<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 the quarterly period ended March 31, 2002

                                       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 3, 2002 there were 6,632,947 shares of the Registrant's
                           Common Stock outstanding.

                                       1

<PAGE>

Part I. Financial Information

INFORMATION WITH RESPECT TO FINANCIAL STATEMENTS

     This quarterly report includes financial statements which have not been
reviewed by an independent public accountant pursuant to Rule 10-01(d) of
Regulation S-X because we elected not to have Arthur Andersen LLP conduct the
review, as allowed under temporary SEC regulations applicable to issuers that
recently used Arthur Andersen as their independent public accountants but no
longer do so. We expect that our new independent public accountant,
PricewaterhouseCoopers LLP, will complete the quarterly review required by Rule
10-01(d) of Regulation S-X. If, upon completion of the review, there is a change
in the financial statements contained in this report, we will amend this
quarterly report to present the reviewed financial statements, and we will
discuss in the amended report any material changes from the unreviewed financial
statements contained in this report. Otherwise, we will state in our first
quarterly report following completion of the review that the unreviewed
financial statements contained in this report have subsequently been reviewed by
an accountant other than Arthur Andersen, and that there were no material
changes as a result of the review.


Item 1. Consolidated Financial Statements

                               GENSYM CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)

<TABLE>
<CAPTION>
(in thousands, except share and per share amounts)                                    March 31,        December 31,
                                                                                        2002               2001
                                                                                      --------         -----------
ASSETS
<S>                                                                                   <C>              <C>
Current Assets:
     Cash and cash equivalents                                                        $  3,297            $  1,967
     Accounts receivable, net                                                            3,092               5,465
     Other current assets                                                                  654                 470
                                                                                      --------            --------
         Total current assets                                                            7,043               7,902

Property and equipment, net                                                              1,369               1,472
Deposits and other assets                                                                  577                 558
                                                                                      --------            --------

                                                                                      $  8,989            $  9,932
                                                                                      ========            ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities:
     Current portion of capital lease obligation                                      $     31            $     42
     Accounts payable                                                                      446                 497
     Accrued expenses                                                                    2,615               2,954
     Deferred revenue                                                                    5,161               6,181
                                                                                      --------            --------
         Total current liabilities                                                       8,253               9,674

Deferred revenue                                                                           678                 667
Other liabilities                                                                           21                  27

Stockholders' Equity (Deficit):
     Preferred stock, $.01 par value -
         Authorized - 2,000,000 shares; issued and outstanding - none                        -                   -
     Common stock, $.01 par value -
         Authorized - 20,000,000 shares; issued - 7,134,247 shares in
           2002 and 2001
         Outstanding - 6,632,947 shares in 2002 and 2001                                    71                  71
     Capital in excess of par value                                                     21,705              21,705
     Treasury stock - 501,300 shares in 2002 and 2001, at cost                          (1,869)             (1,869)
     Accumulated deficit                                                               (19,117)            (19,618)
     Cumulative translation adjustment                                                    (753)               (725)
                                                                                      --------            --------
         Total stockholders' equity (deficit)                                               37                (436)
                                                                                      --------            --------

                                                                                      $  8,989            $  9,932
                                                                                      ========            ========
</TABLE>

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

                                        2

<PAGE>

                               GENSYM CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

(in thousands, except per share amounts)

                                                     Three months ended
                                                          March 31,
REVENUES:                                            2002            2001
                                                  ---------       ---------
   Product                                        $   1,438       $   1,776
   Services                                           2,880           3,657
                                                  ---------       ---------
      Total revenues                                  4,318           5,433

COST OF REVENUES

   Product                                              172             190
   Services                                             773           1,134
                                                  ---------       ---------
      Total cost of revenues                            945           1,324

                                                  ---------       ---------
      Gross profit                                    3,373           4,109
                                                  ---------       ---------

OPERATING EXPENSES:
   Sales and marketing                                1,241           3,093
   Research and development                             704           1,705
   General and administrative                           845             877
   Restructuring charge                                   -             601
                                                  ---------       ---------
      Total operating expenses                        2,790           6,276
                                                  ---------       ---------

      Operating income (loss)                           583          (2,167)

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

   Income (loss) before provision for
      income taxes                                      565          (2,185)

PROVISION FOR INCOME TAXES                               64              28
                                                  ---------       ---------

