<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

(Mark one)

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

                 For the quarterly period ended June 30, 2001

                                      OR

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


                        Commission File Number: 0-27696

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

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


                               52 Second Avenue
                             Burlington, MA 01803
                   (Address of principal executive offices)

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




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

                Yes [X]                             No [_]

     As of August 1, 2001 there were 6,554,016 shares of the Registrant's Common
Stock outstanding.
<PAGE>

                              GENSYM CORPORATION

                               Explanatory Note

     This Amendment No. 1 to the Quarterly Report for the quarterly period ended
June 30, 2001 of Gensym Corporation (the "Company") is being filed by the
Company to amend and restate Item 1 and Item 2. In accordance with Rule 12b-15
promulgated under the Securities Exchange Act of 1934, as amended, the text of
the amended items are amended and restated in their entirety as set forth in
this Amendment No. 1.

     Item 1 of this Amendment No. 1 includes additional disclosure concerning
(1) the Company's costs of revenues related to products and services, (2) the
Company's revenue recognition policies and (3) restructuring costs recorded by
the Company.

     Item 2 of this Amendment No. 1 includes additional disclosure concerning
(1) the Company's revenues related to products and services, (2) the Company's
costs of revenues related to products and services, (3) the Company's operating
expenses and (4) the Company's plan for achieving profitability.
<PAGE>

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

                      GENSYM CORPORATION AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (Unaudited)
<TABLE>
<CAPTION>
(in thousands, except share amounts)                                                                    June 30,       December 31,
                                                                                                          2001             2000
                                                                                                     --------------   --------------
<S>                                                                                                  <C>              <C>
ASSETS

Current Assets:
  Cash and cash equivalents                                                                           $     1,379      $    2,657
  Short-term investments                                                                                        -             698
  Accounts receivable, net                                                                                  4,710           8,800
  Prepaid expenses                                                                                            541           1,258
  Deferred income taxes                                                                                         -               -
                                                                                                     --------------   --------------
    Total current assets                                                                                    6,630          13,413

Property and Equipment, net                                                                                 1,747           1,397

Deposits and other assets                                                                                     654             730
                                                                                                     --------------   --------------
                                                                                                      $     9,031      $   15,540
                                                                                                     ==============   ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities:
  Accounts payable                                                                                    $     1,277      $    1,068
  Accrued expenses                                                                                          3,653           5,541
  Deferred revenue                                                                                          6,031           6,519
                                                                                                     --------------   --------------
    Total current liabilities                                                                              10,961          13,128

Long-term liabilities                                                                                          25               -

Stockholders' Equity (Deficit):
  Preferred stock, $.01 par value -
    Authorized - 2,000,000 shares, issued and outstanding - none                                                -               -
  Common stock, $.01 par value, authorized - 20,000,000 shares Issued - 7,055,316
    shares as of June 30, 2001 and 6,968,270 December 31, 2000 Outstanding -
      6,554,016 shares as of June 30, 2001 and 6,466,970 as of December 31, 2000                               71              70
  Capital in excess of par value                                                                           21,679          21,620
  Treasury stock                                                                                          (1,869)          (1,869)
  Accumulated deficit                                                                                    (21,089)         (15,869)
  Cumulative translation adjustment                                                                         (747)          (1,540)
                                                                                                     --------------   --------------
    Total stockholder's equity (deficit)                                                                  (1,955)           2,412
                                                                                                     --------------   --------------
                                                                                                      $     9,031      $   15,540
                                                                                                     ==============   ==============
</TABLE>

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

                              GENSYM CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)

<TABLE>
<CAPTION>
     (in thousands, except for per share amounts)
                                                                          Three months ended          Six months ended
                                                                               June 30,                   June 30,
REVENUES:                                                                2001          2000           2001          2000
                                                                      ----------    ----------     ----------    ----------
<S>                                                                   <C>           <C>            <C>           <C>
  Product                                                              $  1,427      $  3,268       $  3,203      $  6,234
  Service                                                                 3,574         4,005          7,231         8,140
                                                                      ----------    ----------     ----------    ----------
    Total revenues                                                        5,001         7,273         10,434        14,374

COST OF REVENUES
  Product                                                                   264           226            454           520
  Service                                                                 1,005         1,770          2,139         3,842
                                                                      ----------    ----------     ----------    ----------
    Total cost of revenues                                                1,269         1,996          2,593         4,362

