<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-Q


(Mark one)

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

                 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000

                                      OR

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


                       COMMISSION FILE NUMBER:  0-27696

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

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

                            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 August 1, 2000 there were 6,400,028 shares of the Registrant's Common
Stock outstanding.

                                       1
<PAGE>

                              GENSYM CORPORATION
                                Form 10-Q INDEX

                         PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
                                                                        Page No.
                                                                        --------
<S>        <C>                                                         <C>
Item 1.    Condensed Consolidated Financial Statements:

           Condensed Consolidated Balance Sheet June 30, 2000 and
           December 31, 1999...........................................      3

           Condensed Consolidated Statements of Operations for the
           three and six months ended June 30, 2000 and 1999...........      4

           Condensed Consolidated Statements of Cash Flows for the
           six months ended June 30, 2000 and 1999.....................      5

           Notes to Condensed Consolidated Financial Statements........    6-9

Item 2.    Management's Discussion and Analysis of
           Financial Condition and Results of Operations...............  10-17

Item 3.    Quantitative and Qualitative Disclosures About Market Risk..     17


                         PART II. OTHER INFORMATION

Item 4.    Submission of Matters to a Vote of Security Holders.........     19


Item 6.    Exhibits and Reports on Form 8-K............................     19

           Signatures..................................................     20
</TABLE>

                                       2
<PAGE>

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


                      GENSYM CORPORATION AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (Unaudited)

<TABLE>
<CAPTION>
(in thousands)                                     June 30,     December 31,
                                                     2000           1999
                                                     ----           ----
<S>                                                <C>          <C>
ASSETS

Current Assets:
      Cash and cash equivalents                    $ 5,925        $ 5,710
      Short-term investments                         4,188          5,975
      Accounts receivable, net                       7,477          9,528
      Prepaid expenses                               2,345          2,352
      Deferred income taxes                          1,261          1,261
                                                  --------       --------
            Total current assets                    21,196         24,826

Property and Equipment, net                          1,279          1,295

Long-term deferred income taxes                        612            612
Deposits and other assets                              183            201
                                                  --------       --------

                                                  $ 23,270       $ 26,934
                                                  ========       ========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
      Accounts payable                            $    677       $    387
      Accrued expenses                               5,396          4,694
      Deferred revenue                               6,700          6,931
                                                  --------       --------
            Total current liabilities               12,773         12,012


Stockholders' Equity:
      Common stock                                      69             67
      Capital in excess of par value                21,501         20,923
      Treasury stock                                (1,869)        (1,869)
      Accumulated deficit                           (7,809)        (3,053)
      Cumulative translation adjustment             (1,395)        (1,146)
                                                  --------       --------
            Total stockholder's equity              10,497         14,922
                                                  --------       --------

                                                  $ 23,270       $ 26,934
                                                  ========       ========
</TABLE>
             The accompanying notes are an integral part of these
                 condensed consolidated financial statements.

                                       3
<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,
                                                    ---------------------               ---------------------
                                                    2000             1999               2000             1999
                                                    ----             ----               ----             ----
<S>                                           <C>              <C>                <C>             <C>
REVENUES
   Product                                        $ 3,268          $ 5,337            $ 6,234          $ 9,397
   Service                                          4,005            4,404              8,140            8,700
                                                  -------          -------            -------          -------
    Total revenues                                  7,273            9,741             14,374           18,097

COST OF REVENUES                                    1,996            2,180              4,362            4,325
                                                  -------          -------            -------          -------

    Gross profit                                    5,277            7,561             10,012           13,772
                                                  -------          -------            -------          -------

OPERATING EXPENSES:
   Sales and marketing                              4,057            4,529              8,384            9,007
   Research and development                         1,957            1,768              3,762            3,325
   General and administrative                       1,102            1,121              2,606            2,281
                                                  -------          -------            -------          -------
                                                    7,116            7,418             14,752           14,613
                                                  -------          -------            -------          -------

    Operating income (loss)                        (1,839)             143             (4,740)            (841)

OTHER INCOME (LOSS), NET                               (9)             117                 60              228
                                                  -------          -------            -------          -------
Income (loss) before provision
    for income taxes                               (1,848)             260             (4,680)            (613)