      Net income (loss)                           $     501       $  (2,213)
                                                  =========       =========
      Net income (loss) per share:
        Basic                                     $    0.08       $   (0.34)
        Diluted                                   $    0.07       $   (0.34)
                                                  =========       =========

      Weighted average shares outstanding:
        Basic                                         6,633           6,467
        Diluted                                       6,948           6,467
                                                  =========       =========

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

                                       3

<PAGE>

                               GENSYM CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>
(in thousands)
                                                                                        Three months ended
                                                                                             March 31,
                                                                                     2002                 2001
                                                                                --------------       --------------
<S>                                                                              <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                              $         501        $      (2,213)
  Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities:
    Depreciation and amortization                                                          124                  185
    Changes in assets and liabilities:
         Accounts receivable                                                             2,381                1,796
         Other current assets                                                             (177)                  89
         Accounts payable                                                                  (50)                 282
         Accrued expenses                                                                 (327)                (877)
         Other liabilities                                                                   -                   17
         Deferred revenue                                                               (1,009)                 250
                                                                                --------------       --------------

               Net cash provided by (used in) operating activities                       1,443                 (471)
                                                                                --------------       --------------

CASH FLOW FROM INVESTING ACTIVITIES:
  Purchases of property and equipment                                                      (21)                (736)
  Sales of short-term investments                                                            -                  698
  (Increase) decrease in other assets                                                      (19)                  44
                                                                                --------------       --------------

                      Net cash (used in) provided by investing activities                  (40)                   6
                                                                                --------------       --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments on capital lease obligations                                          (18)                  (1)
                                                                                --------------       --------------

                   Net cash used in financing activities                                   (18)                  (1)
                                                                                --------------       --------------


EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                    (55)                 (88)
                                                                                --------------       --------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     1,330                 (554)


CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                           1,967                2,657
                                                                                --------------       --------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                         $       3,297        $       2,103
                                                                                ==============       ==============
</TABLE>

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

                                       4

<PAGE>

                               GENSYM CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.  Operations

     Gensym Corporation (the "Company") is a supplier of software products and
services that enable organizations to automate aspects of their operations that
have historically required the direct attention of human experts. The Company's
products and service offerings are all based on or relate to its flagship
product, G2, which can emulate the reasoning of human experts as they assess,
diagnose and respond to unusual operating situations or as they seek to optimize
operations. The Company's products are used in a broad range of industries,
including manufacturing, communications, transportation, aerospace and
government services.

2.  Basis of Presentation

     The unaudited 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 of America,
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 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, 2002 and the
results of its operations and cash flows for the three-month periods ended March
31, 2002 and 2001. These 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, 2001 filed with the SEC on April 1, 2002. 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.

     Certain prior period amounts have been reclassified to be consistent with
the current period presentation.

3.   Comprehensive Income (Loss)

     The components of comprehensive income (loss) for the three-month periods
ended March 31, 2002 and 2001 are as follows (in thousands):

                                                         2002         2001
                                                     -----------  ------------

    Net income (loss)                                 $   501      $ (2,213)
    Other comprehensive loss:
       Foreign currency translation adjustment            (28)         (135)
                                                     -----------  ------------

                    Comprehensive income (loss)       $   473      $ (2,348)
                                                     ===========  ============

4.    Net Income (Loss) Per Share

     Basic income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the period. The
computation for diluted earnings per share includes potential common shares from
the assumed exercise of options using the `treasury stock' method. For the
three-month periods ended March 31, 2002 and March 31, 2001, the computation for
diluted income (loss) per share excludes the effect of 519,273 and 1,688,069
shares, respectively, issuable from the assumed exercise of options, as their
effect would be antidilutive.

                                       5

<PAGE>

     Net income (loss) per share is calculated as follows (in thousands, except
per share data):

                                                        Quarter Ended March 31,
                                                   -----------------------------
                                                       2002             2001
                                                   -------------    ------------
Net income (loss)                                     $   501        $(2,213)

Weighted average common shares outstanding              6,633          6,467
Additional dilutive common stock equivalents              315              -
                                                      -------        -------
Diluted shares outstanding                              6,948          6,467
                                                      =======        =======

Net income (loss) per share - basic                   $  0.08        $ (0.34)
Net income (loss) per share - diluted                 $  0.07        $ (0.34)