                                                                      ----------    ----------     ----------    ----------
    Gross profit                                                          3,732         5,277          7,841        10,012

OPERATING EXPENSES:
  Sales and marketing                                                     2,772         4,057          5,865         8,384
  Research and development                                                1,489         1,957          3,194         3,762
  General and administrative                                              1,262         1,102          2,139         2,606
  Restructuring                                                           1,131             -          1,732             -
                                                                      ----------    ----------     ----------    ----------
                                                                          6,654         7,116         12,930        14,752
                                                                      ----------    ----------     ----------    ----------

    Operating loss                                                       (2,922)       (1,839)        (5,089)       (4,740)

OTHER (EXPENSE) INCOME, NET                                                  (4)           (9)           (22)           60
                                                                      ----------    ----------     ----------    ----------
  Loss before provision for income taxes                                 (2,926)       (1,848)        (5,111)       (4,680)

PROVISION FOR INCOME TAXES                                                   81            15            109            75
                                                                      ----------    ----------     ----------    ----------
  Net loss                                                             $ (3,007)     $ (1,863)      $ (5,220)     $ (4,755)
                                                                      ==========    ==========     ==========    ==========
  Basic and diluted loss per share                                     $  (0.46)     $  (0.29)      $  (0.80)     $  (0.75)
                                                                      ==========    ==========     ==========    ==========
  Weighted average common shares outstanding                              6,510         6,367          6,489         6,313
                                                                      ==========    ==========     ==========    ==========
</TABLE>

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

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

<TABLE>
<S>                                                                                           <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                                                                     $ (5,220)              $ (4,755)
 Adjustments to reconcile net loss to net
  cash used in operating activities:
    Depreciation and amortization                                                                  370                    431
    Non-cash portion of restructuring charge                                                       657                      -
    Changes in assets and liabilities:
     Accounts receivable                                                                         4,122                  2,013
     Prepaid expenses                                                                              696                    (56)
     Accounts payable                                                                              211                    299
     Accrued expenses                                                                           (1,652)                   788
     Other long-term liabilities                                                                    28                      -
     Deferred revenue                                                                             (469)                  (225)
                                                                                             -----------            -----------
       Net cash used in operating activities                                                    (1,257)                (1,505)
                                                                                             -----------            -----------
CASH FLOW FROM INVESTING ACTIVITIES:
 Sales of short-term investments                                                                   698                  1,787
 Purchases of property and equipment                                                              (747)                  (415)
 Decrease in other assets                                                                           76                     12
                                                                                             -----------            -----------
       Net cash provided by investing activities                                                    27                  1,384
                                                                                             -----------            -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Principal payments on capitalized lease obligations                                                (2)                     -
 Proceeds from exercise of stock options and issuance
  of common stock under stock plans                                                                 60                    580
                                                                                             -----------            -----------
       Net cash provided by financing activities                                                    58                    580
                                                                                             -----------            -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                           (106)                  (244)
                                                                                             -----------            -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                            (1,278)                   215

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                   2,657                  5,710
                                                                                             -----------            -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                                      $  1,379               $  5,925
                                                                                             ===========            ===========
</TABLE>

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

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

1. Operations

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

2. Basis of Presentation

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

3. Cash Equivalents and Investments

     The Company accounts for investments under Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities. The Company's investments are classified as held-to-
maturity and are recorded at amortized cost at December 31, 2000. Cash
equivalents are short-term, highly liquid investments with original maturity
dates of less than three months. There were no short-term investments held as of
June 30, 2001. Short-term investments held as of December 31, 2000 consisted of
corporate bonds with original maturity dates greater than three months that
mature within one year.

4. Recently Issued Accounting Pronouncements

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

In June 2001, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 141, "Business Combinations". SFAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method. The
Company does not expect the adoption of this statement to have a material impact
on their operations.

