<PAGE>   1


                                  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, 1997

                                       OR

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


                         COMMISSION FILE NUMBER: 0-27696

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

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

                             125 CAMBRIDGEPARK DRIVE
                               CAMBRIDGE, MA 02140
                    (Address of principal executive offices)

                         TELEPHONE NUMBER (617) 547-2500
              (Registrant's telephone number, including area code)




     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:

          Yes  X                                       No 
              ---                                          ---

     As of May 9, 1997 there were 6,270,486 shares of the Registrant's Common
Stock outstanding.


                                       1

<PAGE>   2
                               GENSYM CORPORATION
                                 Form 10-Q INDEX

                          PART I. FINANCIAL INFORMATION


                                                                        PAGE NO.
                                                                        --------
Item 1.           Condensed Consolidated Financial Statements:             

                  Condensed Consolidated Balance Sheets
                  March 31, 1997 and December 31, 1996                      3

                  Condensed Consolidated Statements of Operations
                  Three months ended March 31, 1997 and 1996                4

                  Condensed Consolidated Statements of Cash Flows
                  Three months ended March 31, 1997 and 1996                5

                  Notes to Condensed Consolidated Financial Statements    6-7

Item 2.           Management's Discussion and Analysis of                8-15
                  Financial Condition and Results of Operations

Item 3.           Quantitative and Qualitative Disclosures About
                  Market Risk                                              15

                           PART II. OTHER INFORMATION

Item 1.           Legal Proceedings                                        16

Item 2.           Changes in Securities                                    16

Item 3.           Defaults Upon Senior Securities                          16

Item 4.           Submission of Matters to a Vote of Security Holders      16

Item 5.           Other Information                                        16

Item 6.           Exhibits and Reports on Form 8-K                         16

                  Signatures                                               17







                                       2

<PAGE>   3
PART I.  FINANCIAL INFORMATION
ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
                       GENSYM CORPORATION AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)


<CAPTION>
(in thousands)                                                     MARCH 31,      DECEMBER 31,
                                                                     1997             1996
                                                                   ---------      ------------
<S>                                                                  <C>            <C>
                              ASSETS

Current Assets:
       Cash and cash equivalents                                     $11,505        $11,679
       Short-term investments                                          7,731          7,911
       Accounts receivable, net                                        9,518          9,736
       Prepaid expenses                                                2,479          1,754
       Deferred income taxes                                           1,359          1,579
                                                                     -------        -------
            Total current assets                                      32,592         32,659
                                                                     -------        -------

Property and Equipment, net                                            2,750          2,641
Long-term investments                                                  1,039            742
Deposits and other assets                                                301            215
                                                                     -------        -------
                                                                     $36,682        $36,257
                                                                     =======        =======

               LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
       Accounts payable                                              $   707        $ 1,262
       Accrued expenses                                                5,050          5,109
       Deferred revenue                                                6,420          5,818
                                                                     -------        -------
            Total current liabilities                                 12,177         12,189
                                                                     -------        -------



Stockholders' Equity:
       Common stock                                                       63             62
       Capital in excess of par value                                 19,207         18,727
       Retained earnings                                               5,422          5,356
       Cumulative translation adjustment                                (187)           (77)
                                                                     -------        -------
            Total stockholders' equity                                24,505         24,068
                                                                     -------        -------
                                                                     $36,682        $36,257
                                                                     =======        =======


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

                                       3

<PAGE>   4


<TABLE>

                       GENSYM CORPORATION AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<CAPTION>

(in thousands except net income per share)                                 THREE MONTHS ENDED
                                                                                 MARCH 31,
                                                                            1997         1996
                                                                          -------       ------
<S>                                                                       <C>           <C>
REVENUES:
      Product                                                             $ 5,932       $4,723
      Service                                                               4,099        3,718
                                                                          -------       ------
            Total revenues                                                 10,031        8,441
                                                                          -------       ------