PROVISION FOR INCOME TAXES                             15               37                 75               82
                                                  -------          -------            -------          -------
    Net income (loss)                             $(1,863)           $ 223            $(4,755)          $ (695)
                                                  =======          =======            =======          =======
    Basic and diluted earnings
         (loss) per share                         $ (0.29)          $ 0.04            $ (0.75)         $ (0.11)
                                                  =======          =======            =======          =======

    Weighted average common shares
         outstanding - Basic                        6,367            6,099              6,313            6,125
                                                  =======          =======            =======          =======

    Weighted average common shares
         outstanding - Diluted                      6,367            6,103              6,313            6,125
                                                  =======          =======            =======          =======
</TABLE>
             The accompanying notes are an integral part of these
                 condensed consolidated financial statements.

                                       4
<PAGE>

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

<TABLE>
<CAPTION>
(in thousands)
                                                                                           Six months ended
                                                                                                June 30,
                                                                                        2000              1999
                                                                                    -------------     -------------
<S>                                                                                     <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                                            $ (4,755)           $ (695)
     Adjustments to reconcile net loss to net
       cash used in operating activities:
           Depreciation and amortization                                                      431               573
           Changes in assets and liabilities:
                 Accounts receivable                                                        2,013              (420)
                 Prepaid expenses                                                             (56)             (300)
                 Accounts payable                                                             299               129
                 Accrued expenses                                                             788               119
                 Deferred revenue                                                            (225)               21
                                                                                    -------------     -------------

                        Net cash used in operating activities                              (1,505)             (573)
                                                                                    -------------     -------------


CASH FLOW FROM INVESTING ACTIVITIES:
     Sales of short-term investments                                                        1,787               838
     Purchases of property and equipment                                                     (415)             (161)
     Decrease in other assets                                                                  12                 7
                                                                                    -------------     -------------

                        Net cash provided by investing activities                           1,384               684
                                                                                    -------------     -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Purchase of treasury stock                                                                 -              (591)
     Proceeds from exercise of stock options under stock plans                                580               221
                                                                                    -------------     -------------

                        Net cash provided by (used in) financing activities                   580              (370)
                                                                                    -------------     -------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                      (244)             (311)
                                                                                    -------------     -------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                          215              (570)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                              5,710            13,696
                                                                                    -------------     -------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                                  $ 5,925           $13,126
                                                                                    =============     =============

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

                                       5
<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.  Beginning in 2000, the Company
realigned the way it evaluates its operations.  The Company is organized into
two worldwide business operations: 1) the Expert Operation product line unit,
which focuses on expanding Gensym's presence in chemical, oil and gas,
pharmaceutical, and other manufacturing industries; and 2) the e-Infrastructure
product line unit, which focuses on building Gensym's entrance into the
Business-to-Business electronic infrastructure of networks, e-marketplace
entrants, and Fortune 1000 companies.


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 ensure that the
information presented is 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, 2000 and the results of its
operations for the three- and six-month periods ended June 30, 2000 and 1999 and
its cash flows for the six 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
Annual Report on Form 10-K filed with the SEC on March 29, 2000.  The results of
operations for the interim period are not necessarily indicative of the results
of operations for the full year.


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 June 30, 2000 and December 31,
1999.  Cash equivalents are short-term, highly liquid investments with original
maturity dates of less three months or less.  Short-term investments held as of
June 30, 2000 and December 31, 1999 consist of U.S. and municipal agency bonds
and commercial paper with original maturity dates greater than three months that
mature within one year.


4.  Recently Issued Accounting Pronouncements

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

     In June 1998, the Financial Accounting Standards Board, (FASB), issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting

                                       6
<PAGE>

and reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133, as amended by SFAS Nos. 137 and 138, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. SFAS No. 133 is not expected to
have a material impact on the Company's consolidated financial statements.


5.  Revenue

     Product revenues are recognized upon shipment or upon the completion of all
significant obligations by the Company, whichever is later, provided that the
fee is fixed or determinable and deemed collectible by management.  If
conditions for acceptance exist subsequent to delivery, revenues are recognized
upon customer acceptance.  Revenues from the sale of multi-copy 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.  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.  Software maintenance fees are recognized as
revenue ratably over the period to which they relate.  Deferred revenue
primarily represents advance billings for software services, which include
maintenance, consulting, training and license prepayment fees.