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


<PAGE>

5. Revenue Recognition

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

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

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

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

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

6. Comprehensive Income (loss)

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

<PAGE>

<TABLE>
<CAPTION>
                                                              Three months ended              Six months ended
                                                                   June 30,                       June 30,
                                                              2001           2000            2001           2000
                                                          -----------    -----------     -----------    -----------
<S>                                                       <C>            <C>             <C>            <C>
Comprehensive income (loss):
 Net loss                                                  $ (3,007)      $ (1,863)       $ (5,220)      $ (4,755)
 Other comprehensive income (loss)
  Foreign currency adjustment                                    24            (76)           (111)          (249)
                                                          -----------    -----------     -----------    -----------
    Comprehensive loss                                     $ (2,983)      $ (1,939)       $ (5,331)      $ (5,004)
                                                          ===========    ===========     ===========    ===========
</TABLE>

7. Loss Per Share

     In accordance with SFAS No. 128, Earnings per Share, basic loss per share
was computed by dividing net loss by the weighted average number of common
shares outstanding during the period. For the three- and six month periods ended
June 30, 2001 and 2000, the computation for diluted loss per share excludes the
effect of 1,673,022 and 1,395,138 shares, respectively, issuable from assumed
exercise of options, as their effect would be antidilutive.

8. Restructuring Charges and other

    a. Office closings

          In December 2000, there was a major emphasis on reducing the Company's
       worldwide sales infrastructure. At the time, the Company made the
       decision to close or reduce the size of several sales offices, as some
       were not being fully utilized, due to staff cuts, and others had cost
       structures that could not be supported by the revenue generated by the
       office. The Company recorded a $522,000 liability in December 2000
       associated with these closings. For the six months ended June 30, 2001,
       $193,000 was paid out against the accrual.

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

          In January 2001, the Company's management undertook a restructuring
       plan to reduce operating costs. The restructuring plan consists of
       reductions in employee headcount, totaling 45 employees, or approximately
       12% of the Company's workforce, from all operating groups and from all
       geographical areas. The $601,000 restructuring charge included on the
       accompanying condensed consolidated statement of operations consists
       entirely of severance related costs. Approximately $504,000 was paid out
       in the six-month period ended June 30, 2001, and it is expected that the
       remaining $97,000 will be paid by December 31, 2001.

    c. Restructuring charge in the quarter ended June 30, 2001

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

<PAGE>

          The $474,000 employee severance portion of the restructuring charge
       related entirely to the involuntary severance of 13 employees from all
       operating groups in the U.S. geographic area. Approximately $290,000 was
       paid in the three-month period ended June 30, 2001, and the remaining
       $184,000 is expected to be paid by December 31, 2001.

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

          In July and August 2001, the Company's management undertook separate
       and distinct restructuring plans to reduce operating costs. The
       restructuring plans consist of reductions in employee headcount, totaling
       12 employees in July and 50 employees in August. The employees severed in
       July were from all operating groups and from the U.S. geographic area.
       The employees severed in August were from all groups and from all
       geographic areas. The Company will record restructuring charges of
       approximately $125,000 and $770,000 during the quarter ended September
       30, 2001 related to the July 2001 and August 2001 reductions in
       headcount, respectively.

9. Segment Reporting

     On December 31, 1998, the Company adopted SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information. This pronouncement
established standards for public companies relating to the reporting of
financial and descriptive information about their operating segments in
financial statements. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by management in deciding how to allocate resources and in
assessing performance of the business.

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

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

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

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

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

<PAGE>

(in thousands)

<TABLE>
<CAPTION>
                                                                                          Unallocated
                                                          Expert            Network        Corporate
                                                       Manufacturing      Management      Costs/Assets        Total
                                                      ---------------    ------------    --------------    ------------
<S>                                                    <C>                <C>             <C>               <C>
Three months ended June 30, 2001
  Revenues                                               $  2,341          $  2,660                         $    5,001
                                                         ========          ========                         ==========
  Net contribution                                       $  1,130          $    523         $  (4,575)      $   (2,922)
                                                         ========          ========         =========       ==========
  Identifiable assets                                    $  2,852          $  3,486         $   2,693       $    9,031
                                                         ========          ========         =========       ==========
  Fixed asset depreciation                               $     39          $     59         $      87       $      185
                                                         ========          ========         =========       ==========

Three months ended June 30, 2000
  Revenues                                               $  3,588          $  3,685                         $    7,273
                                                         ========          ========                         ==========
  Net contribution                                       $    684          $  1,018         $  (3,541)      $   (1,839)
                                                         ========          ========         =========       ==========
  Identifiable assets                                    $  5,094          $  4,859         $  13,317       $   23,270
                                                         ========          ========         =========       ==========
  Fixed asset depreciation                               $     54          $     61         $     119       $      234
                                                         ========          ========         =========       ==========

