<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-Q


(Mark one)

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

               For the quarterly period ended September 30, 2001

                                      OR

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


                       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
                             Burlington, MA 01803
                   (Address of principal executive offices)

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

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

                  Yes   X                             No ___
                       ---

     As of November 1, 2001 there were 6,554,016 shares of the Registrant's
Common Stock outstanding.

                                       1
<PAGE>

Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements

                      GENSYM CORPORATION AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (Unaudited)

<TABLE>
<CAPTION>
in thousands, except share amounts)                                                 September 30,     December 31,
                                                                                        2001              2000
                                                                                   --------------    --------------
<S>                                                                                <C>               <C>
ASSETS

Current Assets:
    Cash and cash equivalents                                                      $        1,283    $        2,657
    Short-term investments                                                                      -               698
    Accounts receivable, net                                                                4,988             8,800
    Prepaid expenses                                                                          468             1,258
                                                                                   --------------    --------------
      Total current assets                                                                  6,739            13,413

Property and Equipment, net                                                                 1,622             1,397

Deposits and other assets                                                                     702               730
                                                                                   --------------    --------------

                                                                                   $        9,063    $       15,540
                                                                                   ==============    ==============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities:
    Notes payable                                                                  $        1,041    $            -
    Accounts payable                                                                        1,344             1,068
    Accrued expenses                                                                        3,485             5,541
    Deferred revenue                                                                        5,984             6,519
                                                                                   --------------    --------------
      Total current liabilities                                                            11,854            13,128

Long-term liabilities                                                                          25                 -

Stockholders' Equity (Deficit):
    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 - 7,055,316 shares as of September 30, 2001 and
           6,968,270 December 31, 2000
      Outstanding - 6,554,016 shares as of September 30, 2001
           and 6,466,970 as of December 31, 2000                                               71                70
    Capital in excess of par value                                                         21,679            21,620
    Treasury stock                                                                         (1,869)           (1,869)
    Accumulated deficit                                                                   (21,947)          (15,869)
    Cumulative translation adjustment                                                        (750)           (1,540)
                                                                                   --------------    --------------
      Total stockholder's equity (deficit)                                                 (2,816)            2,412
                                                                                   --------------    --------------

                                                                                   $        9,063    $       15,540
                                                                                   ==============    ==============
</TABLE>

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

                                       2
<PAGE>

                              GENSYM CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)



<TABLE>
<CAPTION>
(in thousands, except for per share amounts)
                                                      Three months ended                  Nine months ended
                                                         September 30,                      September 30,
REVENUES:                                             2001             2000              2001             2000
                                                  ------------    -------------      ------------     ------------
<S>                                               <C>             <C>                <C>              <C>
     Product                                      $     1,555     $      2,139       $     4,758      $     8,373
     Service                                            3,425            3,341            10,656           11,481
                                                  -----------    -------------      ------------     ------------
       Total revenues                                   4,980            5,480            15,414           19,854

COST OF REVENUES
     Product                                              161              231               615              751
     Service                                              863            1,698             3,002            5,540
                                                  -----------    -------------      ------------     ------------
       Total cost of revenues                           1,024            1,929             3,617            6,291

                                                  -----------    -------------      ------------     ------------
       Gross profit                                     3,956            3,551            11,797           13,563

OPERATING EXPENSES:
     Sales and marketing                                1,546            4,199             7,411           12,583
     Research and development                           1,077            1,959             4,271            5,721
     General and administrative                         1,145            1,062             3,284            3,668
     Restructuring charge                                 827                -             2,559                -
                                                  -----------    -------------      ------------     ------------
                                                        4,595            7,220            17,525           21,972
                                                  -----------    -------------      ------------     ------------

       Operating loss                                    (639)          (3,669)           (5,728)          (8,409)

OTHER (EXPENSE) INCOME, NET                              (207)              98              (229)             158
                                                  -----------    -------------      ------------     ------------

     Loss before provision
       for income taxes                                  (846)          (3,571)           (5,957)          (8,251)

PROVISION FOR INCOME TAXES                                 12            1,963               121            2,038
                                                  -----------    -------------      ------------     ------------

       Net loss                                   $      (858)   $      (5,534)     $     (6,078)    $    (10,289)
                                                  ===========    =============      ============     ============

       Basic and diluted loss
             per share                            $     (0.13)   $       (0.86)     $      (0.93)    $      (1.62)
                                                  ============   =============      ============     ============

       Weighted average common shares
             outstanding                                6,554            6,400             6,510            6,342
                                                  ============   =============      ============     ============
</TABLE>

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

                                       3
<PAGE>

                      GENSYM CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)

<TABLE>
<CAPTION>
(in thousands)
                                                                                            Nine months ended
                                                                                              September 30,
                                                                                        2001              2000
                                                                                    -------------     -------------
<S>                                                                                 <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                                       $     (6,078)     $    (10,289)
     Adjustments to reconcile net loss to net
       cash used in operating activities:
           Depreciation and amortization                                                     562               638
           Loss on disposal of equipment                                                      22                 -
           Deferred taxes                                                                      -             1,873
           Non-cash portion of restructuring charge                                          657                 -
           Changes in assets and liabilities:
                 Accounts receivable                                                       3,823             4,464
                 Prepaid expenses                                                            764               733
                 Accounts payable                                                            282               382
                 Accrued expenses                                                         (1,832)              331
                 Other long-term liabilities                                                  28                 -
                 Deferred revenue                                                           (519)           (1,672)
                                                                                    ------------      ------------

                        Net cash used in operating activities                             (2,291)           (3,540)
                                                                                    ------------      ------------


CASH FLOW FROM INVESTING ACTIVITIES:
     Sales of short-term investments                                                         698             4,278
     Purchases of property and equipment                                                    (837)             (635)
     Decrease in other assets                                                                 27                28
                                                                                    ------------      ------------

                        Net cash (used in) provided by investing activities                 (112)            3,671
                                                                                    ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from short-term financings                                                   1,041                 -
     Principal payments on capitalized lease obligations                                      (2)                -
     Proceeds from exercise of stock options and issuance
       of common stock under stock plans                                                      60               580
                                                                                    ------------      ------------

                        Net cash provided by financing activities                          1,099               580
                                                                                    ------------      ------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                      (70)             (586)
                                                                                    ------------      ------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                      (1,374)              125

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                             2,657             5,710
                                                                                    ------------      ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                            $      1,283      $      5,835
                                                                                    ============      ============
</TABLE>

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

                                       4
<PAGE>

                      GENSYM CORPORATION AND SUBSIDIARIES
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)


1.   Operations

          Gensym Corporation (the "Company") is a leading supplier of software
products and services for intelligent operations management in a broad range of
industries, including manufacturing, telecommunications, government, aerospace,
transportation, and financial services.

