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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark one)

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

For the quarterly period ended March 31, 2006

OR



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

Commission File Number: 0-27696



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GENSYM CORPORATION

(Exact name of
registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 04-2932756                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer 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 ̈

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of large accelerated filer in Rule 12-b-2 of the Exchange Act.
(Check one):



|Large | Accelerated Filer ̈Accelerated
Filer ̈Non-accelerated filer  x
|----- | ------------------------------------------------------------

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

As of May 11, 2006 there were 7,470,653 shares of the Registrants Common Stock outstanding.



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##### Table of Contents

GENSYM CORPORATION

INDEX



|                              |  |                                                                                                      |  |   
|----------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | --
|Part I
Financial Information |  |                                                                                                     
|                              |  |                                                                                                     
|Item 1.                       |  | Consolidated Financial Statements                                                                    |  |   
|                              |  |                                                                                                     
|                              |  | Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005 (Unaudited)                   |  | 3 
|                              |  |                                                                                                     
|                              |  | Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005 (Unaudited) |  | 4 
|                              |  |                                                                                                     
|                              |  | Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 (Unaudited) |  | 5 
|                              |  |                                                                                                     
|                              |  | Notes to Consolidated Financial Statements                                                           |  | 6 
|                              |  |                                                                                                     
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                |  | 12
|                              |  |                                                                                                     
|Item 3.                       |  | Qualitative and Quantitative Disclosures About Market Risk                                           |  | 19
|                              |  |                                                                                                     
|Item 4.                       |  | Controls and Procedures                                                                              |  | 19
|                              | 
|Part II
Other Information    |  |                                                                                                     
|                              |  |                                                                                                     
|Item 1.                       |  | Legal Proceedings                                                                                    |  | 21
|                              |  |                                                                                                     
|Item 1A.                      |  | Risk Factors                                                                                         |  | 21
|                              |  |                                                                                                     
|Item 2                        |  | Unregistered Sales of Equity Securities and Use of Proceeds.                                         |  | 27
|                              |  |                                                                                                     
|Item 6.                       |  | Exhibits                                                                                             |  | 28
|                              |  |                                                                                                     
|                              |  | Signatures                                                                                           |  | 29
|                              |  |                                                                                                     
|                              |  | Exhibit Index                                                                                        |  | 30



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##### Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Consolidated Financial Statements

GENSYM CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share amounts)



|                                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                                        |  | March 31,2006 |         |   | December 31,2005 |  
|ASSETS                                                                                                                                                                                                  |  |               |         |   |                  |   |         |  
|Current assets:                                                                                                                                                                                         |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                                               |  | $             | 3,236   |   |                  | $ | 3,176   |  
|Accounts receivable, net of allowance for doubtful accounts of $44 at March 31, 2006 and $48 at December 31, 2005                                                                                       |  |               | 3,600   |   |                  |   | 3,987   |  
|Prepaid and other current assets                                                                                                                                                                        |  |               | 339     |   |                  |   | 336     |  
|                                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Total current assets                                                                                                                                                                                    |  |               | 7,175   |   |                  |   | 7,499   |  
|                                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Property and equipment, net                                                                                                                                                                             |  |               | 593     |   |                  |   | 599     |  
|Deposits and other assets                                                                                                                                                                               |  |               | 126     |   |                  |   | 153     |  
|                                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Total assets                                                                                                                                                                                            |  | $             | 7,894   |   |                  | $ | 8,251   |  
|                                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                    |  |               |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                                                    |  |               |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                                                        |  | $             | 542     |   |                  | $ | 495     |  
|Accrued expenses                                                                                                                                                                                        |  |               | 1,448   |   |                  |   | 1,533   |  
|Current portion of capital lease obligations                                                                                                                                                            |  |               | 99      |   |                  |   | 101     |  
|Deferred revenue                                                                                                                                                                                        |  |               | 4,744   |   |                  |   | 4,740   |  
|                                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                                               |  |               | 6,833   |   |                  |   | 6,869   |  
|                                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Capital lease and other long-term liabilities, net of current portion                                                                                                                                   |  |               | 194     |   |                  |   | 179     |  
|Long-term deferred revenue                                                                                                                                                                              |  |               | 330     |   |                  |   | 206     |  
|                                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                                       |  |               | 7,357   |   |                  |   | 7,254   |  
|                                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Commitments and contingencies                                                                                                                                                                           |  |               |         |   |                  |   |         |  
|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7,782,522 and 7,773,222 shares in 2006 and 2005 respectively
Outstanding7,450,153 and 7,429,541 shares in 2006 and 2005, respectively |  |               | 78      |   |                  |   | 78      |  
|Capital in excess of par value                                                                                                                                                                          |  |               | 22,225  |   |                  |   | 22,148  |  
|Treasury stock332,369 shares in 2006 and 343,681 shares in 2005 at cost, respectively                                                                                                                  |  |               | (1,240  | ) |                  |   | (1,282  | )
|Accumulated deficit                                                                                                                                                                                     |  |               | (20,513 | ) |                  |   | (19,916 | )
|Accumulated other comprehensive income                                                                                                                                                                  |  |               | (13     | ) |                  |   | (31     | )
|                                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                                              |  |               | 537     |   |                  |   | 997     |  
|                                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                              |  | $             | 7,894   |   |                  | $ | 8,251   |  
|                                                                                                                                                                                                        |  |               |         |   |                  |   |         |  

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



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GENSYM CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share
amounts)



|                                                   |  |                             |       |   |      |   |       |  
|-------------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                                   |  | Three Months endedMarch 31, |      
|                                                   |  | 2006                        |       |   | 2005 |  
|Revenues:                                          |  |                             |       |   |      |   |       |  
|Product                                            |  | $                           | 1,663 |   |      | $ | 2,294 |  
|Services                                           |  |                             | 2,261 |   |      |   | 2,849 |  
|                                                   |  |                             |       |   |      |   |       |  
|Total revenues                                     |  |                             | 3,924 |   |      |   | 5,143 |  
|                                                   |  |                             |       |   |      |   |       |  
|Cost of revenues:                                  |  |                             |       |   |      |   |       |  
|Product                                            |  |                             | 131   |   |      |   | 149   |  
|Services                                           |  |                             | 993   |   |      |   | 1,198 |  
|                                                   |  |                             |       |   |      |   |       |  
|Total cost of revenues                             |  |                             | 1,124 |   |      |   | 1,347 |  
|                                                   |  |                             |       |   |      |   |       |  
|Gross profit                                       |  |                             | 2,800 |   |      |   | 3,796 |  
|                                                   |  |                             |       |   |      |   |       |  
|Operating expenses:                                |  |                             |       |   |      |   |       |  
|Sales and marketing                                |  |                             | 1,304 |   |      |   | 1,407 |  
|Research and development                           |  |                             | 961   |   |      |   | 1,037 |  
|General and administrative                         |  |                             | 1,097 |   |      |   | 1,140 |  
|                                                   |  |                             |       |   |      |   |       |  
|Total operating expenses                           |  |                             | 3,362 |   |      |   | 3,584 |  
|                                                   |  |                             |       |   |      |   |       |  
|Operating (loss) income                            |  |                             | (562  | ) |      |   | 212   |  
|Other (expense) income                             |  |                             |       |   |      |   |       |  
|Interest income                                    |  |                             | 1     |   |      |   | 11    |  
|Interest expense                                   |  |                             | (5    | ) |      |   | (13   | )
|Other (expense) income, net                        |  |                             | (7    | ) |      |   | (3    | )
|                                                   |  |                             |       |   |      |   |       |  
|Other expense, net                                 |  |                             | (11   | ) |      |   | (5    | )
|                                                   |  |                             |       |   |      |   |       |  
|(Loss) income before provision for income taxes    |  |                             | (573  | ) |      |   | 207   |  
|Provision for income taxes                         |  |                             | 2     |   |      |   | 16    |  
|                                                   |  |                             |       |   |      |   |       |  
|Net (loss) income                                  |  | $                           | (575  | ) |      | $ | 191   |  
|                                                   |  |                             |       |   |      |   |       |  
|Basic (loss) earnings per share                    |  | $                           | (0.08 | ) |      | $ | 0.03  |  
|Diluted (loss) earnings per share                  |  | $                           | (0.08 | ) |      | $ | 0.02  |  
|                                                   |  |                            
|Basic weighted average common shares outstanding   |  |                             | 7,437 |   |      |   | 7,264 |  
|Diluted weighted average common shares outstanding |  |                             | 7,437 |   |      |   | 8,437 |  