COST OF REVENUES                                                            2,331        1,646
                                                                          -------       ------

            Gross profit                                                    7,700        6,795
                                                                          -------       ------

OPERATING EXPENSES:
      Sales and marketing                                                   4,711        4,214
      Research and development                                              1,866        1,397
      General and administrative                                            1,001          732
                                                                          -------       ------
                                                                            7,578        6,343
                                                                          -------       -------

            Operating income                                                  122          452

OTHER INCOME (EXPENSE), NET                                                   (16)          63
                                                                          -------       ------

            Income before provision for income taxes                          106          515

PROVISION FOR INCOME TAXES                                                     40          182
                                                                          -------       ------

            Net income                                                    $    66       $  333
                                                                          =======       ======

            Net income per share                                          $  0.01       $ 0.06
                                                                          =======       ======

            Weighted average common and common equivalent
                shares outstanding                                          6,404        5,731
                                                                          =======       ======


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

</TABLE>


                                       4

<PAGE>   5


<TABLE>

                              GENSYM CORPORATION AND SUBSIDIARIES
                       CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                          (UNAUDITED)
<CAPTION>
(in thousands)                                                                    THREE MONTHS ENDED
                                                                                       MARCH 31,
                                                                                1997             1996
                                                                              -------          -------
<S>                                                                           <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income                                                              $    66          $   333
      Adjustments to reconcile net income 
          to net cash provided by operating activities:
          Depreciation                                                            265              280
          Deferred taxes                                                          220               35
          Changes in assets and liabilities:
                Accounts receivable                                               193             (361)
                Prepaid expenses                                                 (789)              24
                Accounts payable                                                 (540)             193
                Accrued expenses                                                   (3)             208
                Deferred revenue                                                  607              437
                                                                              -------          -------

                       Net cash provided by operating activities                   19            1,149
                                                                              -------          -------

CASH FLOWS FROM INVESTING ACTIVITIES:
      (Purchases) sales of short-term investments                                 180           (1,219)
      Purchases of long-term investments                                         (297)               -
      Purchases of property and equipment                                        (374)            (253)
      (Increase) decrease in other assets                                         (95)              93
                                                                              -------          -------

                       Net cash used in investing activities                     (586)          (1,379)
                                                                              -------          -------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from exercise of stock options                                     480               21
      Proceeds from initial public offering - net                                   -           11,978
                                                                              -------          -------

                       Net cash provided by financing activities                  480           11,999
                                                                              -------          -------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                           (87)             (38)
                                                                              -------          -------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                             (174)          11,731

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                 11,679            2,126
                                                                              -------          -------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                      $11,505          $13,857
                                                                              =======          =======



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

</TABLE>


                                       5
<PAGE>   6


                       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 developing and deploying intelligent solutions in a broad range
of industrial, scientific, commercial and government markets.

2. Basis of Presentation

The unaudited condensed consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been condensed or omitted
pursuant to such SEC rules and regulations; nevertheless, the management of the
Company believes that the disclosures herein are adequate to 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, 1997 and the results of its
operations and its cash flows for the three month periods ended March 31, 1997
and 1996. These condensed consolidated financial statements and notes thereto
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K filed with
the SEC on March 31, 1997. The results of operations for the interim period are
not necessarily indicative of the results of operations for the full year.

3. Joint Venture

In October 1996, the Company invested $100,000 in a joint venture, PDS
Technologies LLC ("PDS"), representing a 50% equity interest. During the first
quarter of 1997, the Company invested an additional $250,000, with the total
investment of $350,000 representing a 50% equity investment.

The Company is accounting for this investment using the equity method. The net
investment is included in deposits and other assets in the accompanying
condensed consolidated balance sheets. The Company has recognized approximately
$179,000 and $0 for the three months ended March 31, 1997 and 1996,
respectively, in net losses as its portion of the losses from the joint venture.
This loss is included in other income (expense), net in the accompanying
condensed consolidated statements of operations.