5.   Restructuring Charge

     In January, April, July, and August 2001, the Company undertook a series of
restructuring plans to reduce operating costs. For the year ended December 31,
2001 the Company incurred restructuring charges of $2.6 million. The
restructuring plans consisted of reductions in employee headcount and the
closing of certain offices. The reductions in employee headcount in 2001 were
from all operating groups and from all geographical areas and totaled 45 in
January, 13 in April, 12 in July, and 50 in August. The restructuring charge
included a non-cash amount of $657,000 related primarily to cumulative
translation adjustments associated with the closing of foreign offices and
liquidation of subsidiaries in Europe and Asia-Pacific and $2.0 million related
to employee severance. $1.7 million was paid out for employee severance in the
year ended December 31, 2001 and $112,000 was paid in the three-month period
ended March 31, 2002. The remaining $127,000 of severance payments, which is
included in accrued expenses, is expected to be paid by September 30, 2002.

     The following table sets forth the Company's restructuring accrual and
activity recorded during the three-month period ended March 31, 2002:

(in thousands)                                                          Total
                                                                      ---------
Restructuring severance accrual balance at December 31, 2001          $     239
Cash payments                                                              (112)
                                                                      ---------
Restructuring severance accrual balance at March 31, 2002             $     127
                                                                      =========



6.   Segment Reporting

     In 2001, the Company viewed its business as having two main product lines:
1) the Expert Manufacturing product line, which focused on expanding Gensym's
presence in chemical, oil and gas, pharmaceutical, and other manufacturing
industries; and 2) the Network Management product line, which focused on
building Gensym's entrance into the Business-to-Business electronic
infrastructure of networks, e-marketplace entrants, and Fortune 1000 companies.
These product lines had their own specialized sales strategies, but shared
business development, consulting, and training resources. With the sale of the
Company's network management product line, NetCure, in the quarter ended
December 31, 2001, management believes that it is no longer meaningful or
efficient to evaluate and manage the business along two distinct market
segments. As such, the Company began reporting its results under one operating
segment in the three-month period ended March 31, 2002.

                                       6

<PAGE>

     The following table presents the Company's revenues by geographic area:

                                               Three months ended
                                                    March 31,
                                           2002                   2001
                                       -------------          -------------
               United States                    47%                    61%
               Europe                           42%                    29%
               Other                            11%                    10%
                                       -------------          -------------
                                               100%                   100%
                                       =============          =============

7.   Recent Accounting Pronouncements

     In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement supersedes FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions
of Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Under
this statement, it is required that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired, and it broadens the presentation of discontinued operations to include
more disposal transactions. The provisions of this statement are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early adoption permitted.
The adoption of SFAS No. 144 on January 1, 2002 did not have a significant
impact on the Company's consolidated financial statements.

                                       7

<PAGE>

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

Overview

     We were incorporated in 1986 to provide software products for expert
operations management. We provide software products and services that enable
organizations to automate aspects of their operations that have historically
required the direct attention of human experts. Our product and service
offerings are all based on or relate to our flagship product, G2, which can
emulate the reasoning of human experts as they assess, diagnose, and respond to
unusual operating situations or as they seek to optimize operations. With G2,
organizations in manufacturing, communications, transportation, aerospace, and
government maximize the performance and availability of their operations.

     For example, Fortune 1000 manufacturers such as ExxonMobil, DuPont,
LaFarge, Eli Lilly, and Seagate use G2 to help operators detect problems early
and to provide advice that avoids off-specification production and unexpected
shutdowns. Manufacturers and government agencies use G2 to optimize their supply
chain and logistics operations. Also, communications companies such as AT&T,
Ericsson Wireless, and Nokia use G2 to troubleshoot network faults so that
network availability and service levels are maximized.

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

     We also distribute our 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 our other software
platforms. We market our products in Japan, South America and certain other
countries through distributors. These distributors have technical competence in
the application of G2 and our other technologies, market our products, provide
local training and support assistance to customers, translate documentation,
help localize software, and provide systems integration services.

     In August 2001, we announced a strategic restructuring plan that included a
40% reduction in workforce and a renewed focus on our existing customer base and
our G2 and G2-based products. We also realigned our software and services into
two major product lines: one comprised of G2 and G2-based products, and the
other comprised of NetCure and related products. As part of the strategic
restructuring, we announced that we would seek strategic partners to promote and
exploit the NetCure product line and that we would explore and consider our
options with respect to the sale of the NetCure product line to an established
market participant capable of exploiting it. On November 9, 2001 we sold the
NetCure product line to Rocket Software, Inc. for $2.5 million in cash.