     The Company follows the provisions of the American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-9 in December of 1998. SOP 98-9 requires use
of the residual method of recognition of revenues when vendor-specific objective
evidence exists for undelivered elements but does not exist for delivered
elements of a software arrangement.


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 accumulated deficit and capital in excess of par value
in the equity section of the balance sheet.  The components of comprehensive
income for the three- and six-month periods ended June 30, 2000 and 1999 are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                      Three months ended                  Six months ended
                                                            June 30,                           June 30,
                                                     2000            1999               2000            1999
                                                 -------------   -------------      -------------   -------------
<S>                                                    <C>               <C>              <C>              <C>
Comprehensive income (loss):
     Net income (loss)                                 $(1,863)          $ 223            $(4,755)         $ (695)
     Other comprehensive loss
         Foreign currency adjustment                       (76)           (171)              (249)           (350)
                                                 -------------   -------------      -------------   -------------

            Comprehensive income (loss)                $(1,939)           $ 52            $(5,004)        $(1,045)
                                                 =============   =============      =============   =============

</TABLE>

7.    Earnings (Loss) Per Share

     In accordance with SFAS No. 128, Earnings per Share, basic earnings (loss)
per share was computed by dividing net earnings loss by the weighted average
common shares outstanding during the three- and six-month periods ended June 30,
2000 and 1999.  Diluted earnings (loss) per share was computed using the
weighted average number of common and potential common shares outstanding in
accordance with the treasury stock method. For the three months ended June 30,
1999, 4,050 potential shares of common stock from stock options were included in
the computation of

                                       7
<PAGE>

diluted earnings (loss) per share. For the three- and six-month periods ended
June 30, 2000 1,395,138 stock options were not included in diluted weighted
average shares outstanding, as the effect would have been antidilutive. For the
six-month period ended June 30, 1999, 797,153 stock options were not included in
diluted weighted average common shares outstanding.


8.    Segment Reporting

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

     Beginning in 2000, the Company realigned the way it evaluates its
operations.  The Company views its business as having two worldwide business
operations: 1) the Expert Operation product line unit, which focuses on
expanding Gensym's presence in chemical, oil and gas, pharmaceutical, and other
manufacturing industries; and 2) the e-Infrastructure product line unit, which
focuses on building Gensym's entrance into the Business-to-Business electronic
infrastructure of networks, e-marketplace entrants, and Fortune 1000 companies.

     These business operations have their own specialized sales, 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.

     The Company markets and sells its products through its direct sales force
in the United States, Europe, Africa, and Asia, as well as through selected
distributors in other countries, including Japan.  The Company also sells its
products through value-added resellers and systems integrators, who provide
consulting services and integrated solutions to their customers.  The Company
further licenses technology to original equipment manufacturers, or OEMs, which
embed the technology within their product offerings.

     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:

(in thousands)

<TABLE>
<CAPTION>

                                                                       Unallocated
                                     Expert                             Corporate
                                    Operation      e-Infrastructure      Costs          Total
                                  --------------  -----------------  --------------  ------------
<S>                                      <C>                 <C>            <C>           <C>
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
                                  ==============  ================== ==============  ============
</TABLE>


                                       8
<PAGE>

<TABLE>
<CAPTION>
                                                                       Unallocated
                                     Expert                             Corporate
                                    Operation      e-Infrastructure      Costs          Total
                                  --------------  ------------------  -------------  ------------
<S>                                      <C>                 <C>            <C>          <C>
Three months ended
June 30, 1999
    Revenues                             $ 3,836             $ 5,905                     $  9,741
                                  ==============  ==================                 ============
    Net contribution                     $   898             $ 2,489        $(3,244)     $    143
                                  ==============  ================== ==============  ============
    Identifiable assets                  $ 4,098             $ 6,154        $16,705      $ 26,957
                                  ==============  ================== ==============  ============
    Fixed asset depreciation             $    79             $    82        $   123      $    284
                                  ==============  ================== ==============  ============
</TABLE>

<TABLE>
<CAPTION>
                                                                       Unallocated
                                     Expert                             Corporate
                                    Operation      e-Infrastructure      Costs          Total
                                  --------------  ---------------------------------  ------------
<S>                                      <C>                 <C>            <C>          <C>
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>

