and AWM.  Messrs. Marxe and Greenhouse
     have sole voting power and sole dispositive power over an aggregate of
     700,400 shares, comprised of the 516,000 shares beneficially owned by SSF
     III and MGP and the 184,400 shares beneficially owned by the Cayman Fund
     and AWM.


<PAGE>

(5)  The information is as of February 15, 2000 and is based upon information
     provided to the Company on April 19, 2000 by a representative of Mr.
     Fredkin.
(6)  The information reported is based on a Schedule 13G, filed with the
     Securities and Exchange Commission on February 7, 2001 by Johan H.
     Magnusson.
(7)  The information reported is based on a Schedule 13G, filed with the
     Securities and Exchange Commission on January 16, 2001 by Laurence W.
     Lytton.
(8)  The business address of the stockholder is c/o Gensym Corporation, 52
     Second Ave., Burlington, MA 01803.
(9)  Includes 12,000 shares held by trust for the benefit of Mr. Hawkinson's
     children, as to which shares Mr. Hawkinson disclaims beneficial ownership.
     Also includes shares held by Mr. Hawkinson's spouse, as to which shares Mr.
     Hawkinson disclaims beneficial ownership.
(10) Includes 10,000 shares of Common Stock subject to outstanding stock
     options.
(11) Includes 3,405 shares held by Palmer Service Corporation, of which Mr.
     Shane is the President and sole stockholder.  Mr. Shane disclaims
     beneficial ownership except of his pecuniary interest therein.  Also
     includes 41,500 shares of Common Stock subject to outstanding stock
     options.
(12) Includes 23,000 shares of Common Stock subject to outstanding stock
     options.
(13) Total  of 23,000 shares of Common Stock subject to outstanding stock
     options.
(14) Includes 40,000 shares of Common Stock subject to outstanding stock
     options.
(15) Total of 23,000 shares of Common Stock subject to outstanding stock
     options.
(16) Total of 129,667 shares of Common Stock subject to outstanding stock
     options.
(17) Total of 25,000 shares of Common Stock subject to outstanding stock
     options.
(18) Total of 38,400 shares of Common Stock subject to outstanding stock
     options.
(19) Total of 26,028 shares of Common Stock subject to outstanding stock
     options.
(20) Total of 13,334 shares of Common Stock subject to outstanding stock
     options.


<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) FINANCIAL STATEMENTS

    The following documents are included in Item 8 of this Amendment No. 1 to
    Annual Report on Form 10-K/A:

    Consolidated Balance Sheets as of December 31, 2000 and 1999
    Consolidated Statements of Operations for the three years ended December 31,
    2000
    Consolidated Statements of Stockholders' Equity for the three years ended
    December 31, 2000
    Consolidated Statements of Cash Flows for the three years ended December 31,
    2000
    Notes to Consolidated Financial Statements
    Report of Independent Public Accountants


    (2) FINANCIAL STATEMENT SCHEDULES

    All schedules have been omitted since the required information is not
    present or not present in amounts sufficient to require submission of the
    schedule, or because the information required is included in the
    consolidated financial statements or the notes thereto.

    (3) EXHIBITS

    The exhibits filed as part of this Form 10-K/A are listed in the Exhibit
    Index immediately preceding such exhibits, which index is incorporated
    herein by reference.

(b) Reports on Form 8-K

    No reports on Form 8-K were filed during the quarter or year ended December
    31, 2000



<PAGE>


                                  SIGNATURES

     Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report on Form 10-K/A for the fiscal year
ended December 31, 2000 to be signed on its behalf by the undersigned thereunto
duly authorized.

                               GENSYM CORPORATION
                               (Registrant)

                              By: /s/ Lowell B. Hawkinson
                                 -----------------------------------
                                 Lowell B. Hawkinson
Dated: October 16, 2001          Chief Executive Officer and President
                                 (Principal Executive Officer)


                              By: /s/ Jeffrey A. Weber
                                 -----------------------------------
Dated: October 16, 2001          Jeffrey A. Weber
                                 Vice President of Finance and
                                 Administration, and Chief Financial Officer
                                 (Principal Financial and Accounting Officer)