     Our critical accounting policies, as detailed in our 10-K for the year
ended December 31, 2001, have not changed during the three months ended March
31, 2002.

     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:

                                                    Three months ended
                                                         March 31,
                                                2002                  2001
                                             ------------          ------------
REVENUES:
  Product                                          33.3%                 32.7%
  Services                                         66.7%                 67.3%
                                             ------------          ------------
     Total revenues                               100.0%                100.0%

COST OF REVENUES
  Product                                           4.0%                  3.5%
  Services                                         17.9%                 20.9%
                                             ------------          ------------
     Total cost of revenues                        21.9%                 24.4%
                                             ------------          ------------

     Gross profit                                  78.1%                 75.6%

OPERATING EXPENSES:
  Sales and marketing                              28.7%                 56.9%
  Research and development                         16.3%                 31.4%
  General and administration                       19.6%                 16.1%
   Restructuring charge                               -                  11.1%
                                             ------------          ------------
     Total operating expenses                      64.6%                115.5%

     Operating income (loss)                       13.5%                (39.9%)

OTHER (EXPENSE) INCOME, NET                        (0.4%)                (0.3%)
                                             ------------          ------------

     Income (loss) before provision
        for income taxes                           13.1%                (40.2%)

PROVISION FOR INCOME TAXES                          1.5%                  0.5%
                                             ------------          ------------

     Net income (loss)                             11.6%                (40.7%)
                                             ============          ============

Three Months Ended March 31, 2002 and 2001

Revenues

     Our revenues are derived from two sources: product and services. Product
revenues include revenues from sales of licenses for use of our software
products. Service revenues consist of fees for maintenance contracts, consulting
services, and training courses related to our products.

     Total revenues were $4.3 million for the three months ended March 31, 2002
as compared to $5.4 million for the same period in 2001, a decrease of $1.1
million, or 21%. The decrease in total revenues was primarily attributable to a
decrease in sales of product licenses of $0.3 million and a decrease in sales of
consulting services of $0.6 million. Both domestic and international markets
contributed to the decrease in revenues, reflecting the overall weakness in
economic conditions of the U.S. and world markets. International revenues
accounted for 53% and 39% of total revenues for the three months ended March 31,
2002 and 2001, respectively.

                                       9

<PAGE>

     Product. Product revenues decreased $0.3 million, or 19%, to $1.4 million
for the three months ended March 31, 2002 as compared to $1.8 million in the
comparable quarter for 2001. The decline in product revenue was attributable to
the general slowdown in the U.S. and world markets and a decrease of sales
personnel resulting from the implementation of our strategic restructuring plan.
Sales to one customer, Transco PLC, accounted for $479,000 of product revenue
for the three-month period ended March 31, 2002.

     Services. Service revenues decreased $0.8 million, or 21%, to $2.9 million
for the three months ended March 31, 2002 as compared to $3.7 million in the
comparable quarter for 2001. The decrease in service revenues was primarily due
to a decrease in consulting revenues of $0.6 million for the three months ended
March 31, 2002, from $1.1 million in the comparable quarter for 2001. The
decrease in consulting revenue was due to a general slowdown in the U.S. and
world markets and a reduction in consulting personnel resulting from the
implementation of our restructuring plan. Maintenance and training fees during
the three months ended March 31, 2002 remained relatively unchanged from the
three months ended March 31, 2001.

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 our software. These expenses for the three months ended March 31,
2002 decreased $0.4 million, or 29%, to $0.9 million (22% of total revenue) from
$1.3 million (24% of total revenue) in the comparable quarter for 2001. The
decrease was primarily due to the reduction of payroll and personnel related
expense of $0.4 million. The number of employees associated with the cost of
revenue decreased by 24, or 49%, to 25 employees at March 31, 2002 compared to
49 employees at March 31, 2001. Gross margin for the three months ended March
31, 2002 was 78% compared with 76% for the comparable period for 2001. Gross
margin increased because a reduction in our services expenses more than offset a
reduction in our total revenues.

     Product. Product costs were $0.2 million for the three-month period ending
March 31, 2002 and remained relatively unchanged from the comparable quarter for
fiscal 2001. The number of employees associated with the delivery of products
decreased by 2, or 33%, to 4 employees at period ended March 31, 2002 compared
to 6 employees at period ended March 31, 2001. Personnel related expenses
decreased by $0.1 million and were offset by an increase in printing and
facilities cost of $0.1 million for the three months ended March 31, 2002
compared to the same period in 2001.

