<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

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

                     For three months ended March 31, 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 May 7, 2001 there were 6,466,970 shares of the Registrant's Common
Stock outstanding.

<PAGE>

                              GENSYM CORPORATION

                               Explanatory Note

     This Amendment No. 1 to the Quarterly Report for the quarterly period ended
March 31, 2001 of Gensym Corporation (the "Company") is being filed by the
Company to amend and restate Item 1 and Item 2. In accordance with Rule 12b-15
promulgated under the Securities Exchange Act of 1934, as amended, the text of
the amended items are amended and restated in their entirety as set forth in
this Amendment No. 1.

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

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

<PAGE>

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

                      GENSYM CORPORATION AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (Unaudited)

<TABLE>
<CAPTION>
(in thousands, except share amounts)                                          March 31,             December 31,
                                                                                2001                    2000
                                                                            ------------          ---------------
<S>                                                                         <C>                   <C>
ASSETS

Current Assets:
    Cash and cash equivalents                                                $    2,103           $    2,657
    Short-term investments                                                            -                  698
    Accounts receivable, net                                                      6,979                8,800
    Prepaid expenses                                                              1,168                1,258
                                                                             ----------           ----------
        Total current assets                                                     10,250               13,413

Property and Equipment, net                                                       1,948                1,397

Deposits and other assets                                                           686                  730
                                                                             ----------           ----------
                                                                             $   12,884           $   15,540
                                                                             ==========           ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
    Accounts payable                                                         $    1,350           $    1,068
    Accrued expenses                                                              4,686                5,541
    Deferred revenue                                                              6,769                6,519
                                                                             ----------           ----------
      Total current liabilities                                                  12,805               13,128

Long-term liabilities                                                                15                    -

Stockholders' Equity:
    Preferred stock, $.01 par value -
      Authorized - 2,000,000 shares
      Issued and outstanding - none                                                   -                    -
    Common stock, $.01 par value -
      Authorized - 20,000,000 shares
      Issued - 6,968,270 shares as of March 31, 2001 and
        December 31, 2000
     Outstanding - 6,466,970 shares as of March 31, 2001 and
        December 31, 2000                                                            70                   70
    Capital in excess of par value                                               21,620               21,620
    Treasury stock - 501,300 shares as of March 31, 2001 and
        December 31, 2000, at cost                                               (1,869)              (1,869)
    Accumulated deficit                                                         (18,082)             (15,869)
    Cumulative translation adjustment                                            (1,675)              (1,540)
                                                                             ----------           ----------
      Total stockholder's equity                                                     64                2,412
                                                                             ----------           ----------
                                                                             $   12,884           $   15,540
                                                                             ==========           ==========
</TABLE>

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

<PAGE>

                              GENSYM CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)

<TABLE>
<CAPTION>
(in thousands, except per share amounts)

                                                                      Three months ended
                                                                           March 31,
REVENUES:                                                         2001                   2000
                                                             -------------          -------------
<S>                                                          <C>                    <C>
 Product                                                       $    1,776             $   2,966
 Service                                                            3,657                 4,135
                                                               ----------             ---------
  Total revenues                                                    5,433                 7,101

COST OF REVENUES
 Product                                                              190                   294
 Service                                                            1,134                 2,072
                                                               ----------             ---------
  Total cost of revenues                                            1,324                 2,366
                                                               ----------             ---------
  Gross profit                                                      4,109                 4,735
                                                               ----------             ---------

OPERATING EXPENSES:
 Sales and marketing                                                3,093                 4,327
 Research and development                                           1,705                 1,805
 General and administrative                                           877                 1,504
 Restructuring charge                                                 601                     -
                                                               ----------             ---------
                                                                    6,276                 7,636
                                                               ----------             ---------

  Operating loss                                                   (2,167)               (2,901)

OTHER (EXPENSE) INCOME, NET                                           (18)                   69
                                                               ----------             ---------

 Loss before provision for
  income taxes                                                     (2,185)               (2,832)

PROVISION FOR INCOME TAXES                                             28                    60
                                                               ----------             ---------
  Net loss                                                     $   (2,213)            $  (2,892)
                                                               ==========             =========