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



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GENSYM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)



|                                                                                         |  |                             |       |   |      |   |       |  
|---------------------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                                                                         |  | Three months endedMarch 31, |      
|                                                                                         |  | 2006                        |       |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |                             |       |   |      |   |       |  
|Net (loss) income                                                                        |  | $                           | (575  | ) |      | $ | 191   |  
|Adjustments to reconcile net (loss) income to net cash provided by operating activities: |  |                             |       |   |      |   |       |  
|Depreciation and amortization                                                            |  |                             | 121   |   |      |   | 137   |  
|Non-cash compensation                                                                    |  |                             | 94    |   |      |   | 15    |  
|Provision for bad debt                                                                   |  |                             | (3    | ) |      |   |      |  
|Changes in assets and liabilities:                                                       |  |                             |       |   |      |   |       |  
|Accounts receivable                                                                      |  |                             | 393   |   |      |   | (69   | )
|Prepaid expenses and other current assets                                                |  |                             | (1    | ) |      |   | (248  | )
|Accounts payable                                                                         |  |                             | 46    |   |      |   | 80    |  
|Accrued expenses                                                                         |  |                             | (94   | ) |      |   | 85    |  
|Deposits and other assets                                                                |  |                             |      |   |      |   | 83    |  
|Deferred revenue                                                                         |  |                             | 126   |   |      |   | 74    |  
|Other liabilities                                                                        |  |                             | 40    |   |      |   |       |  
|                                                                                         |  |                             |       |   |      |   |       |  
|Net cash provided by operating activities                                                |  |                             | 147   |   |      |   | 348   |  
|                                                                                         |  |                             |       |   |      |   |       |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |                             |       |   |      |   |       |  
|Purchases of property and equipment                                                      |  |                             | (93   | ) |      |   | (42   | )
|Decrease (increase) in other assets                                                      |  |                             | 8     |   |      |   | (40   | )
|                                                                                         |  |                             |       |   |      |   |       |  
|Net cash used in investing activities                                                    |  |                             | (85   | ) |      |   | (82   | )
|                                                                                         |  |                             |       |   |      |   |       |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |  |                             |       |   |      |   |       |  
|Principal payments on capital lease obligations                                          |  |                             | (27   | ) |      |   | (20   | )
|Proceeds from exercise of stock options and issuance of common stock under stock plans   |  |                             | 3     |   |      |   |      |  
|                                                                                         |  |                             |       |   |      |   |       |  
|Net cash used in financing activities                                                    |  |                             | (24   | ) |      |   | (20   | )
|                                                                                         |  |                             |       |   |      |   |       |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                  |  |                             | 22    |   |      |   | 23    |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                                |  |                             | 60    |   |      |   | 269   |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                           |  |                             | 3,176 |   |      |   | 2,927 |  
|                                                                                         |  |                             |       |   |      |   |       |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                 |  | $                           | 3,236 |   |      | $ | 3,196 |  
|                                                                                         |  |                             |       |   |      |   |       |  
|                                                                                         |  |                            
|Cash paid for income taxes                                                               |  | $                           |      |   |      | $ | 20    |  
|                                                                                         |  |                            
|Cash paid for interest                                                                   |  | $                           | 5     |   |      | $ | 4     |  

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



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GENSYM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Operations

We are a provider of rule engine software and services for mission-critical solutions that support and automate decisions in real time. Our flagship G2 software applies
real-time rule technology for decisions that optimize operations and that detect, diagnose, and resolve costly problems. With applications based on G2, organizations in manufacturing, utilities, communications, transportation, aerospace, finance,
and government increase the agility of their business operations and achieve greater levels of performance.

2. Basis of Presentation

We have prepared the unaudited consolidated financial statements included in this report pursuant to the rules and regulations of the Securities and Exchange Commission
(the SEC) for interim financial reporting. Certain information and footnote disclosures, normally included in financial statements prepared for the full year in accordance with accounting principles generally accepted in the United
States of America, have been condensed or omitted pursuant to such SEC rules and regulations; nevertheless, our management believes that the disclosures in this report are adequate to make the information presented not misleading. In the opinion of
management, the consolidated financial statements reflect all adjustments (of a normal and recurring nature) that are necessary to present fairly our consolidated financial position as of March 31, 2006 and December 31, 2005 and our
results of operations and cash flows for the three-month periods ended March 31, 2006 and 2005. These consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 24, 2006. The results of operations for interim periods are not necessarily indicative of the results of operations for the full
year or any other interim period. Certain prior period amounts have been reclassified to conform to the current period presentation.

During the
three-month period ended March 31, 2006, we incurred operating and net losses, but realized positive cash flow. During the year ended December 31, 2005, we realized an operating and overall loss, but achieved positive cash flow. This was
in contrast to the year ended December 31, 2004 and the first six months of 2005, when we maintained operating and overall profitability. We believe that our cash and cash equivalents and cash flows from operations will be sufficient to meet
our operating, investing and financing cash flow requirements through at least the next 12 months. Our ability to restore growth and profitability in 2006 and beyond is dependent on market acceptance of our existing and next generation of G2 and
G2-based products and related services and on renewal of maintenance contracts for customer support at near-current levels.

Managements expectations
for future revenue growth, profitability, and operating cash flows involve significant judgments and estimates. Should these judgments and estimates prove to be inaccurate, we have the intent and ability to reduce our costs and delay, scale back, or
eliminate certain of our activities in order to ensure that we maintain positive cash and working capital. Any of these actions could have a material adverse long-term effect on our business, financial condition and results of operations.



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GENSYM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

3. Comprehensive (Loss) Income

The components of comprehensive (loss) income for the three-month periods ended March 31, 2006 and 2005 are as follows (in thousands):



|                                        |  |                             |      |   |      |   |     |  
|--------------------------------------- |  | --------------------------- | ---- | - | ---- | - | --- | -
|                                        |  | Three months endedMarch 31, |     
|                                        |  | 2006                        |      |   | 2005 |  
|Net (loss) income                       |  | $                           | (575 | ) |      | $ | 191 |  
|Other comprehensive income (loss):      |  |                             |      |   |      |   |     |  
|Foreign currency translation adjustment |  |                             | 18   |   |      |   | (66 | )
|                                        |  |                             |      |   |      |   |     |  
|Comprehensive (loss) income             |  | $                           | (557 | ) |      | $ | 125 |  
|                                        |  |                             |      |   |      |   |     |  

4. Net (Loss) Income Per Share

The following is a reconciliation of basic and diluted weighted average shares used in the computation of net (loss) income per share (in thousands):



|                                             |  |                             |  |      
|-------------------------------------------- |  | --------------------------- |  | -----
|                                             |  | Three months endedMarch 31,
|                                             |  | 2006                        |  | 2005 
|Weighted average common shares outstanding   |  | 7,437                       |  | 7,264
|Additional dilutive common stock equivalents |  |                            |  | 1,173
|                                             |  |                             |  |      
|Diluted weighted average shares              |  | 7,437                       |  | 8,437
|                                             |  |                             |  |      

For the three-month periods ended March 31, 2006 and 2005, options to purchase 1,774,690 and 197,459 shares
of common stock, respectively, were outstanding, but were not included in the computation of diluted earnings per share. In the 2006 period, the shares were anti-dilutive because we had a net loss for the period. In the corresponding period in 2005,
the shares were anti-dilutive because the options exercise prices were greater than the average market price of the common stock.