<PAGE>

                                 EXHIBIT INDEX

Exhibit No.                    Description
-----------                    -----------
3.1             Amended and Restated Certificate of Incorporation of the
                Registrant (Incorporated by reference to the Registrant's Annual
                Report on Form 10-K filed on March 31, 1997)
3.2             Amended and Restated By-Laws of the Registrant (Incorporated by
                reference to the Registrant's Annual Report on Form 10-K filed
                on March 31, 1997)
4.1             Specimen certificate for shares of the Registrant's Common Stock
                (Incorporated by reference to the Registration Statement on Form
                S-1 of the Registrant filed on December 21, 1995)
+10.1           1987 Stock Plan, as amended to date (Incorporated by reference
                to the Registration Statement on Form S-1 of the Registrant
                filed on December 21, 1995)
+10.2           1994 Stock Option Plan (Incorporated by reference to the
                Registration Statement on Form S-1 of the Registrant filed on
                December 21, 1995)
+10.3           1995 Employee Stock Purchase Plan, as amended (Incorporated by
                reference to the Registrant's Proxy Statement filed on April 6,
                1998)
+10.4           1995 Director Stock Option Plan, as amended (Incorporated by
                reference to the Registrant's Quarterly Report on Form 10-Q
                filed on August 13, 1997)
10.5            Amended and Restated Registration Rights Agreement dated as of
                August 12, 1991 by and among the Registrant and the parties
                named therein (Incorporated by reference to the Registration
                Statement on Form S-1 of the Registrant filed on December 21,
                1995)
10.6            Lease dated as of January 1, 1995 by and between the Registrant
                and CambridgePark One Limited Partnership (Incorporated by
                reference to the Registration Statement on Form S-1 of the
                Registrant filed on December 21, 1995)
10.7            First Amendment to Lease dated as of December 2, 1996 between
                the Registrant and CambridgePark One Limited Partnership
                (Incorporated by reference to the Registrant's Annual Report on
                Form 10-K filed on March 31, 1997)
10.8            Second Amendment to Lease dated as of January 24, 1997 between
                the Registrant and CambridgePark One Limited Partnership
                (Incorporated by reference to the Registrant's Annual Report on
                Form 10-K filed on March 31, 1997)
10.9            Third Amendment to Lease dated as of January 24, 1997 between
                the Registrant and CambridgePark One Limited Partnership
                (Incorporated by reference to the Registrant's Annual Report on
                Form 10-K filed on March 31, 1997)
10.10           Fourth Amendment to Lease dated as of December 4, 1998 between
                the Registrant and CambridgePark One Limited Partnership
10.11#          Distribution Agreement, dated as of January 1, 1995, by and
                among the Registrant, Itochu Corporation and Itochu Techno-
                Science Corporation (Incorporated by reference to the
                Registration Statement on Form S-1 of the Registrant filed on
                December 21, 1995)
+10.12          1997 Stock Incentive Plan (Incorporated by reference to the
                Registrant's Quarterly Report on Form 10-Q filed on August 13,
                1997)
10.13           Sublease Agreement dated August 26, 1997 between Gensym
                Corporation and Spaulding & Slye Services Limited Partnership
                (Incorporated by reference to the Registrant's Quarterly Report
                on Form 10-Q filed on November 12, 1997)
10.14           Rights Agreement, dated as of April 8, 1997, between Gensym
                Corporation and State Street Bank & Trust Company, as Rights
                Agent (Incorporated by reference to the Registrant's Current
                Report on Form 8-K filed on April 17, 1997)
+10.15          Severance arrangement with Lowell Hawkinson dated June 24, 1999.
+10.16          Severance arrangement with Robert Moore dated October 29, 1999.
+10.17          Severance arrangement with William Wood dated September 8, 1999.
+10.18          Severance arrangement with Carl Davies dated February 12, 2001.
10.19           Lease dated as of June 27, 2000 by and between the Registrant
                and Rodger P. Nordbloom and Peter C. Nordbloom, as Trustees
+10.20          2000 Stock Incentive Plan (Incorporated by reference to the
                Registrants Definitive Proxy Statement on Schedule 14A filed on
                April 24, 2000)
<PAGE>

21              Subsidiaries of the Registrant
23*             Consent of Arthur Andersen LLP

Notes
-----
*   Filed herewith.
#   Identifies exhibit with respect to which certain portions have been granted
    confidential treatment.
+   Identifies exhibits constituting management contract or compensatory plan of
    arrangement required to be filed as an exhibit to this Annual Report on Form
    10-K.