<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


(Mark one)

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

                  FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996

                                       OR

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


                         COMMISSION FILE NUMBER: 0-27696

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

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

                             125 CAMBRIDGEPARK DRIVE
                               CAMBRIDGE, MA 02140
                    (Address of principal executive offices)

                         TELEPHONE NUMBER (617) 547-2500
              (Registrant's telephone number, including area code)


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

                    Yes  X                            No 
                        ---                              ---

     As of November 6, 1996 there were 6,153,247 shares of the Registrant's
Common Stock outstanding.

                                       1
<PAGE>   2


                               GENSYM CORPORATION
                                 Form 10-Q INDEX

                                                                       Page No.
                                                                       --------

                          PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheets
         September 30, 1996 and December 31, 1995                         3

         Condensed Consolidated Statements of Operations
         Three and Nine Months Ended September 30, 1996 and 1995          4

         Condensed Consolidated Statements of Cash Flows
         Nine Months Ended September 30, 1996 and 1995                    5

         Notes to Condensed Consolidated Financial Statements             6

Item 2.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations                   7-14



                           PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                15

Item 2.  Changes in Securities                                            15

Item 3.  Defaults Upon Senior Securities                                  15

Item 4.  Submission of Matters to a Vote of Security Holders              15

Item 5.  Other Information                                                15

Item 6.  Exhibits and Reports on Form 8-K                                 15

         Signatures                                                       16

                                       2

<PAGE>   3


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

                       GENSYM CORPORATION AND SUBSIDIARIES
<TABLE>
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)
<CAPTION>
                                                       SEPTEMBER 30,     DECEMBER 31,
                                                           1996              1995
                                                       ------------      ------------
<S>                                                     <C>              <C>
                              ASSETS
Current Assets:
       Cash and cash equivalents                        $10,893,525      $ 2,126,259
       Marketable securities                              7,390,603        2,965,942
       Accounts receivable, net                           8,989,649        8,263,549
       Prepaid expenses                                   1,661,747        1,114,952
       Deferred income taxes                                869,034          941,544
                                                        -----------      -----------
            Total current assets                         29,804,558       15,412,246
                                                        -----------      -----------

Property and Equipment, net                               2,319,850        2,166,445
Long-term investments                                     1,058,835               --
Deposits and other assets                                   224,438          267,804
                                                        -----------      -----------

                                                        $33,407,681      $17,846,495
                                                        ===========      ===========

               LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
       Accounts payable                                 $ 1,015,899      $ 1,027,110
       Accrued expenses                                   5,269,098        3,789,297
       Deferred revenue                                   4,824,440        4,419,511
                                                        -----------      -----------
            Total current liabilities                    11,109,437        9,235,918
                                                        -----------      -----------



Stockholders' Equity:
       Convertible preferred stock                               --           65,346
       Common stock                                          61,530           40,010
       Capital in excess of par value                    17,819,212        5,233,955
       Retained earnings                                  4,539,728        3,307,419
       Cumulative translation adjustment                   (122,226)         (36,153)
                                                        -----------      -----------
            Total stockholders' equity                   22,298,244        8,610,577
                                                        -----------      -----------

                                                        $33,407,681      $17,846,495
                                                        ===========      ===========

</TABLE>

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

                                       3


<PAGE>   4

                       GENSYM CORPORATION AND SUBSIDIARIES
<TABLE>
                            CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                              (UNAUDITED)
<CAPTION>
                                                 THREE MONTHS ENDED            NINE MONTHS ENDED
                                                    SEPTEMBER 30,                 SEPTEMBER 30,
                                                 1996           1995          1996             1995
                                              ----------     ----------    -----------     -----------
<S>                                           <C>            <C>           <C>             <C>
REVENUES:
    Product                                   $4,924,715     $4,293,017    $15,296,731     $11,198,995
    Service                                    3,968,104      3,225,238     11,538,265       8,161,861
                                              ----------     ----------    -----------     -----------
        Total revenues                         8,892,819      7,518,255     26,834,996      19,360,856
                                              ----------     ----------    -----------     -----------