5. Stock Based
Compensation

The Company issues stock options to its employees and outside directors and provides employees the right to purchase stock pursuant to
stockholder approved stock option plans.

Prior to January 1, 2006, the Company accounted for employee stock-based compensation using the intrinsic
value based method as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. Accordingly, no compensation expense was required to be recognized as long as the
exercise price of the Companys stock options was equal to the market price of the underlying stock on the date of grant.

Effective January 1,
2006, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123R). Under the provisions of SFAS No. 123R, the Company recognizes the fair value
of stock compensation in net income, over the requisite service period of the individual grantees, which generally equals the vesting period. All of the Companys stock compensation is accounted for as an equity instrument and there have been
no liability awards granted.



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GENSYM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

The Company has elected the modified prospective
transition method for adopting SFAS No. 123R. Under this method, the provisions of SFAS No. 123R apply to all awards granted or modified after the date of adoption. The unrecognized expense of awards not yet vested at the date of adoption
are recognized in net income in the periods after the date of adoption using the same valuation method (i.e. Black-Scholes) and assumptions determined under the original provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, as disclosed in the Companys previous filings. Accordingly, prior period financials have not been restated. Under the provisions of SFAS 123R, the Company recorded $94,000 of stock-based compensation on its consolidated
condensed statements of operations for the three months ended March 31, 2006, including $10,000 of compensation related to the issuance of 5,306 shares of common stock to the Companys board of directors members. The stock-based
compensation for the three months ended March 31, 2006 is included in the following expense categories (in thousands):



|                           |  |                                  |   
|-------------------------- |  | -------------------------------- | --
|                           |  | Three Months EndedMarch 31, 2006
|Cost of service and other  |  | $                                | 3 
|Selling and marketing      |  |                                  | 8 
|Research and development   |  |                                  | 6 
|General and administrative |  |                                  | 77
|                           |  |                                  |   
|                           |  | $                                | 94
|                           |  |                                  |   

The net impact of adopting the new accounting guidance for the three months ended
March 31, 2006 was as follows:



|                                        |  |                                          |       |   |                                     |   |       |  
|--------------------------------------- |  | ---------------------------------------- | ----- | - | ----------------------------------- | - | ----- | -
|                                        |  | For the three months endedMarch 31, 2006 |      
|($ in thousands, except per share data) |  | Upon AdoptionSFAS No.123R                |       |   | If
SFASNo. 123R hadnot been adopted |  
|Net loss                                |  | $                                        | (575  | ) |                                     | $ | (481  | )
|Basic loss per share                    |  | $                                        | (0.08 | ) |                                     | $ | (0.07 | )
|Diluted loss per share                  |  | $                                        | (0.08 | ) |                                     | $ | (0.07 | )

The adoption of SFAS No. 123R had no effect on cash flow from operations for
the three months ended March 31, 2006.

No compensation expense related to stock-based grants was recorded in the Companys consolidated
statement of operations for the three months ended March 31 2005, because all of the shares granted through that date had an exercise price equal to the market value of the underlying stock on the date of grant. Prior period results have not
been restated with the adoption of SFAS No. 123R.

SFAS No. 123R requires the presentation of pro forma information for the comparative period
prior to the adoption as if all of the Companys employee stock options had been accounted for under the fair value method of the original SFAS No. 123. The following table illustrates the effect on net income and earnings per share if the
Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation to the prior-year period (in thousands, except per share data).



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GENSYM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                                                                                           |  |                                  |     
|-------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----
|                                                                                                                           |  | Three Months EndedMarch 31, 2005
|Net income attributable to common shareholders                                                                            |  |                                  |     
|As reported                                                                                                                |  | $                                | 191 
|Less: Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects |  |                                  | 65  
|Add: Stock-based compensation expense included in reported net income                                                      |  |                                  |    
|                                                                                                                           |  |                                  |     
|Pro forma                                                                                                                  |  | $                                | 126 
|                                                                                                                           |  |                                  |     
|Net income attributable to common shareholders per shareBasic                                                             |  |                                  |     
|As reported                                                                                                                |  | $                                | 0.03
|Pro forma                                                                                                                  |  |                                  | 0.02

The Companys pro-forma results for the three months ended March 31, 2005 included $15,000 of
stock-based compensation related to the issuance of 4,260 shares of common stock to the Companys board of directors members.

The Company utilized
the Black-Scholes valuation model for estimating the fair value of the stock compensation granted after the adoption of SFAS No. 123R. The weighted-average fair values of the options granted under the stock option plans were $1.80 for the three
months ended March 31, 2006 as compared to $4.05 for the same period in 2005, using the following assumptions:



|                                 |  |                             |   |  |                                 |  
|-------------------------------- |  | --------------------------- | - |  | ------------------------------- | -
|                                 |  | Upon adoptionMarch 31, 2006 |   |  | Prior to adoptionMarch 31, 2005 |  
|Average risk free interest rates |  | 4.75                        | % |  | 4.26                            | %
|Expected dividend yield          |  | None                        |   |  | None                            |  
|Expected life                    |  | 7 Years                     |   |  | 7 Years                         |  
|Expected volatility              |  | 130                         | % |  | 139                             | %

The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present
intention to pay cash dividends. Expected volatility is based on the historical volatility of the Companys common stock over the period commensurate with or longer than the expected life of the options. The risk-free interest rate is based
upon interpolation of various U.S. Treasury rates on the date of grant. The expected life is based upon historical experience.

Based on the Companys
historical voluntary turnover rates, an annualized estimated forfeiture rate of 6% has been used in calculating the recorded expense. Under the true-up provisions of SFAS No. 123R, additional expense will be recorded if the actual forfeiture
rate is lower than estimated, and a recovery of prior expense will be recorded if the actual forfeiture is higher than estimated.



9



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##### Table of Contents

GENSYM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Changes in outstanding
stock options for the three months ended March 31, 2006, were as follows:



|                                 |  |                        |   |  |                                |      |                                                   |      |                                 |   |      
|-------------------------------- |  | ---------------------- | - |  | ------------------------------ | ---- | ------------------------------------------------- | ---- | ------------------------------- | - | -----
|                                 |  | Number of StockOptions |   |  | Weighted-AverageExercise Price |      | Weighted-AverageRemainingContractual Termin Years |      | AggregateIntrinsicValue($000s)
|Outstanding at December 31, 2005 |  | 1,667,624              |   |  | $                              | 1.40 |                                                   |      |                                 |   |      
|Granted                          |  | 330,000                |   |  |                                | 1.80 |                                                   |      |                                 |   |      
|Exercised                        |  | (9,300                 | ) |  |                                | 0.58 |                                                   |      |                                 |   |      
|Forfeited                        |  | (213,634               | ) |  |                                | 1.93 |                                                   |      |                                 |   |      
|                                 |  |                        |   |  |                                |      |                                                   |      |                                 |   |      
|Outstanding at March 31, 2006    |  | 1,774,690              |   |  | $                              | 1.42 |                                                   | 6.81 |                                 | $ | 1,473
|                                 |  |                        |   |  |                                |      |                                                   |      |                                 |   |      
|Exercisable at March 31, 2006    |  | 1,339,326              |   |  | $                              | 1.38 |                                                   | 6.16 |                                 | $ | 1,165

At March 31, 2006, there was $474,000 of unrecognized compensation cost related to non-vested awards, which
we expect to recognize over a weighted-average period of 2 years.

Total intrinsic value of options exercised for the three months ended March 31,
2006 and March 31, 2005 were $12,000 and $0, respectively.