<CAPTION>
                                                                                          Unallocated
                                                          Expert            Network        Corporate
                                                       Manufacturing      Management      Costs/Assets        Total
                                                      ---------------    ------------    --------------    ------------
<S>                                                    <C>                <C>             <C>               <C>
Six months ended June 30, 2001
  Revenues                                               $  5,202          $  5,232                         $   10,434
                                                         ========          ========                         ==========
  Net contribution                                       $  2,376          $    897         $  (8,362)      $   (5,089)
                                                         ========          ========         =========       ==========
  Identifiable assets                                    $  2,852          $  3,486         $   2,693       $    9,031
                                                         ========          ========         =========       ==========
  Fixed asset depreciation                               $     75          $    123         $     172       $      370
                                                         ========          ========         =========       ==========

Six months ended June 30, 2000
  Revenues                                               $  6,571          $  7,803                         $   14,374
                                                         ========          ========                         ==========
  Net contribution                                       $    685          $  2,130         $  (7,555)      $   (4,740)
                                                         ========          ========         =========       ==========
  Identifiable assets                                    $  5,094          $  4,859         $  13,317       $   23,270
                                                         ========          ========         =========       ==========
  Fixed asset depreciation                               $    107          $    115         $     209       $      431
                                                         ========          ========         =========       ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                              Three months ended                    Six months ended
                                                   June 30,                             June 30,
                                           --------------------------          --------------------------
                                             2001              2000              2001              2000
                                           --------          --------          --------          --------
<S>                                        <C>               <C>               <C>               <C>
               United States                   54%               55%               58%               56%
               United Kingdom                  12%                7%               10%               10%
               Rest of Europe                  17%               28%               19%               22%
               Other                           17%               10%               13%               12%
                                           --------          --------          --------          --------
                                              100%              100%              100%              100%
                                           --------          --------          --------          --------
</TABLE>

<PAGE>

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


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

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

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

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

     On August 6, 2001, Lowell B. Hawkinson, a founder of Gensym, succeeded
Patrick Courtin as Chairman, President and Chief Executive Officer. Mr.
Hawkinson previously served as Chairman and Chief Executive Officer of Gensym
from 1986 to 1999.

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

     As part of the August 2001 restructuring plan, Gensym has realigned its
software and service products into two major product lines: one comprised of
Gensym's G2(R)/Integrity/Optegrity(TM) and related products and the other
comprised of Gensym's new NetCure(TM) product. The G2/Integrity/Optegrity
product line is well established and currently provides almost all of the
Company's revenue. NetCure is a recently released product with powerful out-of-
the-box capability for network root-cause analysis and event/fault correlation.

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

<PAGE>

Results of Operations

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

<TABLE>
<CAPTION>
                                                           Three months ended                     Six months ended
                                                                 June 30,                              June 30,
                                                         2001               2000               2001               2000
                                                       --------           --------           --------           --------
<S>                                                    <C>                <C>                <C>                <C>
REVENUES:
 Product                                                 28.5%              44.9%              30.7%              43.4%
 Service                                                 71.5%              55.1%              69.3%              56.6%
                                                       --------           --------           --------           --------
  Total revenues                                        100.0%             100.0%             100.0%             100.0%

COST OF REVENUES
 Product                                                  5.3%               3.1%               4.4%               3.6%
 Service                                                 20.1%              24.3%              20.5%              26.7%
                                                       --------           --------           --------           --------
  Total cost of revenues                                 25.4%              27.4%              24.9%              30.3%
                                                       --------           --------           --------           --------
  Gross profit                                           74.6%              72.6%              75.1%              69.7%

OPERATING EXPENSES:
 Sales and marketing                                     55.4%              55.8%              56.2%              58.4%
 Research and development                                29.8%              26.9%              30.6%              26.2%
 General and administration                              25.2%              15.2%              20.5%              18.1%
 Restructuring                                           22.6%                 -               16.6%                 -
                                                       --------           --------           --------           --------
                                                        133.0%              97.9%             123.9%             102.7%

  Operating loss                                        (58.4%)            (25.3%)            (48.8%)            (33.0%)

OTHER INCOME, NET                                        (0.1%)             (0.1%)             (0.2%)              0.4%
                                                       --------           --------           --------           --------
  Income loss before provision
    for income taxes                                    (58.5%)            (25.4%)            (49.0%)            (32.6%)