COST OF REVENUES:
    Product                                      117,708        202,947        376,407         389,859
    Service                                    1,732,009      1,321,436      4,930,325       3,334,861
                                              ----------     ----------    -----------     -----------
        Total cost of revenues                 1,849,717      1,524,383      5,306,732       3,724,720
                                              ----------     ----------    -----------     -----------

        Gross profit                           7,043,102      5,993,872     21,528,264      15,636,136
                                              ----------     ----------    -----------     -----------

OPERATING EXPENSES:
    Sales and marketing                        4,316,677      3,599,784     12,874,352      10,187,524
    Research and development                   1,596,209      1,247,342      4,454,616       3,906,845
    General and administrative                   992,367        687,229      2,644,972       1,863,818
                                              ----------     ----------    -----------     -----------
                                               6,905,253      5,534,355     19,973,940      15,958,187
                                              ----------     ----------    -----------     -----------

        Operating income (loss)                  137,849        459,517      1,554,324        (322,051)

OTHER INCOME, NET                                172,760         27,605        388,985         176,657
                                              ----------     ----------    -----------     -----------

        Income (loss) before provision for
          (benefit from) income taxes            310,609        487,122      1,943,309        (145,394)

PROVISION FOR (BENEFIT FROM) INCOME
    TAXES                                        115,000        329,427        711,000         (98,325)
                                              ----------     ----------    -----------     -----------

        Net income (loss)                     $  195,609     $  157,695    $ 1,232,309     $   (47,069)
                                              ==========     ==========    ===========     ===========

        Net income (loss) per common and
          common equivalent share             $     0.03     $     0.03    $      0.20     $     (0.01)
                                              ==========     ==========    ===========     ===========

        Weighted average common and common
          equivalent shares outstanding        6,507,033      4,804,494      6,248,390       4,690,914
                                              ==========     ==========    ===========     ===========

</TABLE>

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

                                       4
<PAGE>   5

                       GENSYM CORPORATION AND SUBSIDIARIES
<TABLE>
                              CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                (UNAUDITED)

                                                                                    NINE MONTHS ENDED
                                                                                      SEPTEMBER 30,
                                                                                  1996            1995
                                                                               -----------     -----------
<S>                                                                            <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income (loss)                                                        $ 1,232,309     $   (47,069)
      Adjustments to reconcile net income (loss) to net cash
          provided by (used in) operating activities:
          Depreciation                                                             798,653         688,570
          Deferred taxes                                                            72,510        (724,788)
          Changes in assets and liabilities:
                Accounts receivable                                               (742,412)     (1,545,897)
                Prepaid expenses                                                  (596,371)       (524,398)
                Accounts payable                                                    (2,845)       (252,272)
                Accrued expenses                                                 1,509,999       1,102,141
                Deferred revenue                                                   405,747         (56,862)
                                                                               -----------     -----------

                       Net cash provided by (used in) operating activities       2,677,590      (1,360,575)
                                                                               -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchases of marketable securities                                        (4,424,661)     (3,231,304)
      Purchases of long-term investments                                        (1,058,835)
      Purchases of property and equipment                                         (952,058)     (1,219,920)
      Decrease in other assets                                                      31,928          12,621
                                                                               -----------     -----------

                       Net cash used in investing activities                    (6,403,626)     (4,438,603)
                                                                               -----------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from exercise of stock options                                      589,040          20,040
      Proceeds from initial public offering - net                               11,952,391              --
      Borrowings on line of credit                                                      --         850,000
      Repayments on line of credit                                                      --        (450,000)
                                                                               -----------     -----------

                       Net cash provided by financing activities                12,541,431         420,040
                                                                               -----------     -----------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                            (48,129)         34,067
                                                                               -----------     -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                             8,767,266      (5,345,071)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                   2,126,259       6,281,671
                                                                               -----------     -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                       $10,893,525     $   936,600
                                                                               ===========     ===========
</TABLE>

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

                                       5

<PAGE>   6


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


1. Operations

Gensym Corporation (the "Company") is a leading supplier of software products
and services for developing and deploying intelligent applications in a broad 
range of industrial, scientific, commercial, and government markets.