2.   Basis of Presentation

          The unaudited condensed consolidated financial statements included
herein have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States,
have been condensed or omitted pursuant to such SEC rules and regulations;
nevertheless, the management of the Company believes that the disclosures herein
are adequate to make the information presented not misleading. In the opinion of
management, the condensed consolidated financial statements reflect all
adjustments (of a normal and recurring nature) which are necessary to present
fairly the consolidated financial position of the Company as of September 30,
2001 and the results of its operations for the three- and nine-month periods
ended September 30, 2001 and 2000. These condensed consolidated financial
statements and notes thereto should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2000 filed with the SEC on April 2,
2001. The results of operations for the interim period are not necessarily
indicative of the results of operations for the full year or any other interim
period.

3.   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. Cash
equivalents are short-term, highly liquid investments with original maturity
dates of less than three months. There were no short-term investments held as of
September 30, 2001. Short-term investments held as of December 31, 2000
consisted of corporate bonds with original maturity dates greater than three
months that mature within one year.

4.   Recently Issued Accounting Pronouncements

          In January 2001, the Company adopted the Financial Accounting
Standards Board, (FASB), SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS No.. 137 and 138. This statement
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. Adoption of SFAS No. 133 did not have a material impact on the
Company's consolidated financial statements.

          In June 2001, the FASB issued SFAS No. 141, Business Combinations.
SFAS No. 141 requires all business combinations initiated after June 30, 2001 to
be accounted for using the purchase method. The Company does not expect that the
adoption of this statement will have a material impact on its consolidated
financial statements.

          In June 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. With the adoption of SFAS No. 142, goodwill is no longer
subject to amortization over its estimated useful life, but instead goodwill is
subject to at least an annual assessment for impairment by applying a
fair-value-based test. The Company does not expect that the adoption of this
statement will have a material impact on its consolidated financial statements.

          In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement applies to all
entities. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company does not
expect that the adoption of this statement will have a material impact on its
consolidated financial statements.

          In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supercedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." Under this
statement it is required that one accounting model be used for long-lived assets
to be disposed of by sale, whether previously held and used or newly acquired,
and it broadens the presentation of discontinued operations to include more
disposal transactions. The provisions of this statement are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early adoption permitted.
The Company does not expect that the adoption of this statement will have a
material impact on its consolidated financial statements.

                                       5
<PAGE>

5.   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
the provisions of the American Institute of Certified Public Accountants (AICPA)
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 the sales to resellers are recognized upon the delivery
of the software, provided all other revenue recognition criteria, 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.


6.   Comprehensive Income (Loss)

          The Company applies SFAS No. 130, Reporting Comprehensive Income,
which requires that items defined as other comprehensive income (loss), such as
foreign currency translation adjustments, be separately classified in the
financial statements and that the accumulated balance of other comprehensive
income (loss) be reported separately from retained earnings and additional paid-
in capital in the equity section of the balance sheet. The components of
comprehensive income (loss) for the three- and nine-month periods ended
September 30, 2001 and 2000 are as follows (in thousands):

                                       6
<PAGE>

<TABLE>
<CAPTION>
                                                      Three months ended                 Nine months ended
                                                        September 30,                      September 30,
                                                     2001            2000               2001            2000
                                                 -------------   -------------      -------------   -------------
<S>                                              <C>             <C>                <C>             <C>
Comprehensive income (loss):
     Net loss                                    $       (858)   $     (5,534)      $     (6,078)   $    (10,289)
     Other comprehensive income (loss)
         Foreign currency adjustment                       (3)           (322)              (114)           (571)
                                                 ------------    ------------       ------------    ------------

            Comprehensive loss                   $       (861)   $     (5,856)      $     (6,192)   $    (10,860)
                                                 ============    ============       ============    ============
</TABLE>

7.   Loss Per Share

          In accordance with SFAS No. 128, Earnings per Share, basic loss per
share was computed by dividing net loss by the weighted average number of common
shares outstanding during the period. For the three- and nine-month periods
ended September 30, 2001 and 2000, the computation for diluted loss per share
excludes the effect of 1,233,081 and 1,445,750 shares, respectively, issuable
from assumed exercise of options, as their effect would be antidilutive.

8.   Restructuring Charge and other

     a.   Office closings

               In December 2000, there was a major emphasis on reducing the
          Company's 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. For the nine months
          ended September 30, 2001, $240,000 was paid out against the accrual.
          The remaining $282,000 is expected to be paid by December 31, 2002.

     b.   Restructuring charge in the quarter ended March 31, 2001


               In January 2001, the Company's management undertook a
          restructuring plan to reduce operating costs. The restructuring plan
          consisted of reductions in employee headcount, totaling 45 employees,
          or approximately 12% of the Company's workforce, from all operating
          groups and from all geographical areas. The $601,000 restructuring
          charge included on the accompanying condensed consolidated income
          statement of operations consists entirely of severance related costs.
          Approximately $526,000 was paid out against the restructuring
          charge in the nine-month period ended September 30, 2001, and it is
          expected that an additional $7,000 will be paid out by December 31,
          2001. The remaining accrual of $68,000 was credited to the
          restructuring charge in the quarter ended September 30, 2001 due to a
          change in estimate.

     c    Restructuring charge in the quarter ended June 30, 2001

               During the quarter ended June 30, 2001, the Company's management
          undertook a restructuring plan to reduce operating costs. The
          restructuring charge totaled $1,131,000 and was comprised of three
          items: 1) employee severance costs of approximately $474,000, 2) a
          write-off of the cumulative translation adjustment of $595,000
          associated with the specific countries where foreign sales offices
          were closed and the Company decided to liquidate the related
          subsidiaries, and 3) the write-off of assets specific to the closing
          of the offices of approximately $62,000.

