<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, 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>

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
                                                                   --------      --------
    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.


                                        2
<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                        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.


                                        3
<PAGE>

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

(in thousands)
                                                            Six months ended
                                                                 June 30,
                                                            2001        2000
                                                           -------     -------
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
                                                           =======     =======

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


                                        4
<PAGE>

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

1. Operations

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

2. Basis of Presentation

      The unaudited condensed consolidated financial statements included herein
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States, have been
condensed or omitted pursuant to such SEC rules and regulations; nevertheless,
the management of the Company believes that the disclosures herein are adequate
to make the information presented not misleading. In the opinion of management,
the condensed consolidated financial statements reflect all adjustments (of a
normal and recurring nature) which are necessary to present fairly the
consolidated financial position of the Company as of 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.

                                       5
<PAGE>

5. Revenue Recognition

      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 are required subsequent to delivery, revenues are
recognized upon customer acceptance. 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.
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.

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):

                                    Three months ended       Six months ended
                                         June 30,                June 30,
                                      2001      2000          2001       2000
                                    ---------  --------     ---------  ---------

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)
                                    =========  ========     =========  =========

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 Charge

      In January 2001 and April 2001 the Company's management undertook a
restructuring plan to reduce operating costs. The restructuring plan consists of
reductions in employee headcount and the closing of certain offices. 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


                                       6
<PAGE>

associated with the closing of foreign offices in Europe, the far east and
Asia-Pacific. Approximately $277,000 and $563,000 was paid out against the
restructuring charge for employee severance in the three and six months ended
June 30, 2001, respectively. The restructuring accrual balance at June 30, 2001
was $512,000 and relates primarily to severance obligations.

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:


                                        7
<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
                                                    ============    ============    =============     ============
</TABLE>

<TABLE>
<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>

10. Subsequent Event

      On August 6, 2001 the Company announced a strategic restructuring and
reorganization of the Company, including a reduction of approximately 40% of its
current workforce. The expected


                                        8
<PAGE>

restructuring charge for the quarter ending September 30, 2001 for this
reduction in headcount is approximately $1.1 million.




                                        9
<PAGE>

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


      The Company was incorporated in 1986 to provide software products for
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 restructuring, 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".


                                       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,
                                                   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                                    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>


                                       11
<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. Product revenues were lower for both Expert Manufacturing and
Network Management segments of the business. Product revenue was effected by the
general slowdown in the economy.

      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 revenues for both the three- and six-month
periods ended June 30, 2001 was primarily due to a decline in consulting revenue
as consulting activity, to a large extent, is driven by product sales.

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. 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 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. 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.


                                       12
<PAGE>

      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. 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. A $0.3 million
decrease in compensation related costs and reduced facility and support costs in
connection with the Company's prior restructuring actions were partially offset
by $0.3 million in non-recurring expenses related to the Company's foreign
operations. 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 a restructuring plan to reduce operating costs. The
restructuring plan consists of reductions in employee headcount and the closing
of certain offices. 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 in Europe, the far
east and Asia-Pacific. Approximately $277,000 and $563,000 was paid out against
the restructuring charge for employee severance in the three and six months
ended June 30, 2001, respectively. The restructuring accrual balance at June 30,
2001 was $512,000 and related primarily to severance obligations.

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.

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


                                       13
<PAGE>

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, 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
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 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 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.


                                       14
<PAGE>

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 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


                                       15
<PAGE>

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 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


                                       16
<PAGE>

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-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


                                       17
<PAGE>

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
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

Investment Portfolio

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

      The Company conducts business in various foreign countries, primarily in
Europe and the Middle East. As a result, the Company is exposed to the effect of
foreign currency exchange rate fluctuations on the U.S. dollar value of foreign
currency-denominated revenues and expenses. And, to the extent that the
Company's foreign subsidiaries maintain large intercompany payable balances


                                       18
<PAGE>

with the U.S. parent, the potential exists for significant cumulative
translation adjustments in the equity section of the consolidated balance sheet.
The Company does not use foreign exchange forward contracts to hedge its foreign
currency denominated receivables. Looking forward, there can be no assurance
that changes in foreign currency rates, relative to the U.S. dollar, will not
materially adversely affect the consolidated results of the Company.


PART II - OTHER INFORMATION


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

(a)  The 2001 Annual Meeting of Stockholders of the Company was held on
May 16, 2001.