4. Investments

The Company applies Statement of Financial Accounting Standards ("SFAS") No.
115, Accounting for Certain Investments in Debt and Equity Securities.
Accordingly, the Company's investments are classified as available-for-sale and
are recorded at fair value, which approximates amortized cost at March 31, 1997
and December 31, 1996. Cash equivalents are short-term, highly liquid
investments with original maturity dates of less than three months. Short-term
investments held as of March 31, 1997 and December 31, 1996 consist of municipal
bonds with original maturity dates greater than three months and less than one
year. Long-term investments held as of March 31, 1997 and December 31, 1996,
consist of municipal bonds with original maturity dates of greater than one
year.

                                       6

<PAGE>   7


5. Significant Accounting Policies

In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. This statement is effective for fiscal years
ending after December 15, 1997 and early adoption is not permitted. When
adopted, the statement will require restatement of prior years' earnings per
share. The Company will adopt this statement for its fiscal year ended December
31, 1997. In addition, the Company believes that the adoption of SFAS No. 128
will not have a material effect on its financial statements.


6. Stockholders' Equity and Per Share Data

For the quarters ended March 31, 1997 and 1996, net income per common and common
equivalent share was computed using the weighted average number of common and
common equivalent shares outstanding during the period in accordance with the
treasury stock method.







                                       7
<PAGE>   8

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
developing and deploying intelligent systems for decision support and control.
The Company released the first version of G2, its core product, in May 1988, and
has been profitable each year since 1989. Since 1988, the Company has introduced
enhanced versions of G2 and expanded its product line to include several
G2-based application products as well as several G2 connectivity products. In
addition, the Company derives significant service revenues from maintenance
contracts, consulting services, and training courses related to its software
products.

     The Company markets and sells products through its direct sales offices in
the United States, Europe, Africa, and Asia, as well as through selected
distributors in other countries, including Japan. The Company also sells its
products through a network of value-added resellers and systems integrators who
provide consulting services and integrated solutions to their customers. The
Company believes that there is a trend among end-users in its markets toward
purchasing complete solutions, rather than software tools with which to develop
such solutions. This trend has increased the Company's reliance on such
value-added resellers and systems integrators to provide consulting services and
integrated solutions to end-users, and has led the Company to increase its own
capabilities to deliver complete solutions directly. In January 1997, the
Company established three strategic business units, Manufacturing,
Communications, and Advanced Systems, to manage domain-specific expertise,
products, and services required to serve mainstream customers. The Company has
also adopted a solutions-oriented approach in its sales, marketing, product
development and service organizations.

     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" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth below under the
caption "Certain Factors That May Affect Future Results."





                                       8
<PAGE>   9



RESULTS OF OPERATIONS

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

<CAPTION>
                                                  THREE MONTHS ENDED
                                                        MARCH 31,
                                                  1997          1996
                                                 -----         -----
<S>                                              <C>           <C>
Revenues:
       Product                                    59.1%         56.0%
       Service                                    40.9          44.0
                                                 -----         -----
              Total revenues                     100.0         100.0
                                                 -----         -----

Cost of revenues:                                 23.3          19.5
                                                 -----         -----

Gross margin                                      76.7          80.5
                                                 -----         -----

Operating expenses:
       Sales and marketing                        46.9          49.9
       Research and development                   18.6          16.5
       General and administrative                 10.0           8.7
                                                 -----         -----

              Total operating expenses            75.5          75.1
                                                 -----         -----

Operating income                                   1.2           5.4

Other income (expense), net                       (0.1)          0.7
                                                 -----         -----

Income before provision for income taxes           1.1           6.1

Provision for income taxes                         0.4           2.2
                                                 -----         -----

Net income                                         0.7%          3.9%
                                                 =====         =====
</TABLE>



                                       9

<PAGE>   10


THREE MONTHS ENDED MARCH 31, 1997 AND 1996

Revenues

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

     Total revenues for the three months ended March 31, 1997 increased to $10
million from $8.4 million in the first quarter of 1996, an increase of 18.8%.
The increase in total revenues was attributable to increased sales of both
software product licenses and related services. International revenues accounted
for 48.5% of total revenues in the first quarter of 1997 and 47.2% in the first
quarter of 1996.