                                       7
<PAGE>

               The $474,000 employee severance portion of the restructuring
          charge related entirely to the involuntary severance of 13 employees
          from all operating groups in the U.S. geographic areas. Approximately
          $440,000 was paid in the six-month period ended September 30, 2001,
          and the remaining $34,000 is expected to be paid by December 31, 2001.

     d.   Restructuring charges in the quarter ended September 30, 2001

               In July and August 2001, the Company's management undertook
          separate and distinct restructuring plans to reduce operating costs.
          The restructuring plans consists of reductions in employee headcount,
          totaling 12 employees in July and 50 employees in August. The
          employees severed in July were from all operating groups and from the
          U.S. geographic area. The employees severed in August were from all
          groups and from all geographic areas. The Company recorded
          restructuring charges in the amount of approximately $125,000 and
          $770,000 during the quarter ended September 30, 2001 related to the
          July 2001 and August 2001 reductions in headcount, respectively.
          Approximately $106,000 was paid in the three-month period ended
          September 30, 2001 related to the July severance, and the remaining
          $19,000 is expected to be paid by December 31, 2001. Approximately
          $348,000 was paid in the three-month period ended September 30, 2001
          related to the August severance, and the remaining $422,000 is
          expected to be paid by September 30, 2002.

9.  Notes Payable

     In September 2001, the Company obtained bridge loans of approximately $1.0
million to meet cash needs from a group of investors consisting of a Gensym
business partner and eight individuals, including a Gensym founder and all of
the members of the Company's board of directors. The interest rate on the loans
was 10% per annum. On November 9, 2001, the principal and accrued interest on
the loans were repaid.

10. Sale of Product Line

          On November 9, 2001 the Company completed the sale of its NetCure
product line to Rocket Software, Inc. for $2.5 million in cash. The sale of the
NetCure product line is a part of Gensym's reorganization plan that was
announced in early August 2001 when Lowell Hawkinson returned to the Company as
president and chief executive officer. The proceeds from the sale of NetCure
will be used for working capital and other general corporate expenses, including
repayment of the bridge loans of approximately $1.0 million (as discussed in
Note 9) and expenses associated with our restructuring actions.

11. 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
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 Europe, Japan, South America 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 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

                                       8
<PAGE>

Company's operating segments. Information as to the operations of the different
segments is set forth below:

(in thousands)

<TABLE>
<CAPTION>
                                                                                       Unallocated
                                                        Expert          Network        Corporate
                                                     Manufacturing    Management      Costs/Assets       Total
                                                    ---------------  ------------    --------------     --------
<S>                                                 <C>              <C>             <C>                <C>
Three months ended September 30, 2001
    Revenues                                        $      2,045     $     2,935                        $   4,980
                                                    ============     ===========                        =========
    Net contribution                                $      1,428     $     1,389     $     (3,456)      $    (639)
                                                    ============     ===========     ============       =========
    Identifiable assets                             $      2,646     $     3,795     $      2,622       $   9,063
                                                    ============     ===========     ============       =========
    Fixed asset depreciation                        $         41     $        59     $         92       $     192
                                                    ============     ===========     ============       =========

Three months ended September 30, 2000
    Revenues                                        $      2,572     $     2,908                        $   5,480
                                                    ============     ===========                        =========
    Net contribution                                $       (223)    $       186     $     (3,632)      $  (3,669)
                                                    ============     ===========     ============       =========
    Identifiable assets                             $      3,502     $     3,755     $      8,671       $  15,928
                                                    ============     ===========     ============       =========
    Fixed asset depreciation                        $         51     $        55     $        101       $     207
                                                    ============     ===========     ============       =========
</TABLE>

<TABLE>
<CAPTION>
                                                                                      Unallocated
                                                        Expert          Network        Corporate
                                                     Manufacturing    Management      Costs/Assets       Total
                                                    ---------------  ------------    --------------     --------
<S>                                                 <C>              <C>             <C>                <C>
Nine months ended September 30, 2001
    Revenues                                        $      7,247     $     8,167                        $  15,414
                                                    ============     ===========                        =========
    Net contribution                                $      3,804     $     2,286     $    (11,818)      $  (5,728)
                                                    ============     ===========     ============       =========
    Identifiable assets                             $      2,646     $     3,795     $      2,622       $   9,063
                                                    ============     ===========     ============       =========
    Fixed asset depreciation                        $        116     $       182     $        264       $     562
                                                    ============     ===========     ============       =========

Nine months ended September 30, 2000
    Revenues                                        $      9,143     $    10,711                        $  19,854
                                                    ============     ===========                        =========
    Net contribution                                $        463     $     2,315     $    (11,187)      $  (8,409)
                                                    ============     ===========     ============       =========

    Identifiable assets                             $      3,502     $     3,755     $      8,671       $  15,928
                                                    ============     ===========     ============       =========
    Fixed asset depreciation                        $        158     $       170     $        310       $     638
                                                    ============     ===========     ============       =========
</TABLE>

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

<TABLE>
<CAPTION>
                                            Three months ended             Nine months ended
                                                September 30,                 September 30,
                                      ---------------------------     ---------------------------
                                          2001          2000              2001          2000
                                      -------------  ------------     -------------  ------------
              <S>                     <C>            <C>              <C>            <C>
              United States                    60%           56%               59%           56%
              United Kingdom                   10%            3%               10%            8%
              Rest of Europe                   13%           26%               17%           23%
              Other                            17%           15%               14%           13%
                                      -----------    ----------       -----------    ----------
                                              100%          100%              100%          100%
                                      ===========    ==========       ===========    ==========
</TABLE>

                                       9
<PAGE>

Item 2.             MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS


     The Company was incorporated in 1986 to provide software products for
expert operations management.  The Company provides software products and
services that enable organizations to automate aspects of their operations that
have historically required the direct attention of human experts.  Gensym's
product and service offerings are all based on or relate to Gensym's flagship
product G2, which can emulate the reasoning of human experts as they assess,
diagnose, and respond to unusual operating situations or as they seek to
optimize operations.