2. Basis of Presentation

The unaudited condensed consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been condensed or omitted
pursuant to such SEC rules and regulations; nevertheless, the management of the
Company believes that the disclosures herein are adequate to make the
information presented not misleading. In the opinion of management, the
condensed consolidated financial statements reflect all adjustments (of a normal
and recurring nature) which are necessary to present fairly the consolidated
financial position of the Company as of September 30, 1996 and the results of
its operations for the three and nine month periods ended September 30, 1996 and
1995 and its cash flows for the nine months then ended. These condensed
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's prospectus dated February 16, 1996. The results of
operations for the interim period are not necessarily indicative of the results
of operations for the full year.

3. Investments

The Company applies Statement of Financial Accounting Standards ("SFAS") No.
115, Accounting for Certain Investments in Debt and Equity Securities.
Accordingly, the Company's investments are classified as available-for-sale and
are recorded at fair value, which approximates amortized cost at September 30,
1996. Cash equivalents are short-term, highly liquid investments with original
maturity dates of less than three months. Marketable securities held as of
September 30, 1996 consist of municipal bonds with original maturity dates
greater than three months and less than one year. Long-term investments held as
of September 30, 1996, consist of municipal bonds with original maturity dates
of greater than one year.

4. Stockholders' Equity and Per Share Data

In February 1996, the Company completed an initial public offering of 2,300,000
shares of Common Stock, of which 1,366,788 were sold by the Company and 933,212
were sold by selling stockholders. The net proceeds received by the Company were
approximately $12 million after deducting underwriting discounts and expenses of
the offering. The Company did not receive any proceeds from the sale of shares
by the selling stockholders.

For the three and nine months ended September 30, 1996 and the three months
ended September 30, 1995, net income per common and common equivalent share was
computed using the weighted average number of common and common equivalent
shares outstanding during the period in accordance with the treasury stock
method. For the nine months ended September 30, 1995, net loss per common and
common equivalent share was computed using the weighted average number of common
shares outstanding.

                                       6

<PAGE>   7


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

OVERVIEW

     The Company was incorporated in 1986 to provide software products for
developing and deploying intelligent systems for decision support and control.
The Company released the first version of G2, its core product, in May 1988, and
has been profitable each year since 1989. Since 1988, the Company has introduced
enhanced versions of G2 and expanded its product line to include G2-based
application products as well as G2 connectivity products. In addition, the
Company derives significant service revenues from maintenance contracts,
consulting services, and training courses related to its software products.

     The Company markets and sells its products through its 27 direct sales
offices in the United States, Europe, Africa, and Asia, as well as through
selected distributors in other countries, including Japan. In 1994, the Company
made a strategic decision to aggressively expand its direct sales force and
consulting services organization, leading to an increase in both product and
service revenues in 1995 and the first nine months of 1996. The Company also
sells its products through a network of value-added resellers and systems
integrators which provide consulting services and integrated solutions to their
customers. The Company believes that there is a trend among end users in its
markets toward purchasing complete solutions, rather than software tools with
which to develop such solutions. This trend may increase the Company's reliance
on such value-added resellers and system integrators to provide consulting
services and integrated solutions to end users, and may also lead the Company to
increase its own capabilities to deliver complete solutions directly.

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

                                       7

<PAGE>   8

RESULTS OF OPERATIONS
<TABLE>
     The following table sets forth, as a percentage of total revenues,
consolidated statement of operations data for the periods indicated:
<CAPTION>
                                                     THREE MONTHS ENDED   NINE MONTHS ENDED
                                                        SEPTEMBER 30,       SEPTEMBER 30,
                                                       1996      1995      1996      1995
                                                     --------  --------   -------   -------
<S>                                                    <C>       <C>       <C>       <C>
Revenues:
      Product                                           55.4%     57.1%     57.0%     57.8%
      Service                                           44.6      42.9      43.0      42.2
                                                       -----     -----     -----     -----