     Services. Services costs were $0.8 million for the three months ended March
31, 2002, a decrease of $0.4 million from the comparable quarter for fiscal
2001. The number of employees associated with the services costs of revenue
decreased by 22, or 51%, to 21 employees at March 31, 2002 compared to 43
employees at March 31, 2001. Total services personnel related expenses decreased
by $0.4 million for the three-month period ended March 31, 2002 compared to the
same period for 2001. Consulting employees decreased by 15, or 58%, to 11
employees at March 31, 2002. Consulting personnel related expenses decreased by
$0.4 million offset by an increase in facilities cost of $0.1 million for the
three-month period ended March 31, 2002 compared to the same period of 2001.
Training and customer support headcount decreased by 7, or 41%, to 10 employees
at March 31, 2002. Personnel related expenses decreased by $0.1 million for the
three-month period ended March 31, 2002 compared to the same period in 2001.

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, 2002 decreased $1.9 million, or 60%, to $1.2 million (29%
of total revenue) from $3.1 million (57% of total revenue) in the comparable
quarter for 2001. The decrease was primarily due to our restructuring, which
resulted in a reduction in payroll and personnel related expenses of $1.5
million, a reduction of marketing programs and trade shows of $0.2 million and a
reduction of facilities support costs of $0.2 million. Facility support costs
decreased because they are allocated based on the number of employees and the
number of employees associated with sales and marketing decreased by 38, or 69%,
to 17 employees at March 31, 2002 compared to 55 employees at March 31 2001.

     Research and Development. Research and development expenses consist
primarily of costs of personnel, equipment, and facilities. These expenses for
the three months ended March 31, 2002 decreased $1.0 million, or 59%, to $0.7
million (16% of total revenue) from $1.7 million (31% of total revenue) in the
comparable quarter for 2001. The decrease was primarily attributable to a
reduction in personnel-related costs of $0.8 million and a reduction in
professional services and facilities support cost of $0.2 million. The number of
employees associated with research and development decreased by 24, or 59%, to
17 employees at March 31, 2002 compared to 41 employees at March 31, 2001.

                                       10

<PAGE>

General and Administrative. General and administrative expenses consist
primarily of personnel costs for finance, administration, operations, and
general management, as well as legal and accounting expenses. These expenses for
the three months ended March 31, 2002 of $0.8 million were level with the
expenses for the same period in 2001, but increased as a percent of revenues as
compared to the 2001 period as a result of a lower revenue base in 2002.
Decreases in personnel related costs were offset by increases in professional
fees and facility expenses.

Restructuring Charge

     In January, April, July, and August 2001, we undertook restructuring plans
to reduce operating costs. We incurred no restructuring charges for the
three-month period ended March 31, 2002, while we reported restructuring charges
of $0.6 million in the same three-month period in 2001.

Other expense, net

     Other expense consists primarily of interest expense and foreign exchange
transaction gains and losses. Other expense was $18,000 for both three month
periods ended March 31, 2002 and 2001.

Income Taxes

     Our provision for income taxes primarily pertained to foreign withholding
tax and income taxes in foreign jurisdictions, where our subsidiaries had
taxable income, but do not have operating loss carryforwards.

Liquidity and Capital Resources

     Our March 31, 2002 cash and cash equivalents balance of $3.3 million
increased $1.3 million from $2.0 million at December 31, 2001. The change in our
cash balance was primarily attributable to our operating activities. Cash
provided by operations for the period ended March 31, 2002 was $1.4 million.
Cash provided by a reduction of accounts receivable of $2.4 million and from net
income of $0.5 million was partially offset by a decrease in our deferred
revenue of $1.0 million, a decline in accrued liabilities of $0.3 million and an
increase in our other current assets of $0.2 million.

     On March 28, 2001, we entered into an accounts receivable financing
agreement with Silicon Valley Bank. The financing agreement provides us with the
ability to borrow up to 80% of our 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. On August 16, 2001, we renegotiated the terms of the
financing agreement, and signed an accounts receivable purchase agreement that
does not include restrictive financial covenants. The total available
borrowings, interest rate and administrative fee under the renegotiated facility
remain unchanged. At March 31, 2002 we had no borrowings outstanding under this
facility. Amounts under this facility are collateralized by substantially all of
our corporate assets. The facility may be terminated by either party at any
time.