     With G2, organizations in manufacturing, communications, transportation,
aerospace, and government maximize the performance and availability of their
operations.  For example, Fortune 1000 manufacturers such as ExxonMobil, DuPont,
LaFarge, Eli Lilly, and Seagate use G2 to help operators detect problems early
and to provide advice that avoids off-specification production and unexpected
shutdowns.  Manufacturers and government agencies use G2 to optimize their
supply chain and logistics operations.  Also, communications companies such as
AT&T, Ericsson Wireless, and Nokia use G2 to troubleshoot network faults so that
network availability and service levels are maximized.

     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 Europe, Japan, South America 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.

     In early August, 2001, Lowell B. Hawkinson, a founder of Gensym, succeeded
Patrick Courtin as chairman, president and chief executive officer. Mr.
Hawkinson previously served as chairman and chief executive officer of Gensym
from 1986 to 1999. Also in early August 2001, the Company announced a strategic
restructuring that included a 40% reduction in workforce and a renewed focus on
its existing customer base and its G2 and G2-based products. The Company also
realigned its software and services into two major product lines: one comprised
of G2 and G2-based products, which are sold in both the expert manufacturing and
network management market segments, and the other comprised of NetCure and
related products which are sold exclusively in the network management market
segment. As part of the strategic restructuring, the Company announced that it
would seek strategic partners to promote and exploit the NetCure product line
and that it would explore and consider its options with respect to the sale of
the NetCure product line to an established market participant capable of
exploiting it.

     The Company will continue to sell directly in North America, Europe and the
Middle East, as well as indirectly through channel partners, and will continue
to provide product support and consulting services worldwide.

     On November 9, 2001 the Company completed the previously announced sale of
its NetCure product line to Rocket Software, Inc. for $2.5 million in cash. The
sale of the NetCare product line is part of Gensym's reorganization plan that
was announced in August 2001 when Mr. Hawkinson returned to the Company as
president and chief executive officer.

     This Quarterly Report on Form 10-Q 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.

                                       10
<PAGE>

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 "Factors That May Affect Future Results".


Results of Operations

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

<TABLE>
<CAPTION>
                                           Three months ended      Nine months ended
                                              September 30,          September 30,
                                            2001        2000       2001        2000
                                          --------    --------   --------    --------
<S>                                       <C>         <C>         <C>        <C>
REVENUES:
    Product                                 31.2%       39.0%      30.9%       42.2%
    Service                                 68.8%       61.0%      69.1%       57.8%
                                           -----       -----      -----       -----
      Total revenues                       100.0%      100.0%     100.0%      100.0%

COST OF REVENUES
    Product                                  3.2%        4.2%       4.0%        3.8%
    Service                                 17.4%       31.0%      19.5%       27.9%
                                           -----       -----      -----       -----
      Total cost of revenues                20.6%       35.2%      23.5%       31.7%

                                           -----       -----      -----       -----
      Gross profit                          79.4%       64.8%      76.5%       68.3%

OPERATING EXPENSES:
    Sales and marketing                     31.0%       76.6%      48.1%       63.4%
    Research and development                21.6%       35.8%      27.7%       28.8%
    General and administration              23.0%       19.4%      21.3%       18.4%
    Restructuring                           16.6%                  16.6%
                                                           -                      -
                                           -----       -----      -----       -----
                                            92.2%      131.8%     113.7%      110.6%

      Operating loss                       (12.8%)     (67.0%)    (37.2%)     (42.3%)

OTHER INCOME, NET                           (4.2%)       1.8%      (1.5%)       0.8%
                                           -----       -----      -----       -----

      Income loss before provision
         for income taxes                  (17.0%)     (65.2%)    (38.7%)     (41.5%)

PROVISION FOR INCOME TAXES                   0.2%       35.8%       0.8%       10.3%
                                           -----       -----      -----       -----

      Net loss                             (17.2%)    (101.0%)    (39.5%)     (51.8%)
                                           =====       =====      =====       =====
</TABLE>



                                       11
<PAGE>
Three and Nine Months Ended September 30, 2001 and 2000

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 for the three and nine months ended September 30, 2001 were
$5.0 million and $15.4 million, respectively.  This represents a decrease of
$0.5 million, or 9.1%, for the three-month period ended September 30, 2001 as
compared to the same period in 2000 and a decrease of $4.4 million, or 22.4%,
for the nine-month period ended September 30, 2001 as compared to the same
period in 2000.  For the three- and nine-month periods ended September 30, 2001,
compared to the same periods of fiscal 2000, the decrease in total revenue was
primarily attributable to decreased sales of product licenses.  Both domestic
and international markets contributed to the drop in revenues.  For the three
and nine months ended September 30, 2001 international revenues as a percent of
total were 40% and 41%, respectively, for the same periods of 2000 international
revenues were 44%.