  Basic and diluted loss
    per share                                                  $    (0.34)            $   (0.46)
                                                               ==========             =========

  Weighted average common shares
    outstanding                                                     6,467                 6,260
                                                               ==========             =========
</TABLE>

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

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                          2001              2000
                                                                                    --------------    ---------------
<S>                                                                                 <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                            $  (2,213)         $  (2,892)
  Adjustments to reconcile net loss to net
   cash (used in) provided by operating activities:
      Depreciation and amortization                                                         185                197
      Changes in assets and liabilities:
          Accounts receivable                                                             1,796              2,962
          Prepaid expenses                                                                   89               (400)
          Accounts payable                                                                  282                247
          Accrued expenses                                                                 (877)               897
          Other long-term liabilities                                                        17                  -
          Deferred revenue                                                                  250                (94)
                                                                                      ---------          ---------
              Net cash (used in) provided by operating activities                          (471)               917
                                                                                      =========          =========

CASH FLOW FROM INVESTING ACTIVITIES:
  Sales of short-term investments                                                           698              3,473
  Purchases of short-term investments                                                         -             (1,476)
  Purchases of property and equipment                                                      (736)              (232)
  Decrease in other assets                                                                   44                  7
                                                                                      ---------          ---------
              Net cash provided by investing activities                                       6              1,772
                                                                                      ---------          ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments on capitalized lease obligations                                        (1)                 -
  Proceeds from exercise of stock options under stock plans                                   -                379
                                                                                      ---------          ---------
              Net cash (used in) provided by financing activities                            (1)               379
                                                                                      ---------          ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                     (88)              (162)
                                                                                      ---------          ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                       (554)             2,906

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                            2,657              5,710
                                                                                      =========          =========
CASH AND CASH EQUIVALENTS, END OF PERIOD                                              $   2,103          $   8,616
                                                                                      =========          =========
</TABLE>

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

<PAGE>

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

1. Operations

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

2. Basis of Presentation

     The unaudited condensed consolidated financial statements included herein
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC").  Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States,
have been condensed or omitted pursuant to such SEC rules and regulations;
nevertheless, the management of the Company believes that the disclosures herein
are adequate to make the information presented not misleading. In the opinion of
management, the condensed consolidated financial statements reflect all
adjustments (of a normal and recurring nature) which are necessary to present
fairly the consolidated financial position of the Company as of March 31, 2001
and the results of its operations and cash flows for the three-month periods
ended March 31, 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
March 31, 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.

5. Revenue Recognition

     The Company recognizes revenue from product sales upon product shipment
provided that there are no uncertainties regarding acceptance, there is
persuasive evidence of an arrangement, the sales price is fixed or determinable
and collection of the related accounts receivable is probable. If there are
uncertainties regarding customer acceptance, revenue is deferred until the
uncertainties are resolved. The Company recognizes revenue in accordance with
Statement of Position (SOP) 97-2, "Software Revenue Recognition". For
arrangements that include the delivery of multiple elements, revenue is
allocated to the various elements based on vendor specific objective evidence of
fair value (VSOE). The Company establishes VSOE based on either the price
charged for the element when sold separately or

<PAGE>

for elements not yet sold separately, the price established by management with
the relevant authority to do so. Software maintenance VSOE represents a
consistent percentage of the license fees charged to customers for maintenance
renewals. Consulting and training services VSOE represents standard rates, which
the Company charges its customers when it sells these services separately. In
accordance with SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions", the Company uses the
residual method when fair value does not exist for one of the delivered elements
in the arrangements. Under the residual method, the fair value of the
undelivered element is deferred and recognized when delivered. The Company has
established VSOE for consulting, training and software maintenance services.
Accordingly, software license revenue is recognized under the residual method in
arrangements in which software is licensed with consulting, training or software
maintenance.