PROVISION FOR INCOME TAXES                                1.6%               0.2%               1.0%               0.5%
                                                       --------           --------           --------           --------
  Net loss                                              (60.1%)            (25.6%)            (50.0%)            (33.1%)
                                                       ========           ========           ========           ========
</TABLE>

<PAGE>

Three and Six Months Ended June 30, 2001 and 2000

Revenues

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

     Total revenues for the three and six months ended June 30, 2001 were $5.0
million and $10.4 million, respectively. This represents a decrease of $2.3
million, or 31.2%, for the three-month period ended June 30, 2001 as compared to
the same period in 2000 and a decrease of $3.9 million, or 27.4%, for the six-
month period ended June 30, 2001 as compared to the same period in 2000. For the
three-and six-month periods ended June 30, 2001, compared to the same periods of
fiscal 2000, the decrease in total revenue was primarily attributable to
decreased sales of product licenses. Both domestic and international markets
contributed to the drop in revenues. For the three and six months ended June 30,
2001 international revenues as a percent of total were 46% and 42%,
respectively, for the same periods of 2000 international revenues were 45% and
44%.

     Product. Product revenues for the three and six months ended June 30, 2001
were $1.4 million and $3.2 million, respectively, a decrease of $1.8 million, or
56.3%, and a decrease of $3.0 million, or 48.6%, from the comparable periods of
fiscal 2000. Expert Manufacturing's product revenue decreased $1.1 million for
three months ended June 30, 2001 and decreased $1.1 million for six months ended
June 30, 2001, due to the Company's shift in focus to selling network management
products. Network Management's product revenue decreased $0.7 million for three
months ended June 30, 2001 and $1.9 million for six months ended June 30, 2001.
due to the general slowdown in the telecommunications industry.

     Service. Service revenues include customer service support, consulting and
training. For the three and six months ended June 30, 2001 service revenues were
$3.6 million and $7.2 million, respectively, a decrease of $0.4 million, or
10.8%, and a decrease $0.9 million, or 11.2%, from the comparable periods of
fiscal 2000. The decrease in service revenue was primarily due to a decline in
consulting revenue activity, to a large extent, is driven by product sales.
Consulting revenue decreased $0.4 million and $0.6 million for the respective
periods.

Cost of Revenues

     Cost of revenues primarily consists of consulting labor, technical support
costs, and the costs of material and labor involved in producing and
distributing the Company's software. These costs for the three and six months
ended June 30, 2001 were $1.3 million and $2.6 million, respectively. This was a
decrease of $0.7 million, or 36.4%, and a decrease of $1.8, or 40.6%, from the
comparable periods of 2000. The decrease in costs for the three and six months
ended June 30, 2001 versus the comparable periods in 2000 was due primarily to a
decrease in personnel costs related to reduced staffing in consulting services
amounting to $0.5 million for the three months ended June 30, 2001 and $1.0
million for the six months ended June 30, 2001. This was associated with
reductions in headcount of 3 and 25 in the same periods. Gross margin percentage
of 74.6% for the three months ended June 30, 2001 increased from 72.6% for the
comparable quarter in fiscal 2000. Gross margin for the six months ended June
30, 2001 of 75.1% increased from the 69.7% gross margin for the comparable
period in fiscal 2000. The increases in gross margin resulted primarily from the
lower consulting services costs.

Operating Expenses

     Sales and Marketing. Sales and marketing expenses consist primarily of
costs associated with personnel involved in the sales and marketing process,
sales commissions, sales facilities, travel and lodging, trade shows and
seminars, advertising, and promotional materials. These expenses for the

<PAGE>

three and six months ended June 30, 2001 were $2.8 million and $5.9 million,
respectively. The costs decreased $1.3 million, or 31.7%, from $4.1 million in
the comparable quarter for fiscal 2000 and decreased $2.5 million, or 30.0%,
from $8.4 million in the comparable six month period in 2000. The decreases were
primarily due to lower personnel costs associated with reduced headcount which
resulted in a decrease in payroll and related expenses of $0.7 million and $1.5
million for the three and six months periods. As a percentage of revenues, sales
and marketing expenses were 55.4% and 56.2%, respectively, for the three and six
months ended June 30, 2001 as compared to 55.8% and 58.4% for the comparable
periods in fiscal 2000. The increase was primarily due to lower sales.