(b)  At the 2001 Annual Meeting of Stockholders the stockholders of the
Company elected Lowell B. Hawkinson and Theodore G. Johnson to serve as
directors of the Company until the 2004 Annual Meeting of Stockholders and until
their successors are duly elected and qualified. In addition to the directors
listed above who were elected at the 2001 Annual Meeting of Stockholders, the
terms of the following directors continued after the 2001 Annual Meeting of
Stockholders: Patrick Courtin, Robert A. Degan, Barry R. Gorsun, John A. Shane
and Thomas E. Swithenbank.

(c)  The matters acted upon at the 2001 Annual Meeting of Stockholders, and the
voting tabulation for each such matter, is as follows:

Proposal 1: To elect two Class II Directors to the Board of Directors for the
            ensuing three years:

                                                Number of Votes
                                      ---------------------------------
Nominees                                   For             Withheld
------------------------------------------------------------------------
Lowell B. Hawkinson                     4,931,346           285,459
Theodore G. Johnson                     4,930,060           286,745

     Each of the above named individuals was elected as a Class II Director of
the Company.

Proposal 2: To approve an amendment to the Company's 1995 Employee Stock
            Purchase Plan increasing from 700,000 to 1,000,000 the number of
            shares of Common Stock reserved for issuance under the plan:

                                Number of Votes
     ------------------------------------------------------------------
            For                     Against                 Abstain
     ------------------------------------------------------------------
          5,131,093                 65,383                   20,329

The proposal was approved.

Proposal 3: To ratify the appointment of Arthur Andersen LLP as the Company's
            independent auditors for the fiscal year ending December 31, 2001:

                                Number of Votes
     ------------------------------------------------------------------
            For                     Against                 Abstain
     ------------------------------------------------------------------
         5,165,306                  29,650                   21,849


The proposal was approved.


Item 5. Other Information

Stockholder Proposals
----------------------

     Stockholder proposals submitted pursuant to Rule 14a-8 under the Securities
Exchange Act of 1934 and intended to be presented in the proxy material for the
2002 Annual Meeting of Stockholders must be received by the Company at its
offices, 52 Second Avenue, Burlington, MA 01803, no later than December 26, 2001
in order to be considered for inclusion in the Proxy Statement relating to that
meeting. The Company suggests that proponents submit their proposals by
certified mail, return receipt requested, addressed to the Secretary of the
Company.

     The Company's Amended and Restated By-Laws also establish advance notice
procedures with respect to a stockholder nomination of candidates for election
as directors and for the conduct of other business to be brought before an
annual meeting by a stockholder not submitted pursuant to Rule 14a-8. A notice
regarding a director nomination or a proposal for other business must be
received by the Company not less than 60 days nor more than 90 days prior to the
applicable stockholder meeting. However, in the event that less than 70 days'
notice or prior disclosure of the date of the meeting is given or made to the
Company's stockholders, the notice must be received by the Company not later
than the tenth day following the date on which such notice of the date of the
meeting was mailed or such public disclosure was made, whichever occurs first.
Any such notice must contain certain specified information concerning the
persons to be nominated and/or the other business and the stockholder submitting
the director nomination or proposal for other business. The Company has not yet
publicly announced the date of the 2002 Annual Meeting. The advance notice
provisions of the Company's By-Laws supersede the notice requirements contained
in recent amendments to Rule 14a-4. Director nominations or stockholder
proposals for other business should be mailed to Secretary, Gensym Corporation,
52 Second Avenue, Burlington, MA 01803.

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

(a) Exhibits

    10.1   Accounts Receivable Financing Agreement, dated as of March 28, 2001,
           by and between the Company and Silicon Valley Bank. Exhibit to the
           Company's Current Report on Form 8-K filed April 12, 2001 and
           incorporated herein by reference.

(b) Reports on Form 8-K

    On April 12, 2001 the Company filed a Current Report on Form 8-K reporting,
    under Items 5 and 7, that the Company had entered into an accounts
    receivable financing agreement with Silicon Valley Bank.

    On June 14, 2001, the Company filed a Current Report on Form 8-K reporting,
    under Items 5 and 7, that the Company had received a notice from the Nasdaq
    National Market relating to the delisting of the Company's common stock
    therefrom.



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


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


                                       20