<TABLE>
<CAPTION>
                                                                       Unallocated
                                     Expert                             Corporate
                                    Operation      e-Infrastructure      Costs          Total
                                  --------------  ------------------  -------------  ------------
<S>
Six months ended                         <C>                <C>             <C>          <C>
June 30, 1999
    Revenues                             $ 7,871            $ 10,226                     $ 18,097
                                  ==============  ==================                 ============
    Net contribution                     $ 1,452            $  3,981        $(6,274)     $   (841)
                                  ==============  ================== ==============  ============
    Identifiable assets                  $ 4,098            $  6,154        $16,705      $ 26,957
                                  ==============  ================== ==============  ============
    Fixed asset depreciation             $   147            $    152        $   274      $    573
                                  ==============  ================== ==============  ============
</TABLE>


                                       9
<PAGE>

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


     This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of section 21E of the Securities Exchange Act, as amended.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. These forward-
looking statements involve risks and uncertainties and are not guarantees of
future performance. Without limiting the foregoing, the words "believes,"
"anticipates," "plans," "expects," "intends" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated by such forward-looking statements. These factors include,
without limitation, those set forth below under the caption "Certain Factors
That May Affect Future Results".


OVERVIEW

     The Company was incorporated in 1986 to deliver adaptive software products
for modeling and managing complex business processes. 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.

     The Company markets and sells its products through its direct sales force
in the United States, Europe, Africa, and Asia, as well as through selected
distributors in other countries, including Japan. The Company also sells its
products through value-added resellers and systems integrators, who provide
consulting services and integrated solutions to their customers.  The Company
further licenses technology to OEMs, which embed the technology within their
product offerings.

     Beginning in 2000, the Company realigned its organization to create two
worldwide business units, each of which is responsible for it's own sales,
technical support, and consulting services. The Expert Operations product line
unit serves Gensym's core customers in the chemical, oil and gas, pharmaceutical
and other manufacturing-intensive industries with such leading products as G2
and NeurOn-Line. The new e-Infrastructure product line unit focuses on the
business-to-business electronic infrastructure of networks, e-marketplace
entrants and Fortune 1000 companies by offering both current technology
platforms, such as Integrity (formerly known as OpEx), and new products such as
e-SCOR, which will further address customers' Web-based, dynamic supply chains,
and NetSleuth, which facilitates the discovery, mapping and analysis of IP
networks.

                                       10
<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,
                                                  2000           1999              2000           1999
                                               -----------    ------------      -----------    ------------
<S>                                                  <C>             <C>              <C>             <C>
REVENUES:
    Product                                           44.9%           54.8%            43.4%           51.9%
    Service                                           55.1%           45.2%            56.6%           48.1%
                                               -----------    ------------      -----------    ------------
      Total revenues                                 100.0%          100.0%           100.0%          100.0%

COST OF REVENUES                                      27.4%           22.4%            30.3%           23.9%
                                               -----------    ------------      -----------    ------------

      Gross profit                                    72.6%           77.6%            69.7%           76.1%
                                               -----------    ------------      -----------    ------------

OPERATING EXPENSES:
    Sales and marketing                               55.8%           46.5%            58.4%           49.8%
    Research and development                          26.9%           18.1%            26.2%           18.4%
    General and administration                        15.2%           11.5%            18.1%           12.6%
                                               -----------    ------------      -----------    ------------
                                                      97.9%           76.1%           102.7%           80.8%

      Operating income (loss)                       (25.3%)            1.5%          (33.0%)          (4.7%)

OTHER INCOME, NET                                    (0.1%)            1.2%             0.4%            1.3%
                                               -----------    ------------      -----------    ------------

      Income loss before provision
         for income taxes                           (25.4%)            2.7%          (32.6%)          (3.4%)

PROVISION FOR INCOME TAXES                             0.2%            0.4%             0.5%            0.4%
                                               -----------    ------------      -----------    ------------

      Net income (loss)                             (25.6%)            2.3%          (33.1%)          (3.8%)
                                               ===========    ============      ===========    ============

</TABLE>
                                       11
<PAGE>

THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999

Revenues

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

     Total revenues for the three and six months ended June 30, 2000 were $7.3
million and $14.4 million, respectively. This represents a decrease of $2.5
million, or 25.3%, for the three-month period ended June 30, 2000 as compared to
the same period in 1999 and a decrease of $3.7 million, or 20.6%, for the six-
month period ended June 30, 2000 as compared to the same period in 1999.  For
the three and six-month periods ended June 30, 2000, compared to the same
periods of fiscal 1999, the decrease in total revenue was attributable to
decreased sales of product licenses.