     We currently finance our operations, along with capital expenditures,
primarily through cash flows from operations, short-term financing arrangements,
and our current cash. Our lease commitments consist of operating leases
primarily for our facilities and computer equipment. We also have a capital
lease for our communications equipment.

     Our liquidity is affected by many factors, some based on the normal
operations of our business and others related to the uncertainties of the
industry and global economies. As discussed above, our cash requirements have
been reduced significantly as a result of the restructuring actions we undertook
in 2001. Although our cash requirements will fluctuate based on the factors set
forth above, we believe that our current cash and cash equivalents and cash
flows from operations will be sufficient to meet our expected working capital
needs and other operating cash requirements for at least the next twelve months.

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Factors That May Affect Future Results

         The following important factors, among others, could cause our 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 our
management from time to time.

     We have a history of operating losses, and we may not remain profitable
despite our recent restructuring.

     We have incurred operating losses for each of the five years in the period
ended December 31, 2001. In August 2001, we announced a strategic restructuring
of our company that included a 40% reduction in workforce, a realignment of our
software and services into two major product lines and a renewed focus on our
existing customers. With the restructuring, we took the required steps to return
our company to profitability for the quarter ended March 31, 2002. Our
management's operational plan relies heavily on achieving operating
profitability in 2002 and beyond. Our return to profitability is based on
expense control, cost reductions and continued revenue from new and existing
customers. However, there can be no assurance that we will remain profitable.

     Our common stock has been delisted from the Nasdaq National Market. As a
result of the delisting, our stockholders may face an illiquid market for the
shares of our stock that they own.

     Our common stock was delisted from the Nasdaq National Market on August 20,
2001 because we failed to meet the listing standards required by Nasdaq. The
delisting may negatively impact the liquidity of our common stock, not only in
the number of shares that can be bought or sold, but also through delays in the
timing of transactions and the reductions in potential security analyst and
media coverage. This may reduce the demand for our common stock and its trading
price. The delisting may also impair our ability to raise additional working
capital.

     Our common stock currently trades on the OTC Bulletin Board and is subject
to regulation as a "penny stock." The Securities and Exchange Commission has
adopted regulations that generally define "penny stock" to be any equity
security that has a market price or exercise price of less than $5.00 per share,
subject to certain exceptions, including listing on the Nasdaq National Market
or the Nasdaq SmallCap Market. For transactions covered by the "penny stock"
rules, broker-dealers must make a special suitability determination for the
purchase of the securities and must have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a risk disclosure document mandated by
the Securities and Exchange Commission relating to the penny stock market. The
broker-dealer is also subject to additional sales practice requirements. The
additional burdens imposed upon broker-dealers by these requirements may
discourage broker-dealers from effecting transactions in our common stock and
may limit the ability of purchasers in this offering to sell the common stock in
the secondary market.

     Competition in the market for expert operations management systems is
intensifying and may reduce our revenues.

     Substantially all of our revenues are derived from the licensing and
support of software platforms and products for expert operations management and
supply-chain design. Although many organizations have begun to deploy, or have
announced plans to deploy, such 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 operations management systems successfully, nor that such systems
will gain widespread acceptance. In addition, the timing of the implementation
of operations management systems by organizations may be affected by economic
factors, government regulations, and other factors. Delays in the introduction
of expert operations management systems or the failure of these systems to gain
widespread market acceptance would materially and adversely affect our business,
results of operations, or financial condition. In addition, we believe that
end-users in our markets are increasingly seeking application-specific products
and components as well as complete solutions, rather than general software tools
to develop application-specific functionality and solutions. Meeting this demand
has required us to modify our sales approach. We are also increasingly reliant
on value-added resellers and systems integrators to satisfy market requirements.
The modified sales approach may also lengthen our average sales cycle. Our
failure to respond appropriately to shifts in market demand could have a
material adverse effect on our business, results of operations, or financial
condition.

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<PAGE>

     We rely heavily on indirect distribution channels and strategic partner
relationships for the sales of our products. If these relationships are
disrupted, our revenues may be adversely effected.