     Product. Product revenues increased to $5.9 million in the first quarter of
1997 from $4.7 million in the first quarter of 1996, an increase of 25.6%. The
increase in product revenues reflected earlier expansion of the Company's direct
sales force and marketing partnerships, as well as greater acceptance of G2 and
G2-based products in both existing and new market segments. While the Company
does not have a material amount of backlog at any given time, the backlog at 
March 31, 1997 decreased from the backlog at December 31, 1996.

     Service. Service revenues increased to $4.1 million in the first quarter of
1997 from $3.7 million in the first quarter of 1996, an increase of 10.2%. The
increase in service revenues was primarily due to increased maintenance fees due
to an increased customer base and increased maintenance renewals. The remaining
increase in service revenues was attributable to application consulting. The
Company has continued to expand its application consulting organization to meet
the growing demand from customers and partners for solution-level applications
and implementation support and to aggressively enter into new market segments
such as telecommunications.

     Cost of Revenues

     Cost of revenues consists primarily of the cost of product media and
duplication, manuals, packaging materials, the direct labor involved in
producing and distributing the Company's software, consulting labor costs, and
product support costs. These costs increased to $2.3 million in the first
quarter of 1997 from $1.6 million in the first quarter of 1996, an increase of
41.6%. Cost of revenues increased due to the increase in service revenues and
consisted primarily of increases in consulting labor costs. Gross margin on
revenues decreased to 76.7% for the first quarter of 1997 from 80.5% for the
first quarter of 1996, largely due to a decrease in consulting margin caused by
an increase in consulting personnel, including outside contractors.

     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, seminars, sales facilities expense, trade shows, advertising,
and promotional materials. These expenses increased to $4.7 million in the first
quarter of 1997 from $4.2 million in the first quarter of 1996, an increase of
11.8%. As a percentage of total revenues, sales and marketing expenses decreased
to 46.9% in the first quarter of 1997 from 49.9% in the first quarter of 1996.
The increase in absolute dollars was primarily due to the continued investment
in the Company's global sales and marketing capabilities, including the addition
of senior level management positions to manage three newly established strategic
business units. This increase was also due, to a lesser extent, to increased
costs related to adopting a solutions-oriented approach in the sales and
marketing organization, including the cost of solution selling training programs
provided to the sales force. While the Company plans to continue to increase its
sales and marketing expenses over the coming years, the Company expects these
expenses to continue to decline as a percentage of total revenues over time,
should revenue growth continue.


                                       10

<PAGE>   11


     Research and Development. Research and development expenses consist
primarily of costs of personnel, equipment and facilities. These expenses
increased to $1.9 million in the first quarter of 1997 from $1.4 million in the
first quarter of 1996, an increase of 33.6%. As a percentage of total revenues,
research and development expenses increased to 18.6% in the first quarter of
1997 from 16.5% in the first quarter of 1996. The increase in absolute dollars
and as a percentage of total revenues was primarily due to an increase
throughout 1996 in engineering personnel devoted to enhancements, new features
and quality assurance for the G2 product family, and to the development of new 
products. While the Company plans to increase research and development expenses
over the coming years, the Company expects that these expenses will decrease 
as a percentage of total revenues over time, should revenue growth continue.