     Product.  Product revenues for the three and nine months ended September
30, 2001 were $1.6 million and $4.8 million, respectively, a decrease of $0.6
million, or 27.3%, and a decrease of $3.6 million, or 43.2%, from the comparable
periods of fiscal 2000.  Expert Manufacturing's product revenue decreased $0.4
million for three months ended September 30, 2001 and decreased $1.6 million for
nine months ended September 30, 2001 due to a slowdown in the process
manufacturing industry.  Network Management's product revenue decreased $0.2
million for the three months ended September 30, 2001 and decreased $2.0 million
for the nine months ended September 30, 2001 due to the general slowdown in the
telecommunications industry.

     Service.  Service revenues include customer service support, consulting and
training.  For the three and nine months ended September 30, 2001 service
revenues were $3.4 million and $10.7 million, respectively, an increase of $0.1
million, or 2.5%, and a decrease $0.8 million, or 7.2%, from the comparable
periods of fiscal 2000. The decrease in service revenue for the nine months
ended September 30, 2001, was primarily due to a decline in consulting revenue
activity which, to a large extent, is driven by product sales. Consulting
revenue decreased $0.5 million, customer service support decreased $0.2 million
and training decreased $0.1 million for the nine-month period ended September
30, 2001.

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.  These costs for the three and nine months
ended September 30, 2001 were $1.0 million and $3.6 million, respectively.  This
was a decrease of $0.9 million, or 46.9%, and a decrease of $2.7, or 42.5%, from
the comparable periods of 2000.  The reduction in cost of revenue was due to the
Company's restructuring actions in which employee headcount decreased by 45
people from December 31, 2000 to September 30, 2001.  The decrease in personnel
related expenses were $1.2 million and $2.4 million for the three-and nine-month
periods.

     Product costs were $0.2 million and $0.6 million for the three and nine
months ended September 30, 2001.  Product costs decreased $0.1 million, or 30.3%
and $0.1 million, or 18.1% from the comparable periods of 2000. The decrease in
expenses for the three-and nine-month periods was due primarily to a decrease in
personnel costs. Employee headcount decreased by 5 people from December 31, 2000
to September 30, 2001.

     Service related costs were $0.8 million and $3.0 million for the three and
nine months ended September 30, 2001.  Service costs decreased $0.8 million or
49.2% and $2.5 million or 45.8% from the comparable periods of 2000.  The
decrease in expense for the three-and nine-month periods was due primarily to a
decrease in personnel costs. Staffing in consulting services decreased 40 people
from December 31, 2000 to September 30, 2001.

                                       12
<PAGE>

     Gross margin percentage of 79.4% for the three months ended September 30,
2001 increased from 64.8% for the comparable quarter in fiscal 2000.  Gross
margin for the nine months ended September 30, 2001 of 76.5% increased from the
68.3% gross margin for the comparable period in fiscal 2000.  The increases in
gross margin resulted primarily from the lower personnel costs.


Operating Expenses

     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.  These expenses for the three
and nine months ended September 30, 2001 were $1.5 million and $7.4 million,
respectively.  The costs decreased $2.7 million, or 63.2%, from $4.2 million in
the comparable quarter for fiscal 2000 and decreased $5.2 million, or 41.1%,
from $12.6 million in the comparable nine month period in 2000. The decrease in
expenses were primarily due to lower personnel costs associated with reductions
in headcount from December 31, 2000 to September 30, 2001. For the three-and-
nine-month periods payroll and related expenses decreased $2.0 million and $3.7
million, marketing programs and trade shows decreased $0.3 million and $1.0
million and overhead support cost decreased $0.4 million and $0.5 million. As a
percentage of revenues, sales and marketing expenses were 31.0% and 48.1%, for
the three-and-nine month periods ended September 30, 2001 as compared to 76.6%
and 63.4% for the comparable periods in fiscal 2000. The decrease was due to
lower costs resulting from the Company's restructuring actions.

     Research and Development. Research and development expenses consist
primarily of costs of personnel, equipment, and facilities. These expenses for
the three and nine months ended September 30, 2001 were $1.1 million and $4.3
million, respectively, a decrease of $0.9 million, or 45.0%, and $1.4 million,
or 25.3%, from $2.0 million and $5.7 million in the comparable periods of fiscal
2000. The decreased expense was primarily due to a decrease in personnel-related
costs as a result of reductions in headcount which generated a decrease of
payroll and related expenses of $0.9 million and $1.4 million for the three-and-
nine month periods. As a percentage of revenues, research and development
expenses were 21.6% and 27.7%, respectively, for the three and nine months ended
September 30, 2001 as compared to 35.8% and 28.8% for the comparable periods in
fiscal 2000. The decrease was primarily due to the Company's restructuring
actions.

     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.  The expenses for
the three and nine months ended September 30, 2001 were $1.1 million and $3.3
million, respectively, an increase of $0.1 million, or 7.8%, and a decrease of
$0.4 million, or 10.5%, for the comparable periods in fiscal 2000.  The increase
in expenses of $0.1 million for the three month period was due to an increase in
accounting fees of $0.1 million and legal fees of $0.3 million partially offset
by a decrease in personnel related expense of $0.3 million.  The decrease in
expenses of $0.4 million for the nine-month period was due to a decrease in
compensation and related personnel costs of $0.6 million and a decrease in
professional fees of $0.1 million, offset by an increase in accounting fees of
$0.2 million and overhead support costs of $0.1 million. As a percentage of
revenues, general and administrative expenses were 23.0% and 21.3% for the three
and nine months ended September 30, 2001 as compared to 19.4% and 18.4% for the
comparable periods in fiscal 2000. The increase, as a percent of revenue, was
primarily due to lower sales.