     Research and Development. Research and development expenses consist
primarily of costs of personnel, equipment, and facilities. These expenses for
the three and six months ended June 30, 2001 were $1.5 million and $3.2 million,
respectively, a decrease of $0.5 million, or 23.9%, and $0.6 million, or 15.1%,
from $2.0 million and $3.8 million in the comparable periods of fiscal 2000. The
decreased expense was primarily due to a decrease in personnel-related costs as
a result of reduced headcount which generated a decrease of payroll and related
expenses of $0.2 million and $0.4 million for the three and six months periods.
As a percentage of revenues, research and development expenses were 29.8% and
30.6%, respectively, for the three and six months ended June 30, 2001 as
compared to 26.9% and 26.2% for the comparable periods in fiscal 2000. The
increase was primarily due to lower sales.

     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 and six months ended June 30, 2001 were $1.3 million and $2.1 million,
respectively, an increase of $0.2 million, or 14.5%, and a decrease of $0.5
million, or 17.9%, for the comparable periods in fiscal 2000. . The decrease in
expenses of $0.5 million for six month period was due to $0.3 million decrease
in compensation related costs and reduced facility and support costs in
connection with the Company's prior restructuring actions. As a percentage of
revenues, general and administrative expenses were 25.2% and 20.5% for the three
and six months ended June 30, 2001 as compared to 15.2% and 18.1% for the
comparable periods in fiscal 2000. The increase was primarily due to lower
sales.

     Restructuring Charge. In January 2001 and April 2001 the Company's
management undertook restructuring plans to reduce operating costs. The
restructuring plans consist of reductions in employee headcount and the write-
off of assets associated with liquidated subsidiaries. For the three- and six-
month periods ended June 30, 2001 the Company incurred restructuring charges of
$1,131,000 and $1,732,000, respectively. The reduction in headcount totaled
approximately 25% and 10% of the Company's employees in January and April,
respectively. For the three- and six-month period ended June 30, 2001 the
restructuring charge included a non-cash amount of $657,000 related primarily to
cumulative translation adjustments associated with the closing of foreign
offices and liquidation of subsidiaries in Europe, the far east and Asia-
Pacific. Approximately $794,000 was paid for employee severance in the six
months ended June 30, 2001.

Other Income (Loss), Net

     Other income (loss), net consists primarily of interest income and foreign
exchange transaction gains and losses. Other income (loss), net for the three
and six months ended June 30, 2001 was $(4,000) and $(22,000), respectively, as
compared to $(9,000) and $60,000 for the comparable periods of fiscal 2000. The
decrease in other income (loss), net for the six months ended June 30, 2001
compared to the same period in 2000 was primarily due to decreased interest
income as a result of lower cash balances.

Income Taxes

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

<PAGE>

Liquidity and Capital Resources

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

     The Company's June 30, 2001 cash and cash equivalents balance of $1.4
million decreased $1.3 from December 31, 2000. Cash used for operations in the
first six months of 2001 was $1.3 million, which consisted of the net loss of
$5.2 million offset largely by a decrease in accounts receivable of $4.1
million.

     Cash provided by investing activities for the first six months of 2001 was
$27,000 which primarily consisted of $698,000 received from the sale of short-
term securities and a $76,000 decrease in other assets, offset by $747,000 used
to purchase equipment and leasehold improvements.

     Cash provided by financing activities for the first six months of 2001 was
$58,000 and resulted primarily from the issuance of stock under the Company's
stock purchase plan. Cash decreased $106,000 due to the effect of currency
fluctuation.

     The Company has incurred operating losses for each of the three years in
the period ended December 31, 2000 and for the six months ended June 30, 2001,
and will need to obtain additional funding or alternative means of financial
support, or both to continue as a going concern. Management's operational plan
for 2001 relies heavily on achieving operating profitability in the fourth
quarter of 2001 and beyond. This return to profitability is based on expense
control, projected annual cost reductions (excluding restructuring charges) of
approximately $ 11.5 million related to reduced headcount, office closings,
travel and general costs of doing business, and increased revenues from new and
existing products in the e-Infrastructure marketplace. Subsequent to June 30,
2001, the Company revised the 2001 operating plan to further reduce operating
costs in order to achieve operating profitability in the fourth quarter of 2001
and beyond. The additional reductions in operating costs total $2.0 million, and
result from the July and August severance actions. Management is also seeking to
identify additional funding sources of an equity and/or debt nature as well as
the licensing and/or asset sale of some of the new technology developed by the
Company in connection with its prior strategy of developing out-of-the box
software solutions. However, there can be no assurance that such plans will be
successful or that such funding or financial support will be available or
adequate.