     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
increased to $1.0 million in the first quarter of 1997 from $732,000 in the
first quarter of 1996, an increase of 36.6%. As a percentage of total revenues,
general and administrative expenses increased to 10.0% in the first quarter of
1997 from 8.7% in the first quarter of 1996. The increase in absolute dollars
and percentage of revenue was primarily due to an increase in the number of
personnel in the Company's information systems departments to strengthen the
Company's infrastructure and, to a lesser extent, the increased costs related to
being a public company such as preparation of SEC filings and printing costs.
The Company expects that these expenses will decline slightly as a percentage of
total revenue over time, should revenue growth continue.

     Other Income

     Other income (expense), net consists primarily of Gensym's 50 percent share
in the net loss of its joint venture investment in PDS, offset by interest
income and foreign exchange transaction gains and losses. Other income
(expense), net decreased to ($16,000) in the first quarter of 1997 from $63,000
in the first quarter of 1996. In the first quarter of 1997, the Company recorded
an expense of $179,000 which represents Gensym's share of the net loss from its
joint venture investment, which did not exist in the first quarter of 1996.
Interest income was $167,000 in the first quarter of 1997 as compared to $80,000
in the first quarter in 1996. The increase in interest income was primarily due 
to increased balances in cash, cash equivalents and short and long-term 
investments as a result of proceeds from the Company's initial public offering
in February 1996.

  Income Taxes

     The Company provides for income taxes based on the anticipated tax rate of
approximately 38% for the fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

     The Company currently finances its operations (including capital
expenditures) primarily through cash flow from operations and its current cash
and marketable securities balances. In addition, the Company has $5.0 million of
equipment financed under long-term operating leases. The Company's operating
lease commitments consist primarily of operating leases for the Company's
facilities and computers. The Company generated cash from operating activities
of $19,000 in the first quarter of 1997 and $1.1 million in the first quarter of
1996. Cash generated from operating activities in the first quarter of 1997 was
primarily due to an increase in deferred revenue and a decrease in accounts
receivable, partially offset by decreases in accounts payable and accrued
expenses and an increase in prepaid expenses.

     At March 31, 1997, the Company had cash, cash equivalents, and short-term
investments of $19.2 million. The Company regularly invests excess funds in
short-term, highly rated money market funds, government securities, and
commercial paper.

     At March 31, 1997, the Company had available a bank line of credit allowing
for borrowings up to $1.0 million and providing for an interest rate of prime.
This bank line of credit will expire on May 31, 1997. The Company expects that
the line of credit will be renewed on substantially similar terms. The bank line
of credit requires the Company to maintain certain financial covenants. The 


                                       11

<PAGE>   12

Company was in compliance with all covenants contained in the bank line of
credit at March 31, 1997. There were no borrowings under the bank line of credit
for the period ended March 31, 1997.

     Investing activities utilized $586,000 and $1.4 million during the first
quarters of 1997 and 1996, respectively. The principal uses in the first quarter
of 1997 were to fund the purchase of $374,000 of property and equipment and
$297,000 of long-term investments. The principal uses during the first quarter
in 1996 were to fund $1.2 million of short-term investments and $253,000 of
property and equipment. The Company expects that its requirements for computers,
office facilities and office equipment will grow as staffing requirements 
dictate and that such equipment and facilities will be available when needed.

     The Company believes that the currently available funds and cash generated
from operations will be sufficient to meet the Company's business requirements
at least through March 31, 1998.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

A number of uncertainties exist that could affect the Company's operating
results, including, without limitation, the following:

     Emerging Market for Intelligent Systems. Substantially all of the Company's
revenues are derived from the licensing and support of software products that
enable organizations to implement intelligent systems for decision support and
control applications. Although many organizations have begun to deploy, or have
announced plans to deploy, intelligent systems, these systems are different from
the basic monitoring and control systems that are traditionally employed by
these organizations. There can be no assurance that these organizations will be
able to introduce intelligent systems successfully nor that such systems will
gain widespread acceptance. In addition, the timing of the implementation of
intelligent systems by organizations may be affected by economic factors,
government regulations, and other factors. Delays in the introduction of
intelligent 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 market are increasingly seeking complete solutions, rather than
software tools with which to develop such solutions. Meeting this demand has
required the Company to modify its sales approach and increase its capabilities
to deliver complete solutions. The Company is also increasingly reliant on
value-added resellers and systems integrators to deliver services to implement
these solutions. The modified sales approach may also lengthen the Company's
average sales cycle. Failure by the Company to respond appropriately to such a
shift in market demand could have a material adverse effect on the Company's
business, results of operations, or financial condition.

