<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

          For the transition period from ____________ to ____________

                        Commission File Number 000-30277

                         SERVICEWARE TECHNOLOGIES, INC.
             (Exact Name of Registrant as Specified in Its Charter)

<Table>
<S>                                        <C>
                DELAWARE                       25-1647861
    (State or Other Jurisdiction of         (I.R.S. Employer
     Incorporation or Organization)        Identification No.)

          333 ALLEGHENY AVENUE
              OAKMONT, PA                         15139
(Address of Principal Executive Offices)       (Zip Code)
</Table>

       Registrant's Telephone Number, Including Area Code: (412) 826-1158

     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  _

     The number of shares of the registrant's common stock outstanding as of the
close of business on August 9, 2001 was 24,452,659.

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<PAGE>   2

                         SERVICEWARE TECHNOLOGIES, INC.
                                   FORM 10-Q
                                 JUNE 30, 2001

                                     INDEX

<Table>
<Caption>
                                                                         PAGE
                                                                         ----
<S>        <C>                                                           <C>
PART I.    FINANCIAL INFORMATION
ITEM 1.    Consolidated Financial Statements (Unaudited)
           Consolidated Balance Sheets as of June 30, 2001 and December
           31, 2000....................................................      2
           Consolidated Statements of Operations for the three and six
           months ended June 30, 2001 and 2000.........................      3
           Consolidated Statements of Stockholders' Equity for the
           three months ended March 31, 2001 and the six months ended
           June 30, 2001...............................................      4
           Consolidated Statements of Cash Flows for the six months
           ended June 30, 2001 and 2000................................      5
           Notes to Consolidated Financial Statements..................      6
ITEM 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations...................................      9
ITEM 3.    Quantitative and Qualitative Disclosures About Market
           Risk........................................................     25

PART II.   OTHER INFORMATION
ITEM 4.    Submission of Matters to a Vote of Security Holders.........     26
ITEM 6.    Exhibits and Reports on Form 8-K............................     26
</Table>
<PAGE>   3

                         PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

                          CONSOLIDATED BALANCE SHEETS
                 AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

<Table>
<Caption>
                                                                 JUNE 30,      DECEMBER 31,
                                                                   2001            2000
                                                                -----------    ------------
                                                                (UNAUDITED)
<S>                                                             <C>            <C>
                           ASSETS
Current assets
  Cash and cash equivalents.................................     $  1,224        $ 12,048
  Short term investments....................................        7,003          13,715
  Accounts receivable, less allowance for doubtful accounts
    of $513 as of June 30, 2001 and $460 in 2000............        2,401           4,438
  Other current assets......................................        1,704           2,661
                                                                 --------        --------
         Total current assets...............................       12,332          32,862
Long term assets
  Purchased technology, net of amortization of $1,152 as of
    June 30, 2001
    and $854 in 2000........................................          629             928
  Property and equipment
    Office furniture, equipment, and leasehold
     improvements...........................................        2,165           1,938
    Computer equipment......................................        6,585           6,132
                                                                 --------        --------
         Total property and equipment.......................        8,750           8,070
Less accumulated depreciation...............................       (4,772)         (3,795)
                                                                 --------        --------
Property and equipment, net.................................        3,978           4,275
  Intangible assets, net of accumulated amortization of
    $9,792 as of June 30, 2001
    and $7,263 in 2000......................................        5,116           7,645
  Long term receivables.....................................        1,100           1,100
  Other long term assets....................................          227             262
                                                                 --------        --------
         Total long term assets.............................       11,050          14,210
                                                                 --------        --------
         Total assets.......................................     $ 23,382        $ 47,072
                                                                 ========        ========
            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Accounts payable..........................................     $  1,494        $  2,230
  Accrued compensation and benefits.........................        1,032           1,029
  Deferred revenue -- licenses..............................           78           1,090
  Deferred revenue -- services..............................        2,685           3,505
  Other current liabilities.................................        2,206           1,364
  Net liabilities of discontinued operations................        1,164           1,807
                                                                 --------        --------
         Total current liabilities..........................        8,659          11,025
                                                                 --------        --------
Long term debt, less current portion........................          172             258
Long term deferred revenue -- licenses......................          785             785
Long term deferred revenue -- services......................          315             315
Other long term liabilities.................................          152             120
                                                                 --------        --------
         Total liabilities..................................       10,083          12,503
Stockholders' equity
  Common stock, $0.01 par; 100,000 shares authorized, 24,578
    and 24,366 shares issued and 24,478 and 24,346 shares
    outstanding in 2001 and 2000............................          246             244
  Additional paid in capital................................       73,934          74,208
  Treasury stock, 100 and 20 shares in 2001 and 2000........          (76)           (146)
  Deferred compensation and other...........................       (1,387)         (1,801)
  Warrants..................................................        1,414           1,379
  Note receivable from common stockholders..................       (2,100)         (2,350)
  Accumulated other comprehensive (loss) gain:
    Currency translation account............................          (33)            (18)
    Unrealized gain on short term investments...............           54              19
  Retained deficit..........................................      (58,753)        (36,966)
                                                                 --------        --------
         Total stockholders' equity.........................       13,299          34,569
                                                                 --------        --------
         Total liabilities and stockholders' equity.........     $ 23,382        $ 47,072
                                                                 ========        ========
</Table>