     On March 28, 2001, the Company entered into a credit facility with Silicon
Valley Bank. The credit facility provides the Company the ability to borrow up
to 80% of the Company's qualified and eligible gross domestic accounts
receivable up to a maximum of $2.5 million. Borrowings under this agreement will
be at an interest rate of 2% per month of the average gross daily purchase
account balance, plus an administration fee of 1% of gross purchased account
receivables. This agreement is subject to certain restrictive covenants,
including a monthly adjusted quick ratio covenant. At June 30, 2001 the Company
did not have any borrowings outstanding under this facility. Also at June 30,
2001, the Company was not in compliance with the adjusted quick ratio covenant.
Amounts under this credit facility are secured by substantially all of the
corporate assets of Gensym Corporation

Factors That May Affect Future Results

     The following important factors, among others, could cause Gensym's 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 the
Company's management from time to time.

     Liquidity. The Company has incurred operating losses for each of the three
years in the period ended December 31, 2000 and for the six months ended June,
2001, and will need to obtain additional

<PAGE>

funding or alternative means of financial support, or both to continue as a
going concern. Management's operational plan relies heavily on achieving
operating profitability in the fourth quarter of 2001 and beyond. This return to
profitability is based on expense control, cost reductions, and continued
revenue from new and existing customers. Management is also seeking to identify
additional funding sources of an equity and/or debt nature as well as the
licensing and/or asset sale of some of the new technology developed by the
Company in their prior strategy of developing out-of-the box software solutions.
However, there can be no assurance that such plans will be successful or that
such funding or financial support will be available or adequate.

     Possible Delisting from the Nasdaq National Market. On June 7, 2001, the
Company, pursuant to Marketplace Rule 4815(b), received notice from the Nasdaq
National Market (the "NNM") that the NNM had determined to delist the Company's
common stock from the NNM, effective at the opening of business on June 15,
2001, unless the Company requests a hearing prior to that time. Based on the
Company's review of its business plan, Gensym requested a hearing to appeal
Nasdaq's decision. A hearing request will stay the delisting of the Company's
securities pending a decision by the Nasdaq Listing Qualifications Panel (the
"Panel"). In its notice to the Company, Nasdaq informed Gensym that, based on
the Company's financial statements for the quarter ended March 31, 2001, Gensym
was no longer in compliance with the minimum $4,000,000 net tangible assets
requirement for the NNM under Marketplace Rule 4450(a)(3). Until the Panel
reaches its decision, the Company's common stock will remain listed on the NNM.
On July 12, 2001, the Company had an oral hearing with the NNM and presented and
reviewed the appropriate information related to the delisting. The Company is
awaiting final determination of that meeting. There can be no assurance as to
when the Panel will reach a decision, or that such a decision will be favorable
to Gensym. An unfavorable decision will result in the immediate delisting of the
Company's common stock from NNM. If delisted, the Company expects that its
common stock will be eligible for listing on either the Nasdaq SmallCap Market
or the OTCBB.

     Emerging Market for Intelligent Operations Management Systems.
Substantially all of the Company's revenues are derived from the licensing and
support of software platforms and products for expert manufacturing, network
management and supply-chain design. Although many organizations have begun to
deploy, or have announced plans to deploy, such e-business infrastructure
systems, these systems are different from the basic monitoring and control
systems that are traditionally employed by these organizations. There can be no
assurance that these organizations will be able to introduce e-business
infrastructure management systems successfully, nor that such systems will gain
widespread acceptance. In addition, the timing of the implementation of e-
business infrastructure management systems by organizations may be affected by
economic factors, government regulations, and other factors. Delays in the
introduction of intelligent operations management systems or the failure of
these systems to gain widespread market acceptance would materially and
adversely affect the Company's business, results of operations, or financial
condition. In addition, the Company believes that end-users in its markets are
increasingly seeking application-specific products and components as well as
complete solutions, rather than general software tools with which to develop
application-specific functionality and solutions. Meeting this demand has
required the Company to modify its sales approach. The Company is also
increasingly reliant on value-added resellers and systems integrators to satisfy
market requirements. The modified sales approach may also lengthen the Company's
average sales cycle. Failure by the Company to respond appropriately to shifts
in market demand could have a material adverse effect on the Company's business,
results of operations, or financial condition.