     Variability of Quarterly Operating Results. The Company has experienced,
and may experience in the future, significant quarter-to-quarter fluctuations in
its operating results. Although the Company has been profitable for each of the
past eight fiscal years, the Company has, on occasion, recorded quarterly
losses, and there can be no assurance that revenue growth or profitable
operations can be sustained 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,
the timing of significant orders, the mix of products sold, and the mix of
domestic versus international revenues could contribute to this quarterly
variability. For example, the Company has experienced in the past, and may
experience in the future, delays in customer maintenance renewals due to
unforeseen delays in product releases. In addition, 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.

                                       12


<PAGE>   13

     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. Such capital
expenditures are also susceptible to industry-specific economic downturns.
Certain industries have experienced weakened demand in the past, which has
adversely affected the Company's revenues, gross margin, and operating results
during such periods. There can be no assurance that future recessionary
conditions in the markets for the Company's products will not adversely affect
the Company's business, results of operations, or financial condition.

     Product Concentration. The Company's only current product offerings are G2,
an object-oriented development and deployment environment for building
intelligent systems, and software products which operate in conjunction with G2.
Accordingly, the Company's business and financial results are substantially
dependent upon the continued customer acceptance and deployment of G2 and
related products. The timing of major G2 releases may affect the timing of
purchases of the Company's products. The Company has introduced several G2-based
products for building applications and is developing others. The Company
believes that market acceptance of these products will be important to the
Company's future growth. There can be no assurance that such products will
achieve market acceptance or that new products will be successfully developed.
In addition, the Company relies on many of its marketing partners to develop
G2-based products for specialized markets. Accordingly, the Company's business
and financial results are also linked to the continued successful development by
its marketing partners and market acceptance of such G2-based products. Any
decline in the demand for G2 and related products, whether as a result of
competitive products, price competition, the lack of success of the Company's
marketing partners, technological change, 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 new products, and product
enhancements. Also there can be no assurance that the Company will successfully
complete the development of new or enhanced products, that the Company will
successfully manage the transition to future versions of G2, or 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, the
Company, or others, may announce new products, capabilities, or technologies
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
Systems."



                                       13

<PAGE>   14


     Reliance Upon Indirect Distribution Channels. The Company sells its
products in part through value-added resellers, systems integrators, and
distributors, none of which is under the control of the Company. Sales of the
Company's products by value-added resellers and systems integrators represented
26%, 28% and 40% of the Company's product revenues in 1995, 1996 and the first
quarter of 1997, respectively. Sales of the Company's products by distributors,
primarily the Company's Japanese distributor, accounted for 14%, 14% and 13% of
the Company's product revenues in 1995, 1996 and the first quarter of 1997,
respectively. The loss of one or more major third-party distributors or
resellers of the Company's products, a significant decline in their sales, or
difficulty on the part of such third-party developers or resellers in developing
successful G2-based products and applications, could have a material adverse
effect on the Company's business, results of operations, or financial condition.
There can be no assurance that the Company will be able to attract or retain
additional qualified third-party resellers or that third-party resellers will be
able to effectively sell and implement the Company's products. In addition, the
Company relies on third-party resellers to provide post-sales service and
support to its customers, and any deficiencies in such service and support could
adversely affect the Company's business, results of operations, or financial
condition.