6. Segment Reporting

Revenue is presented geographically based on the country to which the product is shipped or where the services are provided. The following table presents revenues by geographic area:



|               |  |                            |   |  |      |  
|-------------- |  | -------------------------- | - |  | ---- | -
|               |  | Three monthsendedMarch 31, |  
|               |  | 2006                       |   |  | 2005 |  
|United States  |  | 44                         | % |  | 46   | %
|Canada         |  | 10                         | % |  | 7    | %
|Sweden         |  | 7                          | % |  | 9    | %
|Italy          |  | 7                          | % |  | 1    | %
|United Kingdom |  | 5                          | % |  | 5    | %
|Germany        |  | 5                          | % |  | 2    | %
|Switzerland    |  | 1                          | % |  | 8    | %
|Asia           |  | 6                          | % |  | 8    | %
|Rest of Europe |  | 9                          | % |  | 8    | %
|Rest of World  |  | 6                          | % |  | 6    | %
|               |  | 100                        | % |  | 100  | %

Revenues from one customer represented 13% of total revenues for the three months ended March 31, 2006 and
21% of total revenues for the three months ended March 31, 2005.



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##### Table of Contents

GENSYM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

The following table presents our long-lived assets, net
of depreciation and amortization, as of March 31, 2006 and December 31, 2005 (in thousands):



|              |  |               |     |                  |   |    
|------------- |  | ------------- | --- | ---------------- | - | ---
|              |  | March 31,2006 |     | December 31,2005
|United States |  | $             | 531 |                  | $ | 527
|Europe        |  |               | 62  |                  |   | 72 
|              |  |               |     |                  |   |    
|Total         |  | $             | 593 |                  | $ | 599
|              |  |               |     |                  |   |    



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##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Forward-Looking Statements

This quarterly report
contains forward-looking statements and information relating to us and our subsidiaries, which are based on managements beliefs, as well as assumptions made by our management and information currently available to us. These statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used herein, words such as anticipate, believe, estimate, expect, intend and similar
expressions, as they relate to our management or us, identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties, and assumptions, including but not
limited to those factors set forth in Item 1A of Part II under the caption Risk Factors. Should one or more of these risks or uncertainties materialize, or should an underlying assumption prove incorrect, actual results may vary
materially from those described in this report as anticipated, believed, estimated, expected or intended. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. We
undertake no obligation to update or revise any forward-looking statements.

Business Overview

We are a provider of rule engine software and services for mission-critical solutions that support and automate decisions in real time. Our flagship G2 software applies
real-time rule technology to information in order to optimize operations and detect, diagnose and resolve costly problems. With applications based on G2, organizations in manufacturing, utilities, communications, transportation, aerospace, finance
and government increase the agility of their business operations and achieve greater levels of performance.

Our products apply rule-logic in real time to
enable organizations to make better operational decisions. Benefits derived from the use of our products include:



| |  |  | greater agility in responding to changing business conditions;
| | - |  | --------------------------------------------------------------



| |  |  | increased production capacities;
| | - |  | --------------------------------



| |  |  | reduced consumption of energy, materials and resources;
| | - |  | -------------------------------------------------------



| |  |  | avoidance of capital expenditures;
| | - |  | ----------------------------------



| |  |  | waste reduction;
| | - |  | ----------------



| |  |  | higher levels of product and service quality; and
| | - |  | -------------------------------------------------



| |  |  | avoidance of costly operational disruptions and shutdowns.
| | - |  | ----------------------------------------------------------

Our key
product is G2, a mature and robust software platform that underlies all of our other products. We released our most recent version of G2, version 8.2, in December 2005. The version 8.2 release represents another significant advance in our next
generation of G2, where we have been investing heavily since 2002. Version 8.2 of G2 delivers a comprehensive and unified foundation for a wide range of reasoning-driven products and solutions available from us and our partners. The release offers a
unified framework of reasoning building blocks including natural language rules, procedures, object modeling, simulation, business process and workflow execution, graphical diagnostics, message handling, data processing, integration, Web technology
and many developer productivity tools. The release also expands G2s capabilities for business process and workflow execution, rules, integration and user interface.



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##### Table of Contents

We offer a number of products that use G2 as a platform. These products enable customers to implement certain types of
applications more quickly and economically by providing domain-specific functionality.

Our current products are:



|                |  |                                                                                                                             
|--------------- |  | ----------------------------------------------------------------------------------------------------------------------------
|Product         |  | Application                                                                                                                 
|G2              |  | Real-time, rule engine platform for optimizing operations and detecting, diagnosing and responding to problems in real time.
|                | 
|G2 NeurOn-Line® |  | Online, rule-driven neural-network models that predict, control and optimize complex non-linear processes.                  
|                | 
|G2 Optegrity   |  | Abnormal condition management for process manufacturing plants.                                                             
|                | 
|G2 Integrity    |  | Expert fault management of voice and data networks.                                                                         
|                | 
|G2 ReThink®     |  | Management of the business process life cycle through rule-driven simulation and online automation.                         
|                | 
|G2 e-SCOR       |  | Simulation and analysis of supply-chain designs, policies and practices.                                                    

We have a professional services group that can be engaged by our customers to develop applications or to assist in
the development of applications. However, many of our customers, particularly our partners, build their own applications. We also offer courses to train customers in the use of our products.

We derive revenue from sales of and service for our products and account for such revenue in four ways:



| |  |  | Sale of product licensesmostly one-time payment for perpetual licenses.
| | - |  | ------------------------------------------------------------------------



| |  |  | Customer support servicesincludes both product support and product enhancements and updates. Pricing is generally based on a percentage of the price of the product
license. Service contracts, mandatory for the first year following the purchase of a product license, are typically for one-year periods. Payment is due at the commencement of each support year, but revenue is recognized over the course of the year.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Consulting servicesvarious billable services to customers for helping develop and install applications. Most of these services are billed on a time and materials basis.
Occasionally, we enter into fixed price arrangements, which are usually accounted for using a proportional performance model.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Educational servicestraining in the use of our products, some in public classes and some in-house for customers who require a dedicated training program. These services
are billed on a course-fee or day-rate basis.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We have a sales force in the United States, Europe and the Middle East. Our sales force is
focused on the generation of new business in several vertical and horizontal markets. The vertical markets include: chemical, oil and gas; other process manufacturing; discrete manufacturing; power utilities; water utilities; telecommunications;
government; transportation; and aerospace. The horizontal markets include business process management, supply chain management, and modeling and simulation.



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##### Table of Contents

Our sales activities have historically involved a combination of direct sales to end users and indirect sales through
partners. We have an indirect channel strategy for our sales force that places its primary focus on development of new business through indirect channels. In addition, our sales force supports the current and future needs of our existing end user
customers. As part of the execution of our indirect channel strategy, we have introduced new indirect channel programs designed to improve our ability to attract new partners and to support existing partners, who pursue business based on our
products across our target vertical markets. Channel partners are also able to provide development, support and training services to our customers. We have channel partners in North and South America, Europe, the Middle East, Africa and the
Asian-Pacific region.

The following is the breakdown of revenue by product and service revenue:



|                                    |  |                             |   |  |      |  
|----------------------------------- |  | --------------------------- | - |  | ---- | -
|                                    |  | Three months endedMarch 31, |  
|                                    |  | 2006                        |   |  | 2005 |  
|Product license sales               |  | 42                          | % |  | 45   | %
|Consulting and educational services |  | 17                          | % |  | 21   | %
|Customer support services           |  | 41                          | % |  | 34   | %
|Total                               |  | 100                         | % |  | 100  | %

Prices for our products are generally denominated in U.S. dollars or Euros. Telecommunications, the U.S.
Government, particularly the Department of Defense, manufacturing, transportation, and the chemical, oil and gas industries are major markets for us. We have several significant OEM partners, among them Siemens, Ericsson, and Motorola.