               Total revenues                          100.0     100.0     100.0     100.0
                                                       -----     -----     -----     -----

Cost of revenues:
      Product                                            1.3       2.7       1.4       2.0
      Service                                           19.5      17.6      18.4      17.2
                                                       -----     -----     -----     -----
  
               Total cost of revenues                   20.8      20.3      19.8      19.2
                                                       -----     -----     -----     -----

Gross margin                                            79.2      79.7      80.2      80.8
                                                       -----     -----     -----     -----

Operating expenses:
      Sales and marketing                               48.5      47.9      48.0      52.6
      Research and development                          17.9      16.6      16.6      20.2
      General and administrative                        11.2       9.1       9.8       9.6
                                                       -----     -----     -----     -----

               Total operating expenses                 77.6      73.6      74.4      82.4
                                                       -----     -----     -----     -----

Operating income (loss)                                  1.6       6.1       5.8      (1.6)

Other income, net                                        1.9       0.4       1.4       0.9
                                                       -----     -----     -----     -----

Income (loss) before provision for (benefit from)
    income taxes                                         3.5       6.5       7.2      (0.7)

Provision for (benefit from) income taxes                1.3       4.4       2.6      (0.5)
                                                       -----     -----     -----     -----

Net income (loss)                                        2.2%      2.1%      4.6%     (0.2)%
                                                       =====     =====     =====     =====


Gross margin:
      Product revenues                                  97.6%     95.3%     97.5%     96.5%
      Service revenues                                  56.4      59.0      57.3      59.1

</TABLE>

                                       8
<PAGE>   9


THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995

Revenues

     The Company's revenues are derived from two sources: product licenses and
services. Product revenues include revenues from sales of licenses for use of G2
and associated software products. Service revenues consist of fees for
maintenance contracts, consulting services, and training courses related to the
Company's products.

     Total revenues were $8.9 million for the quarter ended September 30, 1996
as compared to $7.5 million for the same period in 1995, an increase of $1.4
million or 18.3%. For the nine month period ended September 30, 1996, total
revenues increased to $26.8 million from $19.4 million for the same period in
1995, an increase of $7.4 million or 38.6%. The increase in total revenues was
attributable to increased sales of both software product licenses and related
services. International revenues accounted for 40.5% and 42.4% of total revenue
in the third quarter of 1996 and 1995, respectively, and 43.8% and 47.7% of
total revenues in the first nine months of 1996 and 1995 respectively.

     Product. Product revenues increased to $4.9 million in the third quarter of
1996 from $4.3 million in the same period in 1995, an increase of 14.7%. For the
nine month period ended September 30, 1996, product revenues increased to $15.3
million from $11.2 million for the same period in 1995, an increase of 36.6%.
The increase in product revenues reflected earlier expansion of the Company's
direct sales force and marketing partnerships, as well as greater acceptance of
G2 and G2-based products in both existing and new market segments.

     Service. Service revenues increased to $4.0 million in the third quarter of
1996 from $3.2 million in the same period in 1995, an increase of 23.0%. For the
first nine months of 1996, service revenues increased to $11.5 million from $8.2
million for the same period in 1995, an increase of 41.4%. The increase in
service revenues was primarily due to increased maintenance fees and application
consulting. Maintenance fees increased to $2.1 million in the third quarter of
1996 from $1.5 million in the same period in 1995, an increase of 39.7%.
Maintenance fees increased to $5.8 million in the first nine months of 1996 from
$4.2 million in the first nine months of 1995, an increase of 36.9%. The
increase in maintenance fees due to an increased customer base and increased
maintenance renewals. Consulting revenues increased to $1.5 million in the third
quarter of 1996 from $1.2 million in the same period in 1995, an increase of
18.3%. Consulting revenues increased to $4.2 million in the first nine months of
1996 from $2.7 million in the first nine months of 1995, an increase of 56.0%.
The Company continues to expand its application consulting organization to meet
the growing demand from customers and partners for solution-level applications
and implementation support.