              See accompanying notes to the financial statements.
                                        2
<PAGE>   4

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
                                  (UNAUDITED)

<Table>
<Caption>
                                                   QUARTER ENDED JUNE 30,     SIX MONTHS ENDED JUNE 30,
                                                   -----------------------    -------------------------
                                                      2001         2000          2001           2000
                                                   ----------    ---------    ----------     ----------
<S>                                                <C>           <C>          <C>            <C>
Revenues
  Licenses.....................................     $  1,550      $ 2,677      $  2,497       $  3,629
  Services.....................................        1,734        1,657         3,053          2,888
                                                    --------      -------      --------       --------
     Total revenues............................        3,284        4,334         5,550          6,517
                                                    --------      -------      --------       --------
Cost of revenues
  Cost of licenses.............................          634          189         1,497            357
  Cost of services.............................        3,156        2,105         6,413          3,445
                                                    --------      -------      --------       --------
     Total cost of revenues....................        3,790        2,294         7,910          3,802
                                                    --------      -------      --------       --------
Gross margin...................................         (506)       2,040        (2,360)         2,715
Operating expenses
  Sales and marketing..........................        4,469        4,538         9,779          7,640
  Research and development.....................        1,956        1,360         4,045          2,248
  General and administrative...................        1,440          694         2,380          1,803
  Intangible assets amortization...............        1,263        1,263         2,529          2,527
  Restructuring charge.........................           --           --         1,856             --
                                                    --------      -------      --------       --------
     Total operating expenses..................        9,128        7,855        20,589         14,218
                                                    --------      -------      --------       --------
Loss from operations...........................       (9,634)      (5,815)      (22,949)       (11,503)
Other income (expense)
  Interest expense.............................          (23)        (132)          (43)          (233)
  Other (net)..................................          153           98           521            192
                                                    --------      -------      --------       --------
Other income (expense), net....................          130          (34)          478            (41)
                                                    --------      -------      --------       --------
Net loss from continuing operations............       (9,504)      (5,849)      (22,471)       (11,544)
Net income from discontinued operations........          284          745           683          3,018
                                                    --------      -------      --------       --------
Net loss.......................................     $ (9,220)     $(5,104)     $(21,788)      $ (8,526)
                                                    ========      =======      ========       ========
Net (loss) income per common share, basic and
  diluted:
  Continuing operations........................     $  (0.39)     $ (0.78)     $  (0.92)      $  (1.60)
  Discontinued operations......................         0.01         0.10          0.03           0.42
                                                    --------      -------      --------       --------
                                                    $  (0.38)     $ (0.68)     $  (0.89)      $  (1.18)
                                                    ========      =======      ========       ========
Shares used in computing per share amounts.....       24,438        7,476        24,397          7,212
                                                    ========      =======      ========       ========
</Table>

              See accompanying notes to the financial statements.
                                        3
<PAGE>   5