     Restructuring Charges.  In January, April, July, and August 2001, the
Company's management undertook restructuring plans to reduce operating costs.
The restructuring plans consisted of reductions in employee headcount and the
closing of certain offices. For the three- and nine-month periods ended
September 30, 2001 the Company incurred restructuring charges of $0.8 million
and $2.6 million, respectively. The reduction in headcount totaled approximately
45 in January, 13 in April, 12 in July, and 50 in August.  For the three-month
period ended September 30, 2001 the restructuring charge, which consists
entirely of severance related costs, includes $895,000 related to

                                       13
<PAGE>

the July and August 2001 restructuring actions and a $68,000 credit related to
the January 2001 restructuring action. For the nine-month period ended September
30, 2001 the restructuring charge includes a non-cash amount of approximately
$657,000 related primarily to cumulative translation adjustments associated with
the closing of foreign offices and liquidation of subsidiaries in Europe, the
far east and Asia-Pacific and approximately $1,902,000 related to employee
severance. Approximately $626,000 and $1,420,000 was paid out for employee
severance in the three and nine months ended September 30, 2001, respectively,
related to 2001 restructuring actions. Approximately $482,000 of severance
payments remain to be paid, and are expected to be fully paid by September 30,
2002.


Other Income (Expense), Net

     Other income (expense), net consists primarily of interest income and
foreign exchange transaction gains and losses.  Other income (expense), net for
the three and nine months ended September 30, 2001 was ($207,000) and
($229,000), respectively, as compared to $98,000 and $158,000 for the comparable
periods of fiscal 2000.  Other income (expense) for the three months ended
September 30, 2001 of ($207,000) was primarily due to interest expense of
$52,000 and foreign currency transactions losses of $155,000.

Income Taxes

     The Company's provision for income taxes primarily pertained to foreign
withholding tax and income taxes in foreign jurisdictions, where the Company
does not have operating loss carryforwards.


Liquidity and Capital Resources

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

     The Company's September 30, 2001 cash and cash equivalents balance of $1.3
million decreased $1.4 from December 31, 2000.  Cash used for operations in the
first nine months of 2001 was  $2.3 million, which consisted of the net loss of
$6.1 million offset largely by a decrease in accounts receivable of $3.8
million.

     Cash provided by investing activities for the first nine months of 2001 was
$112,000 which primarily consisted of $698,000 received from the sale of short-
term securities offset by $837,000 used to purchase equipment and leasehold
improvements.

     Cash provided by financing activities for the first nine months of 2001 was
$1.1 million and resulted primarily from short-term borrowings of $1.0 million
and the issuance of stock under the Company's stock purchase plan of $60,000.

     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. On August 16, 2001, the Company signed a renegotiated credit
facility with Silicon Valley Bank that does not include restrictive financial
covenants. The total available borrowings, interest rate and administrative fee
under the renegotiated credit facility remain unchanged. At September 30, 2001
the Company had approximately $13,000 of borrowings outstanding under this
facility. Amounts under this credit facility are secured by substantially all of
the corporate assets of Gensym Corporation.

                                       14
<PAGE>

     In September 2001, the Company obtained bridge loans of approximately $1.0
million to meet cash needs from a group of investors consisting of a Gensym
business partner and eight individuals, including a Gensym founder and all of
the members of the Company's board of directors. On November 9, 2001, the
principal and accrued interest on the loans were repaid from the net proceeds
related to the sale of the NetCure product line.

     On November 9, 2001 the Company completed the sale of its NetCure product
line to Rocket Software, Inc. for $2.5 million in cash. The sale of the NetCure
product line is part of Gensym's reorganization plan that was announced in
early August when Lowell Hawkinson returned to the Company as president and
chief executive officer. The net proceeds of approximately $2.1 million from the
sale of NetCure improves the Company's working capital position, and, in
conjunction with the significant reduction in Company expenses that have taken
place during the first nine months of 2001, and especially in the quarter ended
September 30, 2001, the Company believes that its available funds, cash
generated from operations, and funds available under the credit facility with
Silicon Valley Bank will be sufficient to meet the Company's business
requirements at least through December 31, 2001.

Factors That May Affect Future Results

     The following important factors, among others, could cause our actual
operating results to differ materially from those indicated or suggested by
forward-looking statements made in this Form 10-Q or presented elsewhere by our
management from time to time.

   We have a history of losses, and our recently instituted restructuring plan
   may not succeed in making us profitable.

   We have incurred operating losses for each of the three years in the period
ended December 31, 2000 and for the nine months ended September 30, 2001.  In
early August 2001, we announced a strategic restructuring of our company that
included a 40% reduction in workforce, a realignment of our software and
services into two major product lines and a renewed focus on our existing
international customers.  With the restructuring, we believe that we have taken
the required steps to return the Company to profitability on an operating basis.
Our management's operational plan relies heavily on achieving operating
profitability in 2002 and beyond.  Our return to profitability is based on
expense control, cost reductions and continued revenue from new and existing
customers.  However, there can be no assurance that we will be profitable in the
future.  We will also continue to explore and consider our equity or financing
options and a range of strategic alternatives.  However, there can be no
assurance that any of these plans will be successful.

   Our common stock has been delisted from the Nasdaq National Market.  As a
   result of the delisting, our stockholders may face a decreased market for the
   shares of our stock that they own.

   Our common stock was delisted from the Nasdaq National Market on August 20,
2001 because we failed to meet the listing standards required by Nasdaq.  The
delisting may negatively impact the liquidity of our common stock, not only in
the number of shares that can be bought or sold, but also through delays in the
timing of transactions and the reductions in potential security analyst and
media coverage.  This may reduce the demand for our common stock and its trading
price.  The delisting may also impair our ability to raise additional working
capital.

   Our common stock currently trades on the OTC Bulletin Board and is subject to
regulation as a "penny stock."  The Securities and Exchange Commission has
adopted regulations that generally define "penny stock" to be any equity
security that has a market price or exercise price of less than $5.00 per share,
subject to certain exceptions, including listing on the Nasdaq National Market
or the Nasdaq SmallCap Market.  For transactions covered by the "penny stock"
rules, broker-dealers must make a special suitability determination for the
purchase of the securities and must have received the purchaser's written
consent to the transaction prior to the purchase.  Additionally, for any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a risk disclosure document mandated by
the Securities and Exchange Commission relating to the penny stock market.  The
broker-dealer is also subject to additional sales practice requirements.  The
additional burdens imposed upon broker-dealers by these requirements may
discourage broker-dealers from effecting transactions in our common stock and
may limit the ability of purchasers in this offering to sell the common stock in
the secondary market.