Critical Accounting Policies

The discussion and analysis of our
financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to bad debts, income taxes, and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

For a more detailed explanation of the judgments made in these areas, refer to our Annual Report on Form 10-K for the year ended December 31, 2005. Our critical
accounting policies, as detailed in our Form 10-K for the year ended December 31, 2005, have not changed during the three-month period ended March 31, 2006 except for the adoption of Statement of Financial Standard No. 123 (Revised
2004), Share-Based Payment, (SFAS No. 123R) is fully explained in footnote 5 to the financial statements.



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##### Table of Contents

Results of Operations

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



|                                                |  |                             |    |  |      |  
|----------------------------------------------- |  | --------------------------- | -- |  | ---- | -
|                                                |  | Three months endedMarch 31, |   
|                                                |  | 2006                        |    |  | 2005 |  
|REVENUES:                                       |  |                             |    |  |      |  
|Product                                         |  | 42                          | %  |  | 45   | %
|Services                                        |  | 58                          | %  |  | 55   | %
|                                                |  |                             |    |  |      |  
|Total revenues                                  |  | 100                         | %  |  | 100  | %
|                                                |  |                             |    |  |      |  
|COST OF REVENUES:                               |  |                             |    |  |      |  
|Product                                         |  | 4                           | %  |  | 3    | %
|Services                                        |  | 24                          | %  |  | 23   | %
|                                                |  |                             |    |  |      |  
|Total cost of revenues                          |  | 28                          | %  |  | 26   | %
|                                                |  |                             |    |  |      |  
|Gross margin                                    |  | 72                          | %  |  | 74   | %
|                                                |  |                             |    |  |      |  
|OPERATING EXPENSES:                             |  |                             |    |  |      |  
|Sales and marketing                             |  | 33                          | %  |  | 28   | %
|Research and development                        |  | 25                          | %  |  | 20   | %
|General and administrative                      |  | 28                          | %  |  | 22   | %
|                                                |  |                             |    |  |      |  
|Total operating expenses                        |  | 86                          | %  |  | 70   | %
|                                                |  |                             |    |  |      |  
|Operating (loss) income                         |  | (14                         | )% |  | 4    | %
|OTHER INCOME (EXPENSES), NET                    |  | (1                          | )% |  | 0    | %
|                                                |  |                             |    |  |      |  
|(Loss) income before provision for income taxes |  | (15                         | )% |  | 4    | %
|PROVISION FOR INCOME TAXES                      |  | 0                           | %  |  | 0    | %
|                                                |  |                             |    |  |      |  
|Net (loss) income                               |  | (15                         | )% |  | 4    | %
|                                                |  |                             |    |  |      |  

Three-month period ended March 31, 2006

Revenues

We derive revenue from two sources: product
and services. Product revenues include revenues from sales of licenses for use of our software products which include G2 and related application software. Services revenues consist of fees for support and maintenance, which is generally provided on
an annual contract basis; consulting services; and training courses related to our products.

We derive revenues from US and international customers.
Revenues for the three-month periods ended March 31, 2006 and 2005 were as follows:



|              |  |                                             |       |  |      |   |  |   |       |  |    |  
|------------- |  | ------------------------------------------- | ----- |  | ---- | - |  | - | ----- |  | -- | -
|              |  | Three months ended March 31, (in thousands) |      
|              |  | 2006                                        |       |  | 2005 |  
|US            |  | $                                           | 1,734 |  | 44   | % |  | $ | 2,360 |  | 46 | %
|International |  |                                             | 2,190 |  | 56   | % |  |   | 2,783 |  | 54 | %
|              |  |                                             |       |  |      |   |  |   |       |  |    |  
|              |  |                                             | 3,924 |  |      |   |  |   | 5,143 |  |    |  
|              |  |                                             |       |  |      |   |  |   |       |  |    |  

The overall decrease in US revenues was the result of a $0.5 million decrease in service revenues between the
three-months ended March 31, 2006 and the same period in 2005, as contracts expired and renewals were delayed and a decrease in license revenue of $0.2 million. The decrease in international revenues was primarily a result of a $0.5 million
decline in license sales from the three-month period ended March 31, 2006 and the respective period in 2005, and a $0.1 million decline in service revenues from the three-month period ended March 31, 2006 and the respective period in 2005,
as a result of service contracts that were performed in 2005 that were not repeated in 2006.



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##### Table of Contents

Our worldwide product and service revenues for the three-month periods ended
March 31, 2006 and 2005 were as follows:



|        |  |                                             |       |  |      |   |  |   |       |  |    |  
|------- |  | ------------------------------------------- | ----- |  | ---- | - |  | - | ----- |  | -- | -
|        |  | Three months ended March 31, (in thousands) |      
|        |  | 2006                                        |       |  | 2005 |  
|Product |  | $                                           | 1,663 |  | 42   | % |  | $ | 2,294 |  | 45 | %
|Service |  |                                             | 2,261 |  | 58   | % |  |   | 2,849 |  | 55 | %
|        |  |                                             |       |  |      |   |  |   |       |  |    |  
|Total   |  |                                             | 3,924 |  |      |   |  |   | 5,143 |  |    |  
|        |  |                                             |       |  |      |   |  |   |       |  |    |  

Product revenues for the three months ended March 31, 2006 decreased by $0.6 million, or 28%, as compared to
the same period in 2005 due to a reduction in license bookings.

Services revenues for the three months ended March 31, 2006 decreased $0.6 million,
or 21%, as compared to the same period in 2005. This decrease was mainly attributable to a reduction in customer support services and a decrease in consulting and training orders during the quarter, which were not offset by new consulting projects
scheduled to start during the quarter.

One customer accounted for 13% and 21% of revenues for the three-month periods ended March 31, 2006 and 2005,
respectively.

Cost of Revenues

Cost of revenues primarily consist of consulting labor, technical support costs, general office expenses, and the costs of material and labor involved in producing and distributing our software. These costs for the three-month periods ended
March 31, 2006 and 2005 were as follows:



|        |  |                                            |       |      |   |      
|------- |  | ------------------------------------------ | ----- | ---- | - | -----
|        |  | Three months ended March 31,(in thousands)
|        |  | 2006                                       |       | 2005
|Product |  | $                                          | 131   |      | $ | 149  
|Service |  |                                            | 993   |      |   | 1,198
|        |  |                                            |       |      |   |      
|Total   |  |                                            | 1,124 |      |   | 1,347
|        |  |                                            |       |      |   |      

Product costs remained relatively consistent for the three months ended March 31, 2006 as compared to the
same period in 2005 because production costs do not fluctuate in proportion to the decrease in license sales.

Service costs decreased $0.2 million, or
17%, for the three months ended March 31, 2006 as compared to the same period in 2005. This decrease was primarily attributable to the decreased use of contractors that were not needed based on the lower level of consulting services provided.

Gross margin percentages for the three-month periods ended March 31, 2006 and 2005 were as follows:



|        |  |                             |   |  |      |  
|------- |  | --------------------------- | - |  | ---- | -
|        |  | Three months endedMarch 31, |  
|        |  | 2006                        |   |  | 2005 |  
|Product |  | 92                          | % |  | 94   | %
|Service |  | 56                          | % |  | 58   | %
|        |  |                             |   |  |      |  
|Total   |  | 72                          | % |  | 74   | %

Our gross margin on product decreased from 94% to 92% during the three-month period ended March 31, 2006 as
compared to the same period in 2005. This decrease in gross margin reflects that our product expenses did not decrease in proportion with the decrease in product revenue. Our product expenses do not necessarily decrease when there is a decrease in
our revenues because product costs generally consist of fixed labor and facility costs.