     Product.  Product revenues for the three and six months ended June 30, 2000
were $3.3 million and $6.2 million, respectively, a decrease of $2.1 million, or
38.8%, and a decrease of $3.2 million, or 33.7%, from the comparable periods of
fiscal 1999.  The decrease in product revenues for the three- and six-month
periods ended June 30, 2000 for the Expert Operations  segment were $0.2 million
and $0.9 million and the decrease was mainly a result of decreased sales to the
process manufacturing industry. The e-Infrastructure segment decreased $1.9
million and $2.3 million for the respective periods. This decrease occurred
primarily in the telecommunications sector in which the first six month of 1999
included several large orders from a single customer, BMC Software Inc., which
accounted for $1.4 million in the six months ended June 30, 1999. The remaining
decrease occurred mainly in the aerospace and transportation industries.

     Service. Service revenues for the three and six months ended June 30, 2000
were $4.0 million and $8.1 million, respectively, a decrease of $0.4 million, or
9.1%, and a decrease $0.6 million, or 6.4%, from the comparable periods of
fiscal 1999.  The decrease in service revenues for both the three- and six-month
periods ended June 30, 2000 was primarily due to decreases in application
consulting revenues and training fees.


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, 2000 were $2.0 million and $4.4 million, respectively.  This was
a decrease of $0.2 million, or 8.4%, and an increase of $37,000, or 0.9%, from
the comparable periods of 1999. The decrease in costs for the three months ended
June 30, 2000 versus the comparable period in 1999, was due primarily to a
decrease in costs related to consulting services. The slight increase in costs
for the six months ended June 30, 2000 resulted from increases in royalty
expenses and personnel costs offset by reduced consulting costs. Gross margin of
72.6% for the three months ended June 30, 2000 declined from 77.6% for the
comparable quarter in fiscal 1999.  Gross margin for the six months ended June
30, 2000 of 69.7% declined from the 76.1% gross margin for the comparable period
in fiscal 1999.  The decreases in gross margin resulted primarily from declines
in the higher margin product revenues for both comparable periods.


Operating Expenses

     Sales and Marketing.  Sales and marketing expenses consist primarily of
costs associated with personnel involved in the sales and marketing process,
sales commissions, sales facilities, travel and lodging, trade shows and
seminars, advertising, and promotional materials. These expenses for the three
and six months ended June 30, 2000 were $4.1 million and $8.4 million,
respectively. The costs decreased $0.5 million, or 10.4%, from $4.5 million in
the comparable quarter for fiscal 1999 and $0.6 million, or 6.9%, from
$9.0 million in the comparable six month period in 1999. The decreases were
primarily due to lower commission expenses related to lower sales volume. As a

                                       12
<PAGE>

percentage of revenues, sales and marketing expenses were 55.8% and 58.4%,
respectively, for the three and six months ended June 30, 2000 as compared to
46.5% and 49.8% for the comparable periods in fiscal 1999. 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, 2000 were $2.0 million and $3.8 million,
respectively, an increase of $0.2 million, or 10.7%, and $0.4 million, or 13.1%,
from $1.8 million and $3.3 million in the comparable quarters of fiscal 1999.
The increased expense was primarily due to an increase in personnel-related
costs: recruitment, subcontracted labor, and compensation expenses. As a
percentage of revenues, research and development expenses were 26.9% and 26.2%,
respectively, for the three and six months ended June 30, 2000 as compared to
18.1% and 18.4% for the comparable periods in fiscal 1999. The increases were a
result of both higher expenses and 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, 2000 were $1.1 million and $2.6 million,
respectively, a decrease of $19,000, or 1.7%, and an increase of $0.3 million,
or 14.2%, for the comparable periods in fiscal 1999.  The increase in expense
was primarily due to increased legal and recruitment costs.  As a percentage of
revenues, general and administrative expenses were 15.2% and 18.1% for the three
and six months ended June 30, 2000 as compared to 11.5% and 12.6% for the
comparable periods in fiscal 1999.  This increase was due to higher expenses in
addition to lower sales.