  Cost of Revenues

     Cost of Product. Cost of product revenues consists primarily of the cost of
product media and duplication, manuals, packaging materials, and the direct
labor involved in producing and distributing the Company's software. These costs
decreased to $118,000 in the third quarter of 1996 from $203,000 in the third
quarter in 1995, a decrease of 42.0%. In the nine month period ended September
30, 1996, cost of product revenues decreased to $376,000 from $390,000 in the
same period in 1995, a decrease of 3.5%. Cost of product revenues decreased in
the third quarter of 1996 and in the nine months ended September 30, 1996,
primarily due to higher production costs related to a major product release in
the third quarter of 1995. Gross margin on product revenues increased to 97.6%
from 95.3% for the third quarter of 1996 and 1995, respectively. For the first
nine months of 1996 and 1995, gross margin on product revenues increased to
97.5% from 96.5%, respectively.


                                       9
<PAGE>   10



     Cost of Service. Cost of service revenues consists primarily of consulting
labor costs and product support costs. These costs increased to $1.7 million for
the quarter ended September 30, 1996 from $1.3 million for the quarter ended
September 30, 1995, an increase of 31.1%. For the nine month period ended
September 30, 1996, these costs increased to $4.9 million from $3.3 million for
the comparable period in 1995, an increase of 47.8%. The increase in cost of
service revenue was due primarily to an increase in the number of consulting
projects which, in turn, resulted in an increase in consulting payroll costs.
Gross margin on service decreased to 56.4% in the third quarter of 1996 from
59.0% in the third quarter of 1995. Gross margin on service revenues decreased
to 57.3% in the first nine months of 1996 from 59.1% in the same period in 1995,
largely due to a greater percentage of lower margin consulting revenues versus
higher margin product support and training revenues.

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, seminars, sales facilities expense, trade shows, advertising,
and promotional materials. In the third quarter of 1996, these expenses
increased 19.9% to $4.3 million (48.5% of revenues) from $3.6 million (47.9% of
revenues) for the comparable quarter of 1995. For the nine month period ended
September 30, 1996, these expenses increased 26.4% to $12.9 million (48.0% of
revenues) from $10.2 million (52.6% of revenues) for the comparable period in
1995. The increase in absolute dollars was primarily a result of the continued
investment in the Company's global sales and marketing capabilities, including
the addition of sales and sales-related personnel in new and existing offices.

     Research and Development. Research and development expenses consist
primarily of costs of personnel, equipment, and facilities. These expenses
increased 28.0% to $1.6 million (17.9% of revenues) in the third quarter of 1996
from $1.2 million (16.6% of revenues) for the comparable period in 1995. On a
year-to-date basis, research and development expenses increased 14.0% to $4.5
million (16.6% of revenues) for the nine months ended September 30, 1996 from
$3.9 million (20.2% of revenues) for the comparable period in 1995. The increase
in absolute dollars was primarily due to an increase in engineering personnel
devoted to new product features and enhancements in the G2 product family and
the development of new products. The decrease as a percentage of revenues on a
year to date basis is primarily due to increased revenues.

     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
increased 44.4% to $992,000 (11.2% of revenues) in the third quarter of 1996
from $687,000 (9.1% of revenue) in the third quarter of 1995. For the first nine
months of 1996, general and administrative expenses increased 41.9% to $2.6
million (9.8% of revenues) compared to $1.9 million (9.6% of revenues) for the
comparable period in 1995. This increase in absolute dollars was primarily due
to an increase in the number of personnel in the Company's finance,
administrative, and information systems departments.

  Other Income

     Other income consists primarily of interest income and foreign exchange
transaction gains and losses. In the third quarter of 1996, other income
increased 525.8% to $173,000 from $28,000 for the comparable period in 1995.
Other income increased 120.2% to $389,000 in the first nine months of 1996 from
$177,000 for the comparable period in 1995. This increase was primarily due to
an increase in interest income related to higher cash and marketable securities
balances available for investment, as a result of the proceeds from the
Company's initial public offering in February 1996. During the third quarter of
1996, interest income increased 253.2% to $162,000 from $46,000 in the same
period in 1995. For the first nine months of 1996, interest income increased
131.3% to $409,000 from $177,000 in the comparable period in 1995.

