<PAGE>

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

                                    FORM 10-Q


(Mark one)

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

                      FOR 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>

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
                                                                      ---------    ---------
ASSETS
<S>                                                                   <C>           <C>
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 stockholders' equity                                        64         2,412
                                                                      --------      --------

                                                                      $ 12,884      $ 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)


(in thousands, except per share amounts)

<TABLE>
<CAPTION>

                                           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                            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.

                                       3
<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.

                                       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 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

     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

                                       5
<PAGE>

billings for software services, which include 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):



                                                        Three months ended
                                                             March 31,
                                                       2001            2000
                                                    ------------    ------------


Net loss                                                $(2,213)        $(2,892)
Other comprehensive loss
     Foreign currency translation adjustment               (135)           (173)
                                                    ------------    ------------

         Comprehensive loss                             $(2,348)        $(3,065)
                                                    ============    ============


7.    Income (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-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 Charge

     In January 2001, the Company's management undertook a restructuring plan to
reduce operating costs. The restructuring plan consists primarily of reductions
in employee headcount, totaling approximately 12% of the Company's employees.
The $601,000 restructuring charge included on the accompanying condensed
consolidated income statement of operations consists entirely of severance
related costs. Approximately $286,000 was paid out against the restructuring
charge in the quarter ended March 31, 2001, and the remaining $315,000 is
expected to be fully paid out by the end of the quarter ending September 30,
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

                                       6
<PAGE>

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 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:

<TABLE>
<CAPTION>
(in thousands)                                                         Unallocated
                                      Expert           Network          Corporate
                                   Manufacturing     Management        Costs/Assets     Total
                                   ---------------------------------  ----------------------------
<S>                                <C>            <C>                  <C>          <C>
Three months ended
March 31, 2001
    Revenues                            $ 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
                                   =============  ==================  =============  =============


</TABLE>


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%
                                    ============     =============



                                       7
<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".

                                       8
<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                                    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 both lower license and lower
services revenues.

     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

                                       9
<PAGE>

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 as a result
of a decrease in the Company's consulting headcount.  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.  The increase in gross margin was due
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 a reduction in compensation expense and travel costs, 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,
recruitment costs and legal costs.  General and administrative expenses as a
percentage of revenues were 16.1% for the quarter ended March 31, 2001 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 implemented a plan of
restructuring intended to lower operating expenses in subsequent periods by
reducing its workforce by approximately 12%. Accordingly, the Company recorded a
restructuring charge of $601,000 in the first quarter of 2001. This amount
consists entirely of severance related costs directly associated with the
Company's restructuring of the operations. Approximately $286,000 was paid out
against the restructuring charge in the quarter ended March 31, 2001, and the
remaining $315,000 is

                                       10
<PAGE>

expected to be paid out by the end of the third quarter of 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.
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 $471,000, which consisted primarily of the net
loss of $2.2 million and a decrease of accrued expenses of $877,000 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 $88,000 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, cost reductions, and increased
revenues from new and existing products in the e-Infrastructure marketplace.
Management is also seeking to identify additional funding 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.

                                       11
<PAGE>

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
notice from the Nasdaq National Market that it failed to meet the minimum
$4,000,000 net tangible assets requirement and 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 15, 2001, to regain
compliance with these requirements or be delisted from trading. If the Company
is unable to regain compliance with these requirements during this time, and any
appeal to the Nasdaq National Market for relief from these requirements is
unsuccessful, the Company's common stock will be delisted from trading by the
Nasdaq National Market. If the Company's common stock is delisted 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 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

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<PAGE>

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 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

                                       13
<PAGE>

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 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

                                       14
<PAGE>

addressed by these value-added resellers, such as cement kiln control and
refinery scheduling, and they could be successful in supplying alternatives to
products based on the Company's software.

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

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

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

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

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

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<PAGE>

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
March 31, 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
Canada, Europe, Middle East, Australia, Japan and other Asian countries.  As a
result, the Company is exposed to the effect of foreign currency exchange rate
fluctuations on the U.S. dollar value of foreign currency-denominated revenues
and expenses.  And, to the extent that the Company's foreign subsidiaries
maintain large intercompany payable balances with the U.S. parent, the potential
exists for significant cumulative translation adjustments in the equity section
of the consolidated balance 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.

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<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
                                     (Registrant)


                                     /s/ Jeffrey A. Weber
                                     --------------------
       Dated May 15, 2001            Jeffrey A. Weber
                                     Vice President of Finance and
                                     Administration, and Chief Financial Officer


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