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, 2000 was $(9,000) and $60,000, respectively, as
compared to $117,000 and $228,000 for the comparable periods of fiscal 1999.
The decrease in other income (loss), net for both periods was primarily due to
decreased interest income as a result of lower cash balances and to expenses
associated with the disposal of certain fixed assets.


Income Taxes

     Under SFAS No. 109, the Company cannot recognize a deferred tax asset for
the future benefit of its tax loss carryforward unless it concludes that it is
"more likely than not" that such deferred tax asset would be realized.
Accordingly, the Company has established a valuation allowance against its
deferred tax asset to the extent that it cannot conclusively demonstrate that
these assets "more likely than not" will be realized. In determining the amount
of valuation allowance required, the Company considers numerous factors,
including historical profitability, estimated future taxable income, the
volatility of the historical earnings, and the volatility of earnings of the
industry in which it operates. The Company's provision for income taxes
primarily pertained to income taxes in foreign jurisdictions, where the Company
does not have operating loss carryforwards.

LIQUIDITY AND CAPITAL RESOURCES

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

     The Company's June 30, 2000 cash and cash equivalents balance of
$5.9 million increased $215,000 from the period ended December 31, 1999:
$1.5 million was used by operating activities (primarily due to the Company's
net loss in the six months ended June 30, 2000), $1.8 million was received from
the sales of short-term securities, $403,000 was used to purchase equipment and
other assets, $580,000 was received from the exercise of stock options and from
issuance of stock under the Company's Employee Stock Purchase Plan, and cash
decreased $244,000 due to the effect of currency fluctuation.

                                       13
<PAGE>

     At June 30, 2000, the Company had cash, cash equivalents, and short-term
investments of $10.1 million. The Company regularly invests excess funds in
highly rated money market funds, government securities, and commercial paper.

     The Company believes that its available funds and cash generated from
operations will be sufficient to meet the Company's business requirements at
least through December 31, 2000.


CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

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

     Emerging Market for Intelligent Operations Management Systems.
Substantially all of the Company's revenues are derived from the licensing and
support of software products that enable organizations to implement intelligent
operations management systems for decision support and control. Although many
organizations have begun to deploy, or have announced plans to deploy,
intelligent operations management 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 operations management systems successfully, nor that
such systems will gain widespread acceptance. In addition, the timing of the
implementation of intelligent operations 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.

     Dependence Upon Development of Sales and Marketing Force. The Company's
future success 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 or 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, on occasion, recorded quarterly losses,
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

                                       14
<PAGE>

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.

     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 which 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, an
object-oriented development and deployment environment for building intelligent
operations management systems, and software application 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 product 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, 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. 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 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."

     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, OEMs and distributors, who are not
under the control of the Company.  Sales of the Company's products by value-
added resellers and systems integrators represented 22% and 23% of the Company's
product revenues in the first six months of 2000 and 1999, respectively.  The
loss of major OEMs or resellers of the Company's products, a significant decline
in their sales, or difficulty on the part of such third-party developers or
resellers in developing successful G2-based products and

                                       15
<PAGE>

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.

     Risks Associated With International Operations.  The Company's
international revenues represented 44% and 45% of total revenues in the first
six months of 2000 and 1999, 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, 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.

     Competition.   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,
and Systems Management Arts (SMARTS), sell "point solutions" that compete with
the Company's products with respect to specific applications or uses. Several
companies, including Ilog S.A. and SMARTS, offer products with limited real-
time, expert system, or fault isolation capabilities at lower price points than
those provided by the Company. These products often require extensive
programming with languages such as C or C++ for complete implementation. Certain
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.

     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 operating
results.  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,

                                       16
<PAGE>

errors will not be found in new products after commencement of commercial
shipments. Although the Company has not experienced material adverse effects
resulting from any such errors or defects to date, there can be no assurance
that errors or defects will not be discovered in the future that could cause
delays in product introduction and shipments or require design modifications
that could adversely affect the Company's business, results of operations, or
financial condition.