     Risks Associated With International Operations. The Company's international
revenues represented 44%, 42% and 49% of total revenues in 1995, 1996, and the
first quarter of 1997, respectively. Revenues are categorized by the Company
according to product shipment destination and therefore do not necessarily
reflect the ultimate country of installation. The international portion of the
Company's business is subject to a number of inherent risks, including
difficulties in building and managing international operations, difficulties in
localizing products and translating documentation into local languages,
fluctuations in the value of international currencies, fluctuating import/export
duties and quotas, and unexpected regulatory, economic, or political changes in
international markets. There can be no assurance that these factors will not
adversely affect the Company's business, results of operations, or financial
condition.

    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, causing delays in product introduction and
shipments or requiring design modifications that could 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 products, a number of companies offer
point solution products that perform certain functions of the Company's
products. Moreover, new competitors could enter the intelligent systems market,
and existing competitors could expand the capabilities of their products to
equal or exceed those of the Company's products. In addition, 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.

     The Company's software is 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 could be successful in
supplying alternatives to products based on the Company's software.

     The Company's products can also be used to perform lower-level functions
such as monitoring, supervisory control, cell control, and other similar
functions that do not utilize all of G2's capabilities. For these functions, G2
competes with products offered by a number of other companies. The Company
believes that its products compete favorably in these functional areas where
breadth of applicability, flexibility, maintainability, scalability, and ease of
use are important considerations. However, certain competitors in this category
have greater financial and other resources than the Company and might introduce
new or improved products to compete with G2, possibly at lower prices.


                                       14


<PAGE>   15

     The Company believes that continued investment in research and development
and sales and marketing will be required to maintain its competitive advantages.
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
competition will not have a material adverse effect on 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 independently develop similar technology. 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.

     Management of Growth. The Company's business has grown significantly over
the past several years. This growth has resulted in an increase in
responsibilities placed upon the Company's management and has placed added
pressures on the Company's operating and financial systems. For example, the
Company's expansion of its international operations introduced significant
legal, tax, and accounting complexities, as well as the challenges associated
with managing geographically dispersed operations. To manage its growth
effectively, the Company will be required to implement additional management and
financial systems and controls, and to expand, train, and manage its employee
base. There can be no assurance that the management and systems currently in
place will be adequate if the Company continues to grow, or that the Company
will be able to implement additional systems successfully and in a timely manner
as required. Any future strategic transactions such as acquisitions or equity
investments would place additional strains upon the Company's management
resources. There can be no assurance that the Company will be effective in
managing its future growth or that any failure to manage growth will not have a
material adverse effect on the Company's business, results of operations, or
financial condition.

     Dependence on Key Personnel. The Company's success depends in large part
upon certain key employees, 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. The loss of certain key employees or the Company's
inability to attract and retain other qualified employees or to adequately
replace key personnel who depart the Company could have a material adverse
effect on the Company's business, results of operations, or financial condition.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

    Not Applicable.


                                       15

<PAGE>   16


PART II - OTHER INFORMATION


ITEM 1.   LEGAL PROCEEDINGS

          None

ITEM 2.   CHANGES IN SECURITIES

          None

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

          None

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

          None

ITEM 5.   OTHER INFORMATION

          None

ITEM 6.   EXHIBITS AND REPORTS OF FORM 8-K

          (a)  Exhibit Index
               Exhibit 11 - Computation of Net Income Per Share
               Exhibit 27 - Financial Data Schedule

          (b)  No reports on Form 8-K were filed by Gensym during the quarter
               ended March 31, 1997.





                                       16




<PAGE>   17


                                   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/ Lowell B. Hawkinson
                                    -----------------------
      Dated:  May 13, 1997          Lowell B. Hawkinson
                                    Chief Executive Officer
                                    (Principal Executive Officer)


                                    /s/ Richard M. Darer
                                    --------------------
      Dated:  May 13, 1997          Richard M. Darer
                                    Vice President of Finance and 
                                    Administration, and Chief Financial Officer
                                    (Principal Financial and Accounting Officer)





                                       17