Our gross margin on service decreased from 58% to 56% for the
three-month period ended March 31, 2006 as compared to the same period in 2005. Our service expenses do not necessarily decrease when there is a decrease in our revenues because service costs are generally fixed labor, contractor and facility
costs.



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##### Table of Contents

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-month period ended March 31, 2006 were $1.3 million, a decrease of $0.1 million, or 7%, as compared to the same period in 2005. The decrease was primarily
attributable to a $0.1 million decrease in commissions due to lower sales, a $0.1 million decrease in personnel, partially offset by a $0.1 million increase in marketing programs as a result of our annual user conference in March 2006.

Research and Development. Research and development expenses consist primarily of costs of personnel, equipment and facilities. Expenditures include research
and support of the existing G2 product line and, in the three months ended March 31, 2005 included the development of the software reasoning platform, TrueManage in 2005 that was not continued in 2006. Total research and development expenses
for the three months ended March 31, 2006 were $1.0 million, unchanged from the same period in 2005.

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 for the three months ended March 31, 2006 remained unchanged
from the same period in 2005 at $1.1 million. The expenses for the 2006 period included a $0.1 million increase in personnel expenses such as bonus and stock-based compensation expenses under SFAS No. 123R partially off set by a decrease of
$0.1 million for a severance settlement in 2005 that was not repeated in 2006.

Other Income, Expense

Other expense, net for the three months ended March 31, 2006 was $10,000, compared to other expense, net of $5,000 for the same period in 2005. The decrease is
primarily due to foreign exchange rate fluctuations.

Income Taxes

Our provision for income taxes results from income tax credits in the US offset by tax liabilities in foreign jurisdictions where our wholly owned subsidiaries have taxable income but do not have operating loss carry
forwards to reduce tax obligations. Provision for income taxes for the three months ended March 31, 2006 was $2,000, compared to $16,000 for the same period in 2005. The decrease in the tax expense for the three months ended March 31, 2006
is primarily attributable to the net loss for the period.

LIQUIDITY AND CAPITAL RESOURCES

Our March 31, 2006 cash and cash equivalents were $3.2 million, an increase of $0.1 million from December 31, 2005.

For the quarter ended March 31, 2006, we had $0.1 million provided by operating activities offset by $0.1 million used in investing activities and $24,000 used in
financing activities.

We reported $0.1 million and $0.3 million of cash flow from operations for the three months ended March 31, 2006 and 2005,
respectively. The difference was primarily a result of $0.7 million of lower profits offset by $0.5 million from improved accounts receivable collections and lower operating cash outflows of $0.2 million as accrued expenses increased.

Cash flows used in investing activities were consistent at $0.1 million for both three-month periods ended March 31, 2006 and 2005 and were primarily used for
purchases of property and equipment.

Cash flows used in financing activities were consistent at $24,000 for both three-month periods ended March 31,
2006 and 2005 and were primarily used for principal payments on capital lease obligations.



17



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##### Table of Contents

We currently finance our operations, along with capital expenditures, primarily through cash flows from operations and
our current cash. Our lease commitments consist of operating leases primarily for our facilities and computer equipment. We also have capital leases for certain computer equipment.

Managements expectations for future revenue growth, profitability, and operating cash flows involve significant judgments and estimates. Should these judgments and estimates prove to be inaccurate, we have the
intent and ability to reduce our costs and delay, scale back, or eliminate certain of our activities in order to ensure that we maintain positive cash and working capital. Any of these actions could have a material adverse long-term effect on our
business, financial condition and results of operations.

Commitments and Contingencies

Leases

We lease our facilities and certain equipment
under operating and capital leases. The future minimum annual payments under these leases at March 31, 2006 are as follows:



|                                              |  |                 |       |               |   |    
|--------------------------------------------- |  | --------------- | ----- | ------------- | - | ---
|                                              |  | (in thousands) 
|For the period ended December 31,             |  | OperatingLeases |       | CapitalLeases
|2006                                          |  | $               | 466   |               |   | 84 
|2007                                          |  |                 | 557   |               |   | 102
|2008                                          |  |                 | 514   |               |   | 13 
|2009                                          |  |                 | 388   |               |   |   
|2010                                          |  |                 | 385   |               |   |   
|Thereafter                                    |  |                 | 107   |               |   |   
|                                              |  |                 |       |               |   |    
|Total minimum lease payments                  |  | $               | 2,417 |               | $ | 199
|Less: Amount representing interest            |  |                 |       |               |   | 16 
|                                              |  |                 |       |               |   |    
|Present value of minimum lease payments       |  |                 |       |               |   | 183
|Less: Current portion                         |  |                 |       |               |   | 99 
|                                              |  |                 |       |               |   |    
|Long-term portion of capital lease obligation |  |                 |       |               | $ | 84 

Litigation

We are involved in various lawsuits, claims and inquiries, most of which are routine to the nature of our business. In the opinion of our management, the resolution of these matters will not have a material adverse
effect on our financial position, results of operations or cash flows.

Stock Repurchase Program

In the third quarter of 1998, we began a program to repurchase up to 650,000 shares of our common stock on the open market. As of March 31, 2006, 501,300 shares had
been repurchased at a cost of approximately $1,869,000. No shares were purchased in 2006, 2005 or 2004. During the three months ended March 31, 2006 and 2005, respectively, we reissued 11,312 and 4,260 shares of common stock to employees and
non-employee directors. As of March 31, 2006, 332,369 shares remained in treasury at a cost of $1,239,736.

Related party transaction

On January 9, 2002 we entered into a three-year Original Equipment Manufacturer agreement with Integration Objects Inc., an offshore Tunisian
corporation involving three employees who continue to work for us. In March



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##### Table of Contents

2005, July 2005 and May 2006 we extended the agreement for additional six-month increments. The contract currently
expires on July 8, 2006. The agreement calls for the payment of royalties, based on a fixed and determinable percentage of the product sales price, in connection with our use of their product. These payments are to be made within 30-days after
payment from the end user is received. We made no payments to Integration Objects, Inc. during three-months ended March 31, 2006. At March 31, 2006 we had unpaid royalties of $39,432 due Integration Objects, Inc.

On April 21, 2005 we entered into a six month consulting agreement with Cianciotta Holdings, Inc., an entity wholly-owned by Frank Cianciotta, who was then a member
of our board of directors. Pursuant to the agreement, Cianciotta Holdings, Inc. provided business development and sales consulting services to us, which services were performed by Mr. Cianciotta. The agreement called for payments of $6,500 per
month to assist in strategic business development opportunities. In September 2005, we entered into a consulting agreement with Market Partners, Inc., a provider of consulting and technology solutions. Pursuant to the agreement, Market Partners,
Inc. provided business development and sales consulting services to us, which services were provided by Mr. Cianciotta who was a subcontractor for Market Partners, Inc. We agreed to pay Market Partners, Inc. $10,000 per month for consulting
services and an additional $3,333 per month for the first six months of the agreement as a performance bonus. After the first six months, the monthly performance bonus payment under the agreement was to be an amount equal to 5% of our gross revenue
for web hosted business or software delivered on a monthly service fee basis. We terminated the agreement with Market Partners, Inc. effective March 1, 2006. Mr. Cianciotta resigned from our board of directors effective October 27,
2005. We paid Mr. Cianciotta or Market Partners, Inc. a total of $44,686 for the three months ending March 31, 2006 pursuant to these consulting agreements. At March 31, 2006 we had no unpaid consulting fees to Mr. Cianciotta or
Market Partners, Inc.

ITEM 3. Qualitative and Quantitative Disclosures About Market Risk

Investment Portfolio

We do not use derivative financial instruments in our investment portfolio. If we place our funds in other than demand deposit accounts, we use instruments that meet high
credit quality standards, such as money market funds, government securities, and commercial paper. We limit the amount of credit exposure to any one issuer. At March 31, 2006, substantially all of our funds were in demand deposit accounts.