     We sell our products in part through value-added resellers, systems
integrators, original equipment manufacturers and distributors, which are not
under our control. Sales of our products by value-added resellers and systems
integrators represented 18% and 32% of our product revenues in the first three
months of 2002 and 2001, respectively. In January 2001, we significantly reduced
our direct sales force for our expert operations management products and in
early August 2001 we announced another workforce reduction in connection with
our strategic restructuring. We are continuing to manage our relationships with
existing expert operations management customers. We now rely increasingly on our
indirect sales partners for sales of our expert operations management products
to new customers. The loss of major original equipment manufacturers or
resellers of our 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 of our core technology products and applications could have a
material adverse effect on our business, results of operations, or financial
condition. There can be no assurance that we 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 our products. In addition, we rely on
third-party resellers to provide post-sales service and support to our
customers, and any deficiencies in such service and support could adversely
affect our business, results of operations, or financial condition.

     We depend heavily on our sales and marketing force.

     Our future success in the expert operations management marketplace will
depend, in part, upon the productivity of our sales and marketing personnel and
our ability to continue to attract, integrate, train, motivate and retain new
sales and marketing personnel. There can be no assurance that our investment in
sales and marketing will ultimately prove to be successful. In addition, there
can be no assurance that our 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 our current and potential competitors.
Our inability to manage our sales and marketing personnel effectively could have
a material adverse effect on our business, operating results and financial
condition.

     Our quarterly operating results vary, leading to fluctuations in trading
prices for our common stock and possible liquidity problems.

     We have experienced, and may experience in the future, significant
quarter-to-quarter fluctuations in our operating results. We recorded losses in
each of the first three quarters in 2001, we were profitable in the fourth
quarter ended December 31, 2001 and we were profitable in the first quarter of
2002. There can be no assurance that revenue growth or profitable operations can
be attained on a quarterly or annual basis in the future. Our sales cycle
typically ranges from six to 12 months, and the cost of acquiring our software,
building and deploying applications, and training users represents a significant
expenditure for customers. Our 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, we ship software products
within a short period after receipt of an order and typically do 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. Our
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 our net income and cash flows which may impact our ability to
continue as an independent concern. Our financial performance has generally been
somewhat weaker in the first quarter than in the other fiscal quarters, due to
customer purchasing patterns.

     Sales of our products are highly dependent on our customers capital
expenditure budgets. If an economic downturn causes our customers to reduce
their capital expenditures, our revenues may be adversely effected.

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

                                       13

<PAGE>

     We rely heavily on revenues from our G2 product. If demand for the G2
product declines, our revenues may be adversely effected.

     Our main product offerings are G2, a customizable object-oriented
development and deployment platform for building expert operations management
systems, and software application products based on G2 and other core
technologies. Accordingly, our business and financial results are substantially
dependent upon the continued customer acceptance and deployment of G2 and our
other products. The timing of major G2 releases may affect the timing of
purchases of our products. We have introduced several G2-based products for
building applications and are developing others. We believe that market
acceptance of these products will be important to our future growth. There can
be no assurance that such products will achieve market acceptance or that new
products will be successfully developed. In addition, we rely on many of our
distribution partners to develop G2-based products for specialized markets.

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

     Our business may be adversely effected if we fail to develop new products
and respond to the changes in technology.

     The market for our 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. Our
future success will depend in part upon our ability to enhance our 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. We have from time to time experienced delays in
introducing new products and product enhancements. There can be no assurance
that we 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 we will successfully
complete the development of new or enhanced products, that we will successfully
manage the transition to future versions of G2, or to successor technology, or
that our future products will achieve market acceptance. In addition, the
introduction of products embodying new technologies and the emergence of new
industry standards could render our 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 our 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 our existing products.

     Our business may suffer if we fail to address the challenges associated
with international operations.

     Our international revenues represented 53% and 39% of total revenues in the
first three months of 2002 and 2001, respectively. We categorize our revenues
according to product shipment destination and therefore do not necessarily
reflect the ultimate country of installation. The international portion of our
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 our sales and marketing operations in that region. There can
be no assurance that these factors will not adversely affect our business,
results of operations, or financial condition.

     Our business may suffer if we fail to remain competitive with other
companies offering similar products and services.

     A number of companies offer products that perform certain functions of G2
for specific applications. In all of our 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 our
products.

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<PAGE>

     Certain companies, such as Objective Systems Integrators, Inc., Micromuse,
RiverSoft and Systems Management Arts (SMARTS), sell "point solutions" that
compete with our network management products with respect to specific
applications or uses. Several companies, including AspenTech, Ilog S.A.,
Pavilion and System Management Arts, offer expert operations management products
with limited real-time, expert system, or fault isolation capabilities at lower
price points than those provided by us. Many of these products often require
extensive programming with languages such as C or C++ for complete
implementation. Although we believe 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 we do and might introduce new or
improved products to compete with G2, possibly at lower prices.