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

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

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

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

6. Comprehensive Income

     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-month period ended March 31, 2001 and 2000 are as follows (in
thousands):

<TABLE>
<CAPTION>

                                                 Three months ended
                                                      March 31,
                                                  2001         2000
                                               ----------  ----------
<S>                                            <C>         <C>
Comprehensive income (loss):
 Net loss                                       $(2,213)    $ (2,892)
 Other comprehensive loss
   Foreign currency translation adjustment         (135)        (173)
                                                -------     --------
     Comprehensive loss                         $(2,348)    $ (3,065)
                                                =======     ========
</TABLE>

7. Income (Loss) Per Share

<PAGE>

     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-month periods ended March
31, 2001 and 2000, the computation for diluted loss per share excludes the
effect of 1,688,069 and 1,272,712 shares, respectively, issuable from assumed
exercise of options, as their effect would be antidilutive.

8. Restructuring Charges and other

     a. Office closings

     In December 2000, there was a major emphasis on reducing the Company's
worldwide sales infrastructure. At the time, the Company made the decision to
close or reduce the size of several sales offices, as some were not being fully
utilized, due to staff cuts, and others had cost structures that could not be
supported by the revenue generated by the office. The Company recorded a
$522,000 liability in December 2000 associated with these closings. As of March
31, 2001, $85,000 has been paid out against the accrual.

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

     In January 2001, the Company's management undertook a restructuring plan to
reduce operating costs. The restructuring plan consists of reductions in
employee headcount, totaling 45 employees, or approximately 12% of the Company's
workforce, from all operating groups and from all geographical areas.  The
$601,000 restructuring charge included on the accompanying condensed
consolidated statement of operations consists entirely of severance related
costs.  Approximately $415,000 was paid out in the quarter ended March 31, 2001,
and the remaining $186,000 is expected to be paid by December 31, 2001.

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.

<PAGE>

     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 product line 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)                                          Unallocated
                                 Expert      Network     Corporate
                             Manufacturing  Management  Costs/Assets    Total
                             -------------  ----------  ------------  ---------
Three months ended
March 31, 2001
  Revenes                    $       2,861  $    2,572                $   5,433
                             =============  ==========                =========
  Net contribution           $       1,246  $      374  $      (604)  $   1,016
                             =============  ==========  ===========   =========
  Identifiable assets        $       4,423  $    4,622  $     3,839   $  12,884
                             =============  ==========  ===========   =========
  Fixed asset depreciation   $          36  $       64  $        85   $     185
                             =============  ==========  ===========   =========

Three months ended
March 31, 2000
  Revenues                   $       2,983  $    4,118                $   7,101
                             =============  ==========  ===========   =========
  Net contribution           $           2  $    1,111  $      (705)  $     408
                             =============  ==========  ===========   =========
  Identifiable assets        $       4,203  $    5,028  $    15,982   $  25,213
                             =============  ==========  ===========   =========
  Fixed asset depreciation   $          53  $       54  $        90   $     197
                             =============  ==========  ===========   =========


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

                                 Three months ended
                                   March 31, 2001
                                 2001          2000
                                 ----          ----
          United States           61%           57%
          Europe                  29%           29%
          Other                   10%           14%
                                 ----          ----
                                 100%          100%
                                 ====          ====

<PAGE>

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

Overview

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

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

<PAGE>

Results of Operations

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

<TABLE>
<CAPTION>
                                              Three months ended
                                                   March 31,
                                               2001        2000
                                              ------      ------
<S>                                           <C>         <C>
REVENUES:
 Product                                       32.7%       41.8%
 Service                                       67.3%       58.2%
                                              ------      ------
  Total revenues                              100.0%      100.0%

COST OF REVENUES
 Product                                        3.5%        4.1%
 Service                                       20.9%       29.2%
                                              ------      ------
  Total cost of revenues                       24.4%       33.3%

                                              ======      ======
  Gross profit                                 75.6%       66.7%

OPERATING EXPENSES:
 Sales and marketing                           56.9%       60.9%
 Research and development                      31.4%       25.4%
 General and administration                    16.1%       21.2%
 Restructuring charge                          11.1%          -
                                              ------      ------
                                              115.5%      107.5%

  Operating loss                              (39.9%)     (40.8%)

OTHER (EXPENSE) INCOME, NET                    (0.3%)       0.9%
                                              ------      ------

  Loss before provision
    for income taxes                          (40.2%)     (39.9%)

PROVISION FOR INCOME TAXES                      0.5%        0.8%
                                              ------      ------

  Net Loss                                    (40.7%)     (40.7%)
                                              ======      ======
</TABLE>

Three Months Ended March 31, 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 were $5.4 million for the three months ended March 31, 2001
as compared to $7.1 million for the same period in 2000, a decrease of $1.7
million, or 23.5%. The decrease was caused by lower product revenue of $1.2
million and lower service revenues of $0.5 million.