   Competition in the market for expert operations management systems is
   intensifying and may reduce our revenues.

   Substantially all of our revenues are derived from the licensing and support
of software platforms and products for expert operations management, network
management and supply-chain design.  Although many organizations have begun to
deploy, or have announced plans to deploy, such 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 operations management systems
successfully, nor that such systems will gain widespread acceptance.  In
addition, the timing of the implementation of operations management systems by
organizations may be affected by economic factors, government regulations, and
other factors.  Delays in the introduction of expert operations management
systems or the failure of these systems to gain widespread market acceptance
would materially and adversely affect our business, results of operations, or
financial condition.  In addition, we believe that end-users in our markets are
increasingly seeking application-specific products and components as well as
complete solutions, rather than general software tools to develop application-
specific functionality and solutions.  Meeting this demand has required us to
modify our sales approach.  We are also increasingly reliant on value-added
resellers and systems integrators to satisfy market requirements.  The modified
sales approach may also lengthen our average sales cycle.  Our failure to
respond appropriately to shifts in market demand could have a material adverse
effect on our business, results of operations, or financial condition.




                                       15
<PAGE>

   We rely heavily on indirect distribution channels and strategic partner
   relationships for the sales of our products.  If these relationships are
   disrupted, our revenues may be adversely effected.

   We sell our products in part through value-added resellers, systems
integrators, original equipment manufacturers and distributors, which are not
under our control.  Sales of our products by value-added resellers and systems
integrators represented 25% and 29% of our product revenues in the first nine
months of 2001 and 2000, respectively.  In January 2001, we significantly
reduced our direct sales force for our expert operations management products and
in early August 2001 we announced another workforce reduction in connection with
our strategic restructuring.  We are continuing to manage our relationships with
existing expert operations management customers. We now rely increasingly on
our indirect sales partners for sales of our expert operations management
products to new customers. The loss of major original equipment manufacturers or
resellers of our 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 of our core technology products and applications could have a
material adverse effect on our business, results of operations, or financial
condition. There can be no assurance that we 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 our products. In addition, we rely on
third-party resellers to provide post-sales service and support to our
customers, and any deficiencies in such service and support could adversely
affect our business, results of operations, or financial condition.

   We depend heavily on our sales and marketing force.

   Our future success in the expert operations management marketplace will
depend, in part, upon the productivity of our sales and marketing personnel and
our ability to continue to attract, integrate, train, motivate and retain new
sales and marketing personnel.  There can be no assurance that our investment in
sales and marketing will ultimately prove to be successful.  In addition, there
can be no assurance that our 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 our current and potential competitors.
Our inability to manage our sales and marketing personnel effectively could have
a material adverse effect on our business, operating results and financial
condition.

   Our quarterly operating results vary, leading to fluctuations in trading
   prices for our common stock and possible liquidity problems.

   We have experienced, and may experience in the future, significant quarter-
to-quarter fluctuations in our operating results.  We have recorded quarterly
losses in each quarter in 2000 and for the first three quarters of 2001, and
there can be no assurance that revenue growth or profitable operations can be
attained on a quarterly or annual basis in the future.  Our sales cycle
typically ranges from six to 12 months, and the cost of acquiring our software,
building and deploying applications, and training users represents a significant
expenditure for customers.  Our 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, we ship 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. Our 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 our net income. Our financial performance has
generally been somewhat weaker in the first quarter than in the other fiscal
quarters, due to customer purchasing patterns.



                                       16
<PAGE>

   Sales of our products are highly dependent on our customers capital
   expenditure budgets.  If an economic downturn causes our customers to reduce
   their capital expenditures, our revenues may be adversely effected.

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

   We rely heavily on revenues from our G2 product.  If demand for the G2
   product declines, our revenues may be adversely effected.

   Our main product offerings are G2, a customizable object-oriented development
and deployment platform for building expert operations management systems, and
software application products based on G2 and other core technologies.
Accordingly, our business and financial results are substantially dependent upon
the continued customer acceptance and deployment of G2 and our other products.
The timing of major G2 releases may affect the timing of purchases of our
products.  We have introduced several G2-based products for building
applications and are developing others.  We believe that market acceptance of
these products will be important to our future growth.  There can be no
assurance that such products will achieve market acceptance or that new products
will be successfully developed.  In addition, we rely on many of our
distribution partners to develop G2-based products for specialized markets.

   Accordingly, our business and financial results are also linked to the
continued successful product development by our partners and market acceptance
of such G2-based products.  Any decline in the demand for G2 and our other
products, whether as a result of competitive products, price competition, the
lack of success of our partners, technological change, the shift in customer
demand toward complete solutions, or other factors, could have a material
adverse effect on our business, results of operations, or financial condition.

   Our business may be adversely effected if we fail to develop new products and
   respond to the changes in technology.

   The market for our 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.  Our
future success will depend in part upon our ability to enhance our 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.  We have from time to time experienced delays in
introducing new products and product enhancements.  There can be no assurance
that we 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 we will successfully
complete the development of new or enhanced products, that we will successfully
manage the transition to future versions of G2, or to successor technology, or
that our future products will achieve market acceptance.  In addition, the
introduction of products embodying new technologies and the emergence of new
industry standards could render our 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 our 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 our existing products.



                                       17
<PAGE>


   Our business may suffer if we fail to address the challenges associated with
   international operations.

   Our international revenues represented 41% and 44% of total revenues in the
first nine months of 2001 and 2000, respectively.  We categorize our revenues
according to product shipment destination and therefore do not necessarily
reflect the ultimate country of installation.  The international portion of our
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 our sales and marketing operations in that region.  There can
be no assurance that these factors will not adversely affect our business,
results of operations, or financial condition.