     Our 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 our software.

     Many of our 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 our products. There is no assurance that we 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 our products
and services and may limit our future opportunities.

     We believe that continued investment in research and development and sales
and marketing will be required to maintain our competitive position. There can
be no assurance that competitors will not develop products or provide services
that are superior to our products or services or achieve greater market
acceptance. Competitive pressures faced by us could force us to reduce our
prices, which could result in reduced profitability. There can be no assurance
that we 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 our business, results of operations, or financial condition.

     Our software is complex and may contain undetected errors. Such errors
could cause costly delays in product introduction or require costly software
design modifications.

     Complex software products such as those offered by us may contain
unintended errors or failures commonly referred to as "bugs". There can be no
assurance that, despite significant testing by us and by current and potential
customers, errors will not be found in new products after commencement of
commercial shipments. Although we have 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 our business, results of operations, or financial
condition.

     Because we rely heavily upon proprietary technology, our business could be
adversely effected if we are unable to protect our proprietary technology or if
third parties successfully assert infringement claims against us.

     Our success is heavily dependent upon our proprietary technology. We rely
upon a combination of trade secret, contract, copyright, patent, and trademark
law to protect our proprietary rights in our products and technology. We enter
into confidentiality and/or license agreements with our employees, third-party
resellers, and end-users and limit access to and distribution of our software,
documentation, and other proprietary information. In addition, we have placed
technical inhibitors in our 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 our products are
distributed. There can be no assurance that the steps taken by us to protect our
proprietary technology will be adequate to prevent misappropriation of our
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.

     On August 2, 2001, we received a letter from a third party alleging that we
are infringing one or more of their patents relating to neural networks expert
systems and the control of processes. At this time, no formal legal action has
been filed. We believe that these allegations are without merit, and we are
currently engaged in discussions with that party to resolve this matter. There
can be no assurance that our discussions will be successful

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<PAGE>

and resolve the infringement allegations satisfactorily. Additionally, there can
be no assurance that the third party will not file formal legal action relating
to its claims or, if formal legal action is filed, that our defense against
those claims will be successful.

Recent Accounting Pronouncements

     In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement supersedes FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions
of Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Under
this statement, it is required that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired, and it broadens the presentation of discontinued operations to include
more disposal transactions. The provisions of this statement are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early adoption permitted.
The adoption of SFAS No. 144 on January 1, 2002 did not have a significant
impact on the Company's consolidated financial statements.

ITEM 3. Qualitative and Quantitative Disclosures About Market Risk

Investment Portfolio

     We do not use derivative financial instruments in our investment portfolio.
If we place our funds in other than demand deposit accounts we use instruments
that meet high credit quality standards such as money market funds, government
securities, and commercial paper. We limit the amount of credit exposure to any
one issuer. At March 31, 2002 substantially all of our funds were in demand
deposit accounts.

Impact of Foreign Currency Rate Changes

     The U.S. dollar was stronger, on average, in the first three months of 2002
compared to the first three months of 2001 with respect to the currencies of the
European countries in which we have subsidiaries. However, the translation of
our intercompany receivables and foreign entities' assets and liabilities did
not have a material impact on our consolidated results. We do not use foreign
exchange forward contracts to hedge our foreign currency denominated
receivables. There can be no assurance that changes in foreign currency rates,
relative to the U.S. dollar, will not materially affect our consolidated results
in the future.

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Part II.  Other information

ITEM 6. Exhibits and Reports on Form 8-K.

(a)  No exhibits are filed as part of this Quarterly Report on Form 10-Q.

(b)  The following report on Form 8-K was filed for the quarter for which this
     report is filed.

     On January 8, 2002, the Company filed Amendment No. 2 to the Current Report
     on Form 8-K to include, under Item 7, the pro forma financial information
     required by Item 7(b) of Form 8-K and omitted from the Current Report on
     Form 8-K dated November 9, 2001 and filed with the Securities and Exchange
     Commission on November 21, 2001, as amended by Amendment No. 1 thereto
     filed on November 26, 2001.

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                                   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/ John Belchers
                                                    -------------------------
         Dated May 15, 2002                         John Belchers
                                                    Chief Financial Officer
                                                    (Principal Financial and
                                                    Accounting Officer)

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