<PAGE>

     Product. Product revenues were $1.8 million for the three months ended
March 31, 2001 as compared to $3.0 million for the same period in 2000, a
decrease of $1.2 million, or 40.1%. The decline in product revenue was
attributable to three elements: 1) the loss of a key sales person in Europe who
was responsible for several major customers, 2) a delay in anticipated orders
attributable to a contraction in the business climate of several of the
Company's customers, and 3) a significantly large order of $700,000 in the
quarter ended March 31, 2000 from one customer that did not reoccur in the same
quarter of 2001.

     Service. Service revenues were $3.7 million for the three months ended
March 31, 2001, as compared to $4.1 million for the same period in 2000, a
decrease of $0.5 million, or 11.6%. Although renewal maintenance revenue was
strong for the quarter ended March 31, 2001, initial maintenance revenue
decreased in response to lower 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 months ended
March 31, 2001 were $1.3 million. This was a decrease of $1.0 million, or 44.0%,
compared with the first quarter of fiscal 2000. The decrease in cost of revenues
was in large part due to a reduction in consulting expenses. Consulting expenses
were $0.7 million for the three months ended March 31, 2001 compared to $1.5
million for the same period in 2000. The decrease in expenses was primarily the
result of a decrease in the Company's consulting headcount which resulted in a
decrease in payroll and related costs of approximately $0.6 million million.
Gross margin on revenues for the three months ended March 31, 2001 was 75.6%
compared with 66.7% for the three-month period ended March 31, 2000. Gross
margin increased in large part, to the significant decrease in expenses, which
more than offset lower overall sales.

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
months ended March 31, 2001 were $3.1 million, a decrease of $1.2 million, or
28.5%, from $4.3 million in the comparable quarter for fiscal 2000. The decrease
was primarily due to a reduction in payroll and related expense of $0.5 million,
travel costs of $0.2 million and a decrease in trade shows expense of $0.3
million. Compensation decrease is in line with the reduction in sales headcount.
Sales and marketing expenses as a percentage of revenues were 56.9% for the
quarter ended March 31, 2001 as compared to 60.9% for the quarter ended March
31, 2000.  The decrease in sales and marketing expenses as a percentage of
revenues resulted from the significant decrease in sales and marketing expenses,
which more than offset lower revenues.

     Research and Development. Research and development expenses consist
primarily of costs of personnel, equipment, and facilities. These expenses for
the quarter ended March 31, 2001 were $1.7 million, a decrease of $100,000, or
5.5%, from $1.8 million in the comparable quarter of fiscal 2000. The decreased
expense was primarily due to a decrease in personnel related costs, such as
recruitment, subcontracted labor, and compensation expenses.  Research and
development expenses as a percentage of revenues were 31.4% for the quarter
ended March 31, 2001 as compared to 25.4% for the quarter March 31, 2000. The
increase in this percentage was due to lower revenues, which more than offset
the lower research and development expenses during the quarter.

     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 quarter ended March 31, 2001 were $877,000, a decrease of $627,000, or
41.7%, from $1.5 million for the comparable quarter in fiscal 2000.  The
decrease in expense was primarily due to decreased personnel related costs of
$0.1 million, recruiting costs of $0.2 million, and legal costs and other
professional services of $0.3 million.  General and administrative expenses as a
percentage of revenues were 16.1% for the quarter ended March 31, 2001

<PAGE>

as compared to 21.2% for the quarter ended March 31, 2000. The decrease in this
percentage resulted from the significant decrease in general and administrative
expenses, which more than offset lower revenues during the quarter.