   Our business may suffer if we fail to remain competitive with other companies
   offering similar products and services.

   Although we believe that there are no other commercially available products
that offer the full range of high-level capabilities embodied in our network
management products, a number of companies offer products that perform certain
functions of G2 for specific applications.  In all of our 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
our products.

   Certain companies, such as Objective Systems Integrators, Inc., Micromuse,
RiverSoft and Systems Management Arts (SMARTS), sell "point solutions" that
compete with our network management products with respect to specific
applications or uses.  Several companies, including AspenTech, Ilog S.A.,
Pavilion and System Management Arts, offer expert operations management products
with limited real-time, expert system, or fault isolation capabilities at lower
price points than those provided by us.  Many of these products often require
extensive programming with languages such as C or C++ for complete
implementation.  Although we believe 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 we do and might introduce new or
improved products to compete with G2, possibly at lower prices.

   Our 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 our software.

   Many of our 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 our products.  There is no assurance that we 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 our
products and services and may limit our future opportunities.

   We believe that continued investment in research and development and sales
and marketing will be required to maintain our competitive position. There can
be no assurance that competitors will not develop products or provide services
that are superior to our products or services or achieve greater market
acceptance.  Competitive pressures faced by us could force us to reduce our
prices, which could result in reduced profitability.  There can be no assurance
that we 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 our business, results of operations, or financial condition.


                                       18
<PAGE>

   Our software is complex and may contain undetected errors.  Such errors could
   cause costly delays in product introduction or require costly software design
   modifications.

   Complex software products such as those offered by us may contain unintended
errors or failures commonly referred to as "bugs".  There can be no assurance
that, despite significant testing by us and by current and potential customers,
errors will not be found in new products after commencement of commercial
shipments.  Although we have 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 our business, results of operations, or financial condition.

   Because we rely heavily upon proprietary technology, our business could be
   adversely effected if we are unable to protect our proprietary technology or
   if third parties successfully assert infringement claims against us.

   Our success is heavily dependent upon our proprietary technology.  We rely
upon a combination of trade secret, contract, copyright, patent, and trademark
law to protect its proprietary rights in its products and technology.  We enter
into confidentiality and/or license agreements with our employees, third-party
resellers, and end-users and limit access to and distribution of our software,
documentation, and other proprietary information.  In addition, we have placed
technical inhibitors in our 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 our products are
distributed.  There can be no assurance that the steps taken by us to protect
our proprietary technology will be adequate to prevent misappropriation of our
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.

   On August 2, 2001, we received a letter from a third party alleging that we
are infringing one or more of their patents relating to neural networks, expert
systems and the control of processes.  At this time, no formal legal action has
been filed.  We believe that these allegations are without merit, and we are
currently engaged in discussions with that party to resolve this matter.  There
can be no assurance that our discussions will be successful and resolve the
infringement allegations satisfactorily.  Additionally, there can be no
assurance that the third party will not file formal legal action relating to its
claims or, if formal legal action is filed, that our defense against those
claims will be successful.


ITEM 3.  QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Investment Portfolio
--------------------

     The Company does not use derivative financial instruments in its investing
portfolio. From time to time the Company places cash in excess of operating
requirements in investment instruments that meet high credit quality standards
such as money market funds, government securities, and commercial paper. The
Company limits the amount of credit exposure to any one issuer. The Company does
not expect any material loss with respect to its investment portfolio. At
September 30, 2001 substantially all of the Company's cash was in demand deposit
or money market accounts.

     The Company conducts business in various foreign countries, primarily in
Europe and the Middle East.  As a result, the Company is exposed to the effect
of foreign currency exchange rate fluctuations on the U.S. dollar value of
foreign currency-denominated revenues and expenses.  And, to the extent that the
Company's foreign subsidiaries maintain large intercompany payable balances with
the U.S. parent, the potential exists for significant cumulative translation
adjustments in the equity section of the consolidated balance sheet.  The
Company does not use foreign exchange forward contracts to hedge its foreign
currency denominated receivables. Looking forward, there can be no assurance
that changes in foreign currency rates, relative to the U.S. dollar, will not
materially adversely affect the consolidated results of the Company.

                                       19
<PAGE>

PART II - OTHER INFORMATION



Item 6.  Exhibits and Reports on Form 8-K.

(a) Exhibits

         10.1  Accounts Receivable Purchase Agreement, dated as of August 16,
               2001, by and between Silicon Valley Bank and the Company.

         10.2  Bridge Loan, Standby Purchase and Debt Reduction Agreement, dated
               as of September 12, 2001, by and among the Company and the
               parties listed therein.

(b) Reports on Form 8-K


         On October 12, 2001, the Company filed a Current Report on Form 8-K
            reporting, under Items 5 and 7, that the Company had entered into a
            letter of intent with Rocket Software, Inc. relating to the sale of
            the Company's NetCure product line.


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<PAGE>

                                  SIGNATURES


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



                                    GENSYM CORPORATION





                                    By: /s/ Lowell B. Hawkinson
                                        -----------------------
      Dated:  November 14, 2001                 Lowell B. Hawkinson
                                        Chief Executive Officer and President
                                        (Principal Executive Officer)



                                    By: /s/ Jeffrey A. Weber
                                        --------------------
      Dated:  November 14, 2001                 Jeffrey A. Weber
                                        Vice President of Finance and
                                        Administration, and Chief Financial
                                        Officer
                                        (Principal Financial and Accounting
                                        Officer)

                                       21
<PAGE>

EXHIBIT INDEX
-------------

10.1* Accounts Receivable Purchase Agreement, dated as of August 16, 2001, by
      and between Silicon Valley Bank and the Company.

10.2* Bridge Loan, Standby Purchase and Debt Reduction Agreement, dated as of
      September 12, 2001, by and among the Company and the parties listed
      therein.

-----------
* Filed herewith.

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