  Income Taxes

     The Company's effective tax rate for the third quarter of 1996 and the
third quarter of 1995 was 37.0% and 67.6%, respectively. The effective tax rate
for the first nine months of 1996 was 36.6% as compared to 67.6% for the
comparable period in 1995. The effective tax rate for the third quarter of 1996
approximates the expected effective tax rate for the year ending December 31,
1996. The effective tax rate for the three and nine months ended December 31,
1995 was higher than the statutory rate principally due to the effect of taxes
on foreign income and to foreign withholding taxes.

                                       10


<PAGE>   11


LIQUIDITY AND CAPITAL RESOURCES

  The Company currently finances its operations (including capital expenditures)
primarily through cash flow from operations, its current cash and marketable
securities balances. In addition, the Company has $4.7 million of equipment
financed under long-term operating leases. The Company's lease commitments
consist primarily of operating leases for the Company's facilities and
computers. The Company generated cash from operations of $2.7 million in the
first nine months of 1996 and used $1.4 million in the first nine months of
1995. Cash generated from operations in the first nine months of 1996 was
primarily due to net income and increases in accrued expenses and deferred
revenue, partially offset by an increase in accounts receivable and prepaid
expenses.

  At September 30, 1996, the Company had cash, cash equivalents, marketable
securities, and long-term investments of $19.3 million. The Company regularly
invests excess funds in highly rated money market funds, government securities,
and commercial paper. Included in these balances are the proceeds from the
Company's initial public offering of Common Stock in February 1996. A total of
2,300,000 shares of Common Stock were sold in the offering, of which 1,366,788
were sold by the Company and 933,212 were sold by the selling stockholders. The
net proceeds received by the Company were approximately $12.0 million after
deducting underwriting discounts and expenses of the offering. The Company did
not receive any proceeds from the sale of shares by the selling stockholders. In
addition, the Company has received approximately $589,000 in 1996 through the
exercise of stock options.

  At September 30, 1996, the Company had available a bank line of credit
allowing for borrowings up to $1.0 million and providing for an interest rate of
prime. This bank line of credit will expire on May 31, 1997. The bank
line of credit requires the Company to maintain certain financial covenants. The
Company was in compliance with all covenants contained in the bank line of
credit at September 30, 1996 and during the first nine months of 1996. There
were no borrowings under the bank line of credit for the period ended September
30, 1996.

  Investing activities utilized $6.4 million and $4.4 million during the first
nine months of 1996 and 1995, respectively. The principal uses in 1996 were to
fund the purchase of $4.4 million of marketable securities, $1.0 million in
long-term investments and $1.0 million of property and equipment. The principal
uses during the first nine months in 1995 were to fund the purchase of $3.2
million of marketable securities and $1.2 million of property and equipment. The
Company expects that its requirements for computers, office facilities, and
office equipment will grow as staffing requirements dictate and that such
equipment and facilities will be available when needed.


CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

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

     Emerging Market for Intelligent Systems. Substantially all of the Company's
revenues are derived from the licensing and support of software products that
enable organizations to implement intelligent systems for decision support and
control applications. Although many organizations have begun to deploy, or have
announced plans to deploy, intelligent systems, these systems are different from
the basic monitoring and control systems that are traditionally employed by
these organizations. There can be no assurance that these organizations will be
able to introduce intelligent systems successfully or that such systems will
gain widespread acceptance. In addition, the timing of the implementation of
intelligent systems by organizations may be affected by economic factors,
government regulations, and other factors. Delays in the introduction of
intelligent systems or the failure of these systems to gain widespread market
acceptance would materially and adversely affect the Company's business, results
of operations or financial condition. In addition, the Company believes that end
users in its markets are increasingly seeking complete solutions, rather than
software tools with which to develop such solutions. Meeting this demand may
require the Company to modify its sales approach, lengthen its sales cycle,
increase its capabilities to develop and deliver complete solutions, and
increase the Company's reliance on value-added resellers and systems
integrators to develop integrated solutions for end users and deliver services
to implement these solutions. Failure by the Company to respond to such a 
shift in demand by end users could have a material adverse effect on the 
Company's business, results of operations, or financial condition.