Impact of Foreign Currency Rate Changes

Our contracts
with customers are generally denominated in US dollars or Euros. We transact business in various countries and thus have exposure to adverse movements in foreign currency exchange rates. This exposure is primarily related to intercompany receivable
and payable balances that are recorded on the balance sheet in currencies other than the functional currency. These amounts are translated at each month end to the functional currency in each country, and any resulting gain or loss is recorded in
the currency translation adjustment of the equity section of the balance sheet. In addition, we have certain cash balances held in currencies other than our functional currency or the functional currency of our subsidiaries. These amounts are
translated at each month end to the functional currency in each country, and any resulting gain or loss is recorded in the appropriate statements of operations.

ITEM 4. Controls and Procedures.

Our management, with the participation of our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2006. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and
procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the SEC under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required



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disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and
procedures as of March 31, 2006, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
March 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

We are involved in various lawsuits, claims and inquiries, most of which are routine to the
nature of our business. In the opinion of management, the resolution of these matters will not have a material adverse effect on our financial position, results of operations or cash flow.



|ITEM 1A. | Risk Factors
|-------- | ------------

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 management from time to time.

We have a history of operating losses, and we may not be profitable.

We incurred operating losses for the first quarter of 2006 and for three of the five years ended December 31, 2005. In August 2001, we announced a strategic restructuring of our company that included a 40% reduction in workforce, a
realignment of our software and services product lines, and a renewed focus on our existing customers. With the restructuring, we achieved profitability for each fiscal quarter of 2002 and for the year ended December 31, 2002. We incurred
operating losses in each of the first three quarters of 2003 but achieved profitability in the fourth quarter of 2003, and for each quarter of 2004. We were profitable for the first, second and fourth quarters of 2005 and had an operating loss for
the third quarter of 2005 that caused us to incur an operating loss for 2005. As of March 31, 2006, our accumulated deficit was $20.3 million. Our ability to achieve and maintain profitability is dependent on continued revenues from new and
existing customers and expense control. There can be no assurance that we will return to profitability and even if we achieve profitability, we cannot assure that we can sustain profitability on a quarterly or annual basis.

We are increasingly reliant on fees from maintenance contracts and renewals. If we fail to retain our maintenance customers, our revenues may be adversely affected.

We rely on maintenance contract renewals for a significant percentage of our revenues, as renewed software maintenance fees have represented 33%, 35%
and 44% of our total revenues in the years ended December 31, 2005, 2004 and 2003, respectively. Software maintenance fees represented 33% of the total revenues for the three months ended March 31, 2006. While a maintenance contract on our
products is mandatory for the first year after purchase, subsequent renewals of the maintenance contract are at the discretion of our customers. Accordingly, our failure to retain maintenance customers or a significant decline in the rate of
maintenance contract renewals could have a material adverse effect on our business, results of operations, cash flows, and financial position.

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 affected.

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 such channel partners represented 62%, 49% and 56% of our product revenues in years ended December 31, 2005, 2004 and 2003, respectively. Sales of our products by channel partners represented 50% of our total sales for the
three months ended March 31, 2006. We rely heavily 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 applications could have a material adverse effect on our business, results of operations, cash flows and
financial position. 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, cash flows, and financial position.



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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, our ability to continue to attract, integrate, train, motivate and
retain new sales and marketing personnel, and our ability to manage sales and channel partners. 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, results of operations, cash flows, or financial position.

Our
quarterly operating results may 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. 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 6 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 do 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 executed in the final weeks of that quarter. The revenues for a quarter may include some large orders. If the timing of any of these large 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 results of operations and cash flows, which may
impact our ability to continue as an independent concern.

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

A number of companies offer products that offer rule engine capabilities or that perform certain functions of G2 for
specific applications. In all of our markets, there is competition from point solutions, real-time and rule engine products, and internally developed software. There are commercially available software development tools that software
application developers or potential customers could use to build software that has functionality similar to our products.

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 increasingly reliant on indirect channel partners, including original equipment manufacturers, value-added resellers, and systems integrators, to satisfy market requirements. A number of software
companies offer products that compete in specific application areas addressed by these partners, such as cement kiln control, manufacturing execution systems, logistics systems, and network management, and they could be successful in supplying
alternatives to products based on our software.

Companies offering competitive rule engine products include Fair Isaac, ILOG, and Computer Associates.
Certain companies, such as Micromuse and Aspen Technology, sell point solutions that compete with operations management applications based on G2 with respect to specific applications or uses. Several companies, including ILOG, Pavilion,
and System Management Arts, offer operations management products with limited real-time, expert system, or fault isolation capabilities, but at lower price points than those provided by us. 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.



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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. Thus there could be a reduction in the
need for our products and services that 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, cash flows, or financial position.

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

Our international revenues represented 55%, 50%, and 54% of our total revenues for
years ended December 31, 2005, 2004, and 2003, respectively. Our international revenues represented 56% of our total revenues for the three months ended March 31, 2006. We categorize our revenues according to product shipment destination,
which therefore does not necessarily reflect the ultimate country of installation. Our international operations require significant management attention and financial resources.

There are certain risks inherent in our international business activities including:



| |  |  | changes in foreign currency exchange rates;
| | - |  | -------------------------------------------



| |  |  | unexpected changes in politics and regulatory requirements;
| | - |  | -----------------------------------------------------------



| |  |  | tariffs and other trade barriers;
| | - |  | ---------------------------------



| |  |  | costs of localizing products for foreign countries;
| | - |  | ---------------------------------------------------



| |  |  | lack of acceptance of products in foreign countries;
| | - |  | ----------------------------------------------------



| |  |  | longer accounts receivable payment cycles;
| | - |  | ------------------------------------------



| |  |  | difficulties in building and managing international operations;
| | - |  | ---------------------------------------------------------------



| |  |  | tax issues, including restrictions on repatriating earnings;
| | - |  | ------------------------------------------------------------



| |  |  | weaker intellectual property protection in other countries;
| | - |  | -----------------------------------------------------------



| |  |  | economic weakness or currency related crises that may arise in different countries or geographic regions; and
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | the burden of complying with a wide variety of foreign laws.
| | - |  | ------------------------------------------------------------



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These factors may have a material adverse effect on our future international sales and, consequently, on our business,
results of operations, cash flows, or financial position

We rely heavily on revenues from our G2 and G2-based products. If demand for the G2 product
declines, our revenues may be adversely affected.

Substantially all of our license revenues are derived from G2, a customizable object-oriented
development and deployment platform for building expert operations management systems, and from 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 may develop
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, cash flows, or financial position.

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 that we offer 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, cash flows, or financial position.

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 affected.

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, cash flows, or financial position.

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

The
market for our products 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.



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Our research and development in new reasoning technologies may not lead to profitable commercialization.

We developed a pre-release version of a new software reasoning platform, TrueManage, designed for handheld computing devices and targeted at
application markets not currently addressed by our G2 and G2-based products. We have also prototyped a TrueManage application product called LifeVisor, a cell phone device for self-management of chronic conditions such as diabetes and obesity.
Development of TrueManage and LifeVisor is complex, requiring specialized technical expertise. The targeted handheld computing markets experience rapid advancements in related technologies and applications. Our strategy was to distribute these
products, particularly LifeVisor, through other companies that have significantly larger presence and scale in the targeted markets than we do. We found that it would require significant funding to develop, launch, and build distribution channels
for TrueManage and LifeVisor and have therefore suspended development. There can be no assurance that we will be able to successfully complete the development of TrueManage and LifeVisor in the future. Our ability to use this technology and realize
a return on this investment may be limited.

Our stock price may be volatile and an investment in our common stock could suffer a decline in value.