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
                                  (UNAUDITED)
<Table>
<Caption>
                                                                                                          NOTE
                                                                                                       RECEIVABLE     ACCUMULATED
                                   COMMON STOCK     ADDITIONAL                DEFERRED                    FROM           OTHER
                                  ---------------    PAID IN     TREASURY   COMPENSATION                 COMMON      COMPREHENSIVE
                                  SHARES   AMOUNT    CAPITAL      STOCK      AND OTHER     WARRANTS   STOCKHOLDERS    (LOSS) GAIN
                                  ------   ------   ----------   --------   ------------   --------   ------------   -------------
<S>                               <C>      <C>      <C>          <C>        <C>            <C>        <C>            <C>
Balance at December 31, 2000....  24,346    $244     $74,208      $(146)      $(1,801)      $1,379      $(2,350)         $  1
Exercise of stock options.......      23      --        (127)       146            --           --           --            --
Stock based compensation........      --      --        (246)        --           144           --           --            --
Issuance of warrants............      --      --          --         --           (35)          35           --            --
Amortization of warrants........      --      --          --         --            44           --           --            --
Other comprehensive (loss) gain:
Currency translation
  adjustment....................      --      --          --         --            --           --           --            (7)
Unrealized gain on short term
  investments...................      --      --          --         --            --           --           --            35
Net loss........................      --      --          --         --            --           --           --            --
                                                                                                                         ----
Total other comprehensive
  loss..........................                                                                                           28
                                  ------    ----     -------      -----       -------       ------      -------          ----
Balance at March 31, 2001.......  24,369    $244     $73,835      $  --       $(1,648)      $1,414      $(2,350)         $ 29
Exercise of stock options.......      46      --          13         --            --           --           --            --
Issuance of stock for Employee
  Stock Purchase Plan...........     163       2         138         --            --           --           --            --
Stock based compensation........      --      --         (52)        --           333           --           --            --
Amortization of warrants........      --      --          --         --           102           --           --            --
Repurchase of common stock......    (100)     --          --        (76)         (174)          --          250            --
Other comprehensive loss:
Currency translation
  adjustment....................      --      --          --         --            --           --           --            (8)
Net loss........................      --      --          --         --            --           --           --            --
                                                                                                                         ----
Total other comprehensive
  loss..........................                                                                                           (8)
                                  ------    ----     -------      -----       -------       ------      -------          ----
Balance at June 30, 2001........  24,478    $246     $73,934      $ (76)      $(1,387)      $1,414      $(2,100)         $ 21
                                  ======    ====     =======      =====       =======       ======      =======          ====

<Caption>

                                                 TOTAL
                                             STOCKHOLDERS'
                                  DEFICIT       EQUITY
                                  --------   -------------
<S>                               <C>        <C>
Balance at December 31, 2000....  $(36,966)    $ 34,569
Exercise of stock options.......        --           19
Stock based compensation........        --         (102)
Issuance of warrants............        --           --
Amortization of warrants........        --           44
Other comprehensive (loss) gain:
Currency translation
  adjustment....................        --           (7)
Unrealized gain on short term
  investments...................        --           35
Net loss........................   (12,567)     (12,567)
                                  --------     --------
Total other comprehensive
  loss..........................   (12,567)     (12,539)
                                  --------     --------
Balance at March 31, 2001.......  $(49,533)    $ 21,991
Exercise of stock options.......        --           13
Issuance of stock for Employee
  Stock Purchase Plan...........        --          140
Stock based compensation........        --          281
Amortization of warrants........        --          102
Repurchase of common stock......        --           --
Other comprehensive loss:
Currency translation
  adjustment....................        --           (8)
Net loss........................    (9,220)      (9,220)
                                  --------     --------
Total other comprehensive
  loss..........................    (9,220)      (9,228)
                                  --------     --------
Balance at June 30, 2001........  $(58,753)    $ 13,299
                                  ========     ========
</Table>

              See accompanying notes to the financial statements.
                                        4
<PAGE>   6

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
           AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS (UNAUDITED)

<Table>
<Caption>
                                                                SIX MONTHS ENDED
                                                                    JUNE 30,
                                                              --------------------
                                                                2001        2000
                                                              --------    --------
<S>                                                           <C>         <C>
Cash flows from operating activities
Net loss....................................................  $(21,788)   $ (8,526)
Adjustments to reconcile net loss to net cash used in
  operations:
  Depreciation and amortization.............................     4,108       3,567
  Changes in operating assets and liabilities:
     Accounts receivable....................................     2,640      (1,715)
     Other assets...........................................     1,171        (522)
     Accounts payable.......................................      (718)        708
     Accrued compensation...................................         4          21
     Other liabilities......................................       881         732
     Deferred revenue.......................................    (3,115)       (536)
     Unrealized gain on short term investments..............       (16)         --
                                                              --------    --------
Net cash used in operating activities.......................   (16,833)     (6,271)
                                                              --------    --------
Cash flows from investing activities
Purchase of short term investments..........................    (1,872)         --
Sale of short term investments..............................     8,600          --
Property and equipment acquisitions.........................      (759)     (1,101)
                                                              --------    --------
Net cash provided by (used in) investing activities.........     5,969      (1,101)
                                                              --------    --------
Cash flows from financing activities
Repayments of principal of capital lease obligation.........       (32)        (83)
Repayments of principal of line of credit...................        --      (1,250)
Repayments of principal of equipment line...................       (86)         --
Proceeds from borrowing under revolving line of credit......        --       1,000
Proceeds from stock options issuances.......................       173         191
Net proceeds from Series F Preferred stock, common stock,
  warrant and stock option issuances........................        --      10,567
                                                              --------    --------
Net cash (used in) provided by financing activities.........        55      10,425
Effect of exchange rate changes on cash.....................       (15)         --
                                                              --------    --------
Increase in cash and cash equivalents.......................   (10,824)      3,053
Cash and cash equivalents at beginning of period............    12,048       6,623
                                                              --------    --------
Cash and cash equivalents at end of period..................  $  1,224    $  9,676
                                                              ========    ========
Supplemental disclosures of cash flow information:
  Cash paid for interest....................................  $     38    $    221
                                                              ========    ========
</Table>