                                       11

<PAGE>   12


  Variability of Quarterly Operating Results. The Company has experienced, and
may experience in the future, significant quarter-to-quarter fluctuations in its
operating results. Although the Company has been profitable for each of the past
seven fiscal years, the Company has on occasion recorded quarterly losses, and
there can be no assurance that revenue growth or profitable operations can be
sustained on a quarterly or annual basis in the future. The Company's sales
cycle typically ranges from six to twelve months, and the cost of acquiring the
Company's software, building and deploying applications, and training users
represents a significant expenditure for customers. The Company's relatively
long sales cycle and high license fees, together with fixed short-term expenses,
can cause significant variations in operating results from quarter to quarter,
based on a relatively small variation in the timing of major orders. Factors
such as the timing of new product introductions and upgrades, the timing of
significant orders, the mix of products sold, and the mix of domestic versus
international revenues could contribute to this quarterly variability. For
example, the Company has experienced in the past, and may experience in the
future, delays in customer maintenance renewals due to unforeseen delays in
product releases. In addition, the Company's expense levels are based in part on
expectations of future revenue levels. A shortfall in expected revenues could
therefore result in a disproportionate decrease in the Company's net income. The
Company's financial performance has generally been somewhat weaker in the first
quarter than in the other fiscal quarters, due to customer purchasing patterns.

  Economic Factors. Because capital expenditures are often viewed as
discretionary by organizations, sales of the Company's products for capital
budget projects are subject to general economic conditions. Such capital
expenditures are also susceptible to industry-specific economic downturns.
Certain industries have experienced weakened demand in the past, which has
adversely affected the Company's revenues, gross margin, and operating results
during such periods. There can be no assurance that future recessionary
conditions in the markets for the Company's products will not adversely affect
the Company's business, results of operations, or financial condition.

  Product Concentration. The Company's only current product offerings are G2, an
object-oriented development and deployment environment for building intelligent
systems, and software products which operate in conjunction with G2.
Accordingly, the Company's business and financial results are substantially
dependent upon the continued customer acceptance and deployment of G2 and
related products. The timing of major G2 releases may affect the timing of
purchases of the Company's products. The Company has introduced several G2-based
products for building applications and is developing others. The Company
believes that market acceptance of these products will be important to the
Company's future growth. There can be no assurance that such products will
achieve market acceptance or that new products will be successfully developed.
In addition, the Company relies on many of its marketing partners to develop
G2-based products for specialized markets. Accordingly, the Company's business
and financial results are also linked to the continued successful development by
its marketing partners and market acceptance of such G2-based products. Any
decline in the demand for G2 and related products, whether as a result of
competitive products, price competition, the lack of success of the Company's
marketing partners, technological change, or other factors could have a material
adverse effect on the Company's business, results of operations, or financial
condition.

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

                                       12

<PAGE>   13
  Reliance Upon Indirect Distribution Channels. The Company sells its products
in part through value-added resellers, systems integrators, and distributors,
none of which is under the control of the Company. Sales of the Company's
products by value-added resellers and systems integrators represented 29%, 26%,
and 28% of the Company's product revenues in 1994, 1995, and the first nine
months of 1996, respectively. Sales of the Company's products by distributors,
primarily the Company's Japanese distributor, accounted for 19%, 14%, and 19% of
the Company's product revenues in 1994, 1995, and the first nine months of 1996,
respectively. The loss of one or more major third-party distributors or
resellers of the Company's products, or a significant decline in their sales, or
difficulty on the part of such third-party developers or resellers in developing
successful G2-based products and applications, could have a material adverse
effect on the Company's business, results of operations, or financial condition.
There can be no assurance that the Company will be able to attract or retain
additional qualified third-party resellers or that third-party resellers will be
able to effectively sell and implement the Company's products. In addition, the
Company relies on third-party resellers to provide post-sales service and
support to their customers, and any deficiencies in such service and support
could adversely affect the Company's business, results of operations, or
financial condition.