The market price for our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control. These
factors include:



| |  |  | actual or anticipated fluctuations in our operating results;
| | - |  | ------------------------------------------------------------



| |  |  | developments or disputes concerning proprietary rights;
| | - |  | -------------------------------------------------------



| |  |  | the loss of key management or technical personnel;
| | - |  | --------------------------------------------------



| |  |  | technological innovations or new products;
| | - |  | ------------------------------------------



| |  |  | governmental regulatory action;
| | - |  | -------------------------------



| |  |  | fluctuations in currency exchange rates;
| | - |  | ----------------------------------------



| |  |  | general conditions in the software industry;
| | - |  | --------------------------------------------



| |  |  | broad market fluctuations; and
| | - |  | ------------------------------



| |  |  | economic conditions in the United States or abroad.
| | - |  | ---------------------------------------------------

The stock market has
recently experienced price and volume fluctuations. These fluctuations have particularly affected the market price of many software companies, often without regard to their operating performance.

Compliance with changing regulation of corporate governance and public disclosure may result in additional risks and expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ
rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases and, as a result, their application in practice may evolve over time as new
guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.



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We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to
comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and management time and attention. In particular, our efforts to comply with
Section 404 of Sarbanes-Oxley and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors audit of that assessment has required the commitment of significant
financial and managerial resources, and we expect our compliance efforts to require the continued commitment of significant resources. Additionally, if our efforts to comply with new or changed laws, regulations and standards differ from the
activities intended by regulatory or governing bodies, our reputation may be harmed, and we might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely affect our business and the market
price of our stock.

Our common stock is quoted on the OTC Bulletin Board, which limits the liquidity and could negatively affect the value of our
common stock.

Our common stock is quoted on the OTC Bulletin Board, which provides significantly less liquidity than a securities exchange, such as the
American Stock Exchange, or an automated quotation system, such as the NASDAQ National or SmallCap Market.

Purchasers of shares of our common stock may
find it difficult to resell their shares at prices quoted in the market or at all. There is currently a limited volume of trading in our common stock, and on some days there has been no trading activity at all. We cannot predict when or whether
investor interest in our common stock might lead to an increase in its market price or the development of a more active trading market or how liquid that market might become.

Additionally, because our common stock is listed on the OTC Bulletin Board, the liquidity of our common stock is impaired, not only in the number of shares that are bought and sold, but also through delays in the
timing of transactions, and limited coverage by security analysts and the news media, if any, of our company. As a result, prices for shares of our common stock may be lower than might otherwise prevail if our common stock was traded on NASDAQ or a
national securities exchange, like the American Stock Exchange.

Because we rely heavily upon proprietary technology, our business could be adversely
affected 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 our proprietary rights in our products and technology. We enter into confidentiality and/or
license agreements with our employees, contractors, 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.

Provisions in our
corporate documents and Delaware law could delay or prevent a change of control of the company, even if that change would be beneficial to our stockholders.

Our certificate of incorporation and bylaws contain provisions that may make a change of control of the company difficult, even if it would be beneficial to our stockholders, including provisions governing the classification, nomination and
removal of directors, prohibiting stockholder action by written consent, regulating the ability of our stockholders to bring matters for action before annual stockholder meetings, and the authorization given to our board of directors to issue and
set the terms of preferred stock.



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In addition, we have a stockholder rights plan, which would cause extreme dilution to any person or group that attempts
to acquire a significant interest in our company without advance approval of our board of directors, and Section 203 of the Delaware General Corporation Law would impose restrictions on mergers and other business combinations between us and any
holder of 15 percent or more of our outstanding common stock.

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

In the third quarter of 1998, we began a program to
repurchase up to 650,000 shares of our common stock on the open market. As of March 31, 2006, 501,300 shares had been repurchased at a cost of approximately $1,869,000. No shares were purchased in 2006, 2005 or 2004. The following table
provides information about purchases by the company during the quarter ended March 31, 2006 of equity securities that are registered by the company pursuant to Section 12 of the Exchange Act:

GENSYM PURCHASES OF EQUITY SECURITIES



|                  |  |                                                  |  |                             |   |                                                                                                          |         |                                                                                    |        
|----------------- |  | ------------------------------------------------ |  | --------------------------- | - | -------------------------------------------------------------------------------------------------------- | ------- | ---------------------------------------------------------------------------------- | -------
|Period            |  | Total Number ofShares Purchasedduring Period (1) |  | Average PricePaid per Share |   | Total Number ofShares Purchasedsince Adoption ofProgram asPart of
PubliclyAnnounced Plansor Programs (2) |         | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (3)
|01/01/06-01/31/06 |  | 0                                                |  | $                           |  |                                                                                                          | 501,300 |                                                                                    | 148,700
|02/01/06-02/28/06 |  | 0                                                |  |                             |  |                                                                                                          | 501,300 |                                                                                    | 148,700
|03/01/06-03/31/06 |  | 0                                                |  |                             |  |                                                                                                          | 501,300 |                                                                                    | 148,700

---

|(1) | We repurchased an aggregate of 501,300 shares of our common stock pursuant to the repurchase program that we publicly announced on July 1, 1998 (the Program).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Our board of directors approved the repurchase by us of up to an aggregate of 650,000 shares of our common stock pursuant to the Program. Unless terminated earlier by resolution of
our board of directors, the Program will expire when we have repurchased all shares authorized for repurchase thereunder.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | We do not anticipate making further purchases under this Program.
|--- | -----------------------------------------------------------------



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ITEM 6. Exhibits

The following exhibits are filed as part of this Report on Form 10-Q:



|              |  |                                                                                                                                                                                                                                  
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                      
|10.1          |  | Employment Offer Letter, dated January 25, 2006, between Gensym Corporation and Lowell B. Hawkinson (Incorporated by reference to Gensyms Current Report on Form 8-K dated January 25,
2006 and filed on January 31, 2006).     
|              | 
|10.2          |  | Stock Option Agreement, dated January 25, 2006, between Gensym Corporation and Lowell B. Hawkinson (Incorporated by reference to Gensyms Current Report on Form 8-K dated January 25,
2006 and filed on January 31, 2006).      
|              | 
|10.3          |  | Severance Benefits Agreement, dated January 25, 2006, between Gensym Corporation and Lowell B. Hawkinson (Incorporated by reference to Gensyms Current Report on Form 8-K dated January
25, 2006 and filed on January 31, 2006).
|              | 
|31.1          |  | Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.                                
|              | 
|31.2          |  | Certification of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.                                
|              | 
|32.1          |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                               
|              | 
|32.2          |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                               



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SIGNATURES

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



|                    |  |                                                                          
|------------------- |  | -------------------------------------------------------------------------
|                    |  | GENSYM CORPORATION (Registrant)                                          
|                    | 
|Dated: May 11, 2006 |  | /s/ STEPHEN D. ALLISON                                                   
|                    |  | Stephen D. Allison Chief Financial Officer (Principal
Accounting Officer)



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                  
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                      
|10.1          |  | Employment Offer Letter, dated January 25, 2006, between Gensym Corporation and Lowell B. Hawkinson (Incorporated by reference to Gensyms Current Report on Form 8-K dated January 25,
2006 and filed on January 31, 2006).     
|              | 
|10.2          |  | Stock Option Agreement, dated January 25, 2006, between Gensym Corporation and Lowell B. Hawkinson (Incorporated by reference to Gensyms Current Report on Form 8-K dated January 25,
2006 and filed on January 31, 2006).      
|              | 
|10.3          |  | Severance Benefits Agreement, dated January 25, 2006, between Gensym Corporation and Lowell B. Hawkinson (Incorporated by reference to Gensyms Current Report on Form 8-K dated January
25, 2006 and filed on January 31, 2006).
|              | 
|31.1          |  | Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.                                
|              | 
|31.2          |  | Certification of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.                                
|              | 
|32.1          |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                               
|              | 
|32.2          |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                               



30