     Restructuring Charge. In January 2001, the Company's management undertook a
restructuring plan to reduce operating costs.  The restructuring plan consists
of reductions in employee headcount, totaling 45 employees, or approximately 12%
of the Company's workforce, from all operating groups and from all geographical
areas.  The $601,000 restructuring charge consists entirely of severance related
costs.  Approximately $415,000 was paid out against the restructuring charge in
the quarter ended March 31, 2001, and the remaining $186,000 is expected to be
paid out by December 31, 2001. The severed employees were notified of their
benefits in January 2001. Restructuring charges were 11.1% of revenues for the
quarter ended March 31, 2001.

Other Income (Expense)

     Other income (expense) consists primarily of interest income partially
offset by foreign exchange transaction gains and losses. Other income (expense)
for the quarter ended March 31, 2001 was an expense of $18,000 as compared to
$69,000 of income for the comparable period of fiscal 2000. The decrease was
primarily due to decreased interest income due to 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
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 has a capital lease for the Company's communications equipment.

     The Company's March 31, 2001 cash and cash equivalents balance of $2.1
million decreased $554,000 from December 31, 2000. Cash used for operations in
the first quarter of 2001 was $630,000, which consisted primarily of the net
loss of $2.2 million and a decrease of accrued expenses of $1.0 million,
partially offset by a decrease in accounts receivable of $1.8 million, an
increase in accounts payable of $282,000 and an increase in deferred revenue of
$250,000.

     Cash provided by investing activities was $6,000 which primarily consisted
of $698,000 received from the sale of short-term securities and $44,000 received
from other assets partially offset by $736,000 used to purchase equipment. Cash
used in financing activities for the first quarter of 2001 was $1,000 and
resulted from making principal payments on capital lease obligations.  Cash
decreased $135,000 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 three months ended March 31,
2001, and may need to obtain additional funding or alternative means of
financial support, or both. Management's operational plan relies heavily on
achieving profitability in the third quarter of 2001 and beyond. This return to
profitability is based on expense control, projected annual cost reductions
(excluding restructuring charges) of approximately $ 10.4 million related to
reduced headcount, office closings, travel and general costs of doing business,
and increased revenues from new and existing products in the e-Infrastructure
marketplace. Subsequent to March 31, 2001, the Company revised the 2001
operating plan to further reduce operating costs in order to achieve operating
profitability in the fourth quarter of 2001 and beyond. The additional reduction
in annual operating costs (excluding restructuring charges) totals $1.1 million
and results from the April 2001 severance action. Management is also seeking to
identify additional funding

<PAGE>

sources of an equity and/or debt nature. 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 March 31, 2001, the
Company was in compliance with the adjusted quick ratio covenant.  However,
depending on the Company's future operating results the Company may or may not
be able to remain in compliance with the 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 three months ended March
31, 2001, and may need to obtain additional funding or alternative means of
financial support, or both. Management's operational plan relies heavily on
achieving profitability in the third quarter of 2001 and beyond. This return to
profitability is based on expense control, cost reductions, and increased
revenues from new and existing products in the e-Infrastructure marketplace.
Management is also evaluating and considering additional funding sources of an
equity and/or debt nature to provide additional capital. 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.  The Company has received
a notice from the Nasdaq National Market that its common stock has failed to
maintain the required minimum market value public float of $5,000,000 over a
period of 30 consecutive trading days. As a result, the Nasdaq National Market
has provided Gensym with 90 calendar days, or until June 25, 2001, to regain
compliance with this requirement or be delisted from trading.  If the Company is
unable to regain compliance with this requirement during this time, and any
appeal to the Nasdaq National Market for relief from this requirement is
unsuccessful, the Company's common stock will be delisted from trading by the
Nasdaq National Market. If the Company's common stock is deslisted from the
Nasdaq National Market, its liquidity and trading price could be negatively
impacted.

  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

<PAGE>

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
32% and 22% of the Company's product revenues in the first three 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 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 quarter 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

<PAGE>

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
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 39% and 43% 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

<PAGE>

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 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

<PAGE>

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.

<PAGE>

                                  SIGNATURES

     Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report on Form 10-Q/A for the quarter ended
March 31, 2001 to be signed on its behalf by the undersigned thereunto duly
authorized.


                                               GENSYM CORPORATION



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


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