  Risks Associated With International Operations. The Company's international
revenues represented 44% of total revenues in 1994, 1995, and the first nine
months of 1996. Revenues are categorized by the Company according to product
shipment destination and therefore do not necessarily reflect the ultimate
country of installation. The Company expects that international revenues will
account for an increasing percentage of its revenues in the future. The
international portion of the Company's business is subject to a number of
inherent risks, including difficulties in building and managing international
operations, difficulties in localizing products and translating documentation
into local languages, fluctuations in the value of international currencies,
fluctuating import/export duties and quotas, and unexpected regulatory,
economic, or political changes in international markets. There can be no
assurance that these factors will not adversely affect the Company's business,
results of operations, or financial condition.

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

  Competition. Although the Company believes that there are no other
commercially available products that offer the full range of high-level
capabilities embodied in the Company's products, a number of companies offer
point solution products that perform certain of the functions of G2. Moreover,
new competitors could enter the intelligent systems market, and existing
competitors could expand the capabilities of their products to equal or exceed
those of the Company's products. In addition, there are commercially available
software development tools that software applications developers or potential
customers could use to build software having functionality similar to the
Company's products.

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

  The Company's products can also be used to perform lower-level functions such
as monitoring, supervisory control, cell control, and other similar functions
that do not utilize all of G2's capabilities. For these functions, G2 competes
with products offered by a number of other companies. The Company believes that
its products compete favorably in these functional areas where breadth of
applicability, flexibility, maintainability, scalability, and ease of use are
important considerations. However, certain of the competitors in this category
have greater financial and other resources than the Company and might introduce
new or improved products to compete with G2, possibly at lower prices.

                                       13

<PAGE>   14

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

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

  Management of Growth. The Company's business has grown significantly over the
past several years. This growth has resulted in an increase in responsibilities
placed upon the Company's management and has placed added pressures on the
Company's operating and financial systems. For example, the Company's expansion
of its international operations introduced significant legal, tax, and
accounting complexities, as well as the challenges associated with managing
geographically dispersed operations. To manage its growth effectively, the
Company will be required to implement additional management and financial
systems and controls, and to expand, train, and manage its employee base. There
can be no assurance that the management and systems currently in place will be
adequate if the Company continues to grow, or that the Company will be able to
implement additional systems successfully and in a timely manner as required.
Any future strategic transactions such as acquisitions or equity investments
would place additional strains upon the Company's management resources. There
can be no assurance that the Company will be effective in managing its future
growth or that any failure to manage growth will not have a material adverse
effect on the Company's business, results of operations, or financial condition.

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

                                       14

<PAGE>   15

PART II - OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS

        None

ITEM 2. CHANGES IN SECURITIES

        None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None

ITEM 5. OTHER INFORMATION

        None

ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K

        (a) Exhibit Index
            Exhibit 10.1 - Amendment to Business Loan Agreement dated 
             October 17, 1996 between Gensym Corporation and State Street 
             Bank and Trust
            Exhibit 11 - Computation of Net Income Per Share
            Exhibit 27 - Financial Data Schedule

        (b) No reports on Form 8-K were filed by Gensym during the quarter 
            ended September 30, 1996


                                       15

<PAGE>   16

                                   SIGNATURES


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



                                             GENSYM CORPORATION
                                             (Registrant)



                                             /s/ Lowell B. Hawkinson
                                             -----------------------
       Dated: November 13, 1996              Lowell B. Hawkinson
                                             Chief Executive Officer
                                             (Principal Executive Officer)


                                             /s/ Stephen Gregorio
                                             --------------------
       Dated: November 13, 1996              Stephen Gregorio
                                             Vice President Finance and 
                                             Administration,
                                             Chief Financial Officer
                                             (Principal Financial and Accounting
                                             Officer)


                                       16