     Reliance Upon Indirect Distribution Channels and Risks Associated with
Strategic Partner Relationships. The Company sells its products in part through
value-added resellers, systems integrators, original equipment manufacturers and
distributors, which are not under the control of the Company. Sales of the
Company's products by value-added resellers and systems integrators represented
31% and 30% of the Company's product revenues in the first six months of 2001
and 2000, respectively. In January 2001, the Company significantly reduced its
direct sales force for its expert manufacturing products. The Company continues
to manage its relationships with existing expert manufacturing customers. But
Gensym now relies solely on its indirect sales partners for sales of its expert
manufacturing products to new customers. The loss of major original equipment
manufacturers or resellers of the Company's products, a significant decline in
their sales, or difficulty on the part of

<PAGE>

such third-party developers or resellers in developing successful G2-based or
other Company core technology products and applications could have a material
adverse effect on the Company's business, results of operations, or financial
condition. There can be no assurance that the Company will be able to attract or
retain additional qualified third-party resellers, or that third-party resellers
will be able to effectively sell and implement the Company's products. In
addition, the Company relies on third-party resellers to provide post-sales
service and support to its customers, and any deficiencies in such service and
support could adversely affect the Company's business, results of operations, or
financial condition.

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

     Variability of Quarterly Operating Results. The Company has experienced,
and may experience in the future, significant quarter-to-quarter fluctuations in
its operating results. The Company has recorded quarterly losses in each quarter
in 2000 and for the first two quarters of 2001, and there can be no assurance
that revenue growth or profitable operations can be attained on a quarterly or
annual basis in the future. The Company's sales cycle typically ranges from six
to 12 months, and the cost of acquiring the Company's software, building and
deploying applications, and training users represents a significant expenditure
for customers. The Company's relatively long sales cycle and high license fees,
together with fixed short-term expenses, can cause significant variations in
operating results from quarter to quarter, based on a relatively small variation
in the timing of major orders. Factors such as the timing of new product
introductions and upgrades and the timing of significant orders could contribute
to this quarterly variability. In addition, the Company ships software products
within a short period after receipt of an order and typically does not have a
material backlog of unfilled orders of software products. Therefore, revenues
from software licenses in any quarter are substantially dependent on orders
booked in that quarter. Historically, a majority of each quarter's revenues from
software licenses has come from license contracts that have been effected in the
final weeks of that quarter. The revenues for a quarter typically include a
number of large orders. If the timing of any of these orders is delayed, it
could result in a substantial reduction in revenues for that quarter. The
Company's expense levels are based in part on expectations of future revenue
levels. A shortfall in expected revenues could therefore result in a
disproportionate decrease in the Company's net income. The Company's financial
performance has generally been somewhat weaker in the first quarter than in the
other fiscal quarters, due to customer purchasing patterns.

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

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

<PAGE>

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

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

     Risks Associated With International Operations. The Company's international
revenues represented 46% and 45% of total revenues in the first three months of
2001 and 2000, respectively. Revenues are categorized by the Company according
to product shipment destination and therefore do not necessarily reflect the
ultimate country of installation. The international portion of the Company's
business is subject to a number of inherent risks, including difficulties in
building and managing international operations, difficulties in localizing
products and translating documentation into local languages, fluctuations in the
value of international currencies including the euro, fluctuating import/export
duties and quotas, and unexpected regulatory, economic, or political changes in
international markets. In particular, the continuing economic problems in Asia
pose challenges to the Company's sales and marketing operations in that region.
There can be no assurance that these factors will not adversely affect the
Company's business, results of operations, or financial condition.

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

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

<PAGE>

based products, certain competitors in this category have greater financial and
other resources than Gensym and might introduce new or improved products to
compete with G2, possibly at lower prices.

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

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

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

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

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

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

<PAGE>

employees or the Company's inability to attract and retain other qualified
employees or to adequately replace key personnel who depart the Company could
have a material adverse effect on the Company's business, results of operations,
or financial condition.

<PAGE>

                                  SIGNATURES

     Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report on Form 10-Q/A for the quarter ended
June 30, 2001 to be signed on its behalf by the undersigned thereunto duly
authorized.

                                   GENSYM CORPORATION



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



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