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

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


ITEM 3.  QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company does not use derivative financial instruments in its investing
portfolio.  The Company places its investments in instruments that meet high
credit quality standards such as money market funds, government securities, and
commercial paper.  The Company limits the amount of credit exposure to any one
issuer.  The Company does not expect any material loss with respect to its
investment portfolio. The following table provides weighted average interest
rates and dates of maturity for the Company's investment portfolio; the
investment portfolio excludes operating cash held in both interest bearing and
non-interest bearing demand deposit accounts. The fair value of the marketable
securities portfolio is affected by changes in short-term U.S. dollar interest
rates.


<TABLE>
<CAPTION>

Principal amounts by expected maturity in U.S. dollars
(in thousands, except interest rates)
                                                                                Investments
                                                                                maturing in:
                                                    Fair value at       ------------------------------
                                                    June 30, 2000          FY 2000          FY 2001
                                                    -------------       --------------   -------------
<S>                                                  <C>                      <C>             <C>
Cash equivalents                                     $ 2,006                  $ 2,006               -
Weighted average interest rate                          6.61%                    6.61%              -

Short-term investments                               $ 4,188                  $ 2,992         $ 1,196
Weighted average interest rate                          6.44%                    6.10%           7.30%

Total Portfolio                                      $ 6,194                  $ 4,998           1,196
Weighted average interest rate                          6.50%                    6.30%           7.30%
</TABLE>


                                       17
<PAGE>

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

                                       18
<PAGE>

PART II - OTHER INFORMATION


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

     On May 17, 2000, the Company held its 2000 Annual Meeting of Stockholders.
At the meeting the following matters were approved by the vote specified below:

     1.  John A. Shane and Thomas E. Swithenbank were elected to serves as
directors until the 2003 Annual Meeting of Stockholders or until their
successors are duly elected and qualified.  Each of Messrs. Shane and
Swithenbank received 5,053,450 shares of common stock voting in favor of his
election and 73,168 shares of common stock were withheld.  In addition to the
directors listed above who were elected at the Annual Meeting of Stockholders,
the terms of the following directors continued after the Annual Meeting of
Stockholders: Patrick Courtin, Robert A. Degan, Barry R. Gorsun, Lowell B.
Hawkinson and Theodore G. Johnson.

     2.  An amendment to the Company's 1995 Employee Stock Purchase Plan
increasing the total number of shares of common stock reserved for issuance
under the plan from 500,000 to 700,000 was approved.  The votes were cast as
follows: 1,781,824 shares of common stock were voted for the amendment, 68,537
shares of commons stock were voted against the amendment and 16,994 shares of
common stock abstained from the vote. There were 3,259,263 shares of common
stock subject to non-votes.

     3.  The adoption of the Company's 2000 Stock Incentive Plan covering
800,000 shares of commons stock was approved.  The votes were cast as follows:
1,671,440 shares of common stock voted in favor of the adoption of the plan,
178,411 shares of common stock voted against the adoption of the plan and 17,504
shares of common stock abstained from the vote.  There were 3,259,263 shares of
commons stock subject to non-votes.

     4.  The ratification of Arthur Andersen LLP as the Company's independent
public auditors for the year ended December 31, 2000 was approved.  The votes
were cast as follows: 5,107,617 shares of common stock voted in favor of the
ratification, 13,495 shares of common stock voted against the ratification and
5,506 shares of common stock abstained from the vote.


ITEM 6.  EXHIBITS AND REPORTS OF FORM 8-K

     (a)   Exhibits
           27 Financial Data Schedule

                                       19
<PAGE>

                                  SIGNATURES


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



                                GENSYM CORPORATION



                                By: /s/ Patrick Courtin
                                    -------------------
      Dated:  August 10, 2000       Patrick Courtin
                                    Chief Executive Officer and President
                                    (Principal Executive Officer)


                                By: /s/ Jeffrey A. Weber
                                    --------------------
      Dated:  August 10, 2000       Jeffrey A. Weber
                                    Vice President of Finance and
                                    Administration, and Chief Financial Officer
                                    (Principal Financial and Accounting Officer)

                                       20
<PAGE>

                                 EXHIBIT INDEX

27.1  Financial Data Schedule