              See accompanying notes to the financial statements.
                                        5
<PAGE>   7

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2001
                                  (UNAUDITED)

NOTE 1.  ORGANIZATION OF THE COMPANY

     ServiceWare Technologies, Inc. (the "Company") is a leading provider of
intelligent service applications that enable companies to win on service in
their competitive markets. The Company's eService Suite(TM) software empowers
organizations to deliver superior service and support, while reducing expenses.
Powered by MindSync(TM) (formerly the Cognitive Processor), a patented
self-learning search technology, eService Suite enables businesses to develop
and manage a repository of knowledge to effectively answer inquiries over the
Web and in the call center.

     The Company's products include:

     eService Site which allows customers to provide Web-based self-service to
     their end-users.

     eService Professional which provides a Web-based application interface for
     use by customer service professionals to more easily navigate through the
     knowledge base, view various components of the knowledge base as well as
     capture and revise additional knowledge.

     eService Architect which provides a robust set of knowledge tools that
     allows customers' subject matter experts and system administrators to
     administer, design, manage and maintain knowledge bases.

     eService Site, eService Professional and eService Architect are derived
from Knowledge Bridge, which was a product of the Molloy Group prior to its
acquisition by the Company in July 1999, and includes the functionality of
Knowledge-Pak Architect and Knowledge-Pak Viewer, which were products of the
Company.

     The Company had two reportable segments: Software and Content. However, on
July 20, 2001, the Company completed the sale of its Content business to
RightAnswers LLC ("RightAnswers"). See Note 7.

NOTE 2.  UNAUDITED INTERIM FINANCIAL INFORMATION

     The accompanying unaudited balance sheet as of June 30, 2001 and related
unaudited consolidated statements of operations and cash flows for the six
months ended June 30, 2001 and 2000, and the unaudited consolidated statement of
stockholders' equity for the three months ended March 31, 2001 and six months
ended June 30, 2001 have been prepared by the Company in accordance with
accounting principles generally accepted in the United States for interim
financial information and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by U.S. generally accepted
accounting principles for complete financial statements. The interim financial
statements include all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation of the results of interim periods.
Operating results for the three and six month periods ended June 30, 2001 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2001. These unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto incorporated by reference into the Company's 2000 Annual Report on
Form 10-K filed with the Securities and Exchange Commission.

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of all significant
intercompany accounts and transactions.

                                        6
<PAGE>   8

NOTE 3.  NET LOSS PER SHARE

     The following table sets forth the computation of basic and diluted
earnings per share:

<Table>
<Caption>
                                                     THREE MONTHS ENDED      SIX MONTHS ENDED
                                                          JUNE 30,               JUNE 30,
                                                     ------------------    --------------------
                                                      2001       2000        2001        2000
                                                     -------    -------    --------    --------
                                                                   (IN THOUSANDS)
<S>                                                  <C>        <C>        <C>         <C>
Numerator:
  Net loss from continuing operations............    $(9,504)   $(5,849)   $(22,471)   $(11,544)
  Net income from discontinued operations........        284        745         683       3,018
                                                     -------    -------    --------    --------
  Net loss.......................................     (9,220)    (5,104)    (21,788)     (8,526)
Denominator:
     Denominator for basic and diluted earnings
       per share -- weighted average shares......     24,438      7,476      24,397       7,212
                                                     =======    =======    ========    ========
Basic and diluted net loss per share:
     Continuing operations.......................    $ (0.39)   $ (0.78)   $  (0.92)   $  (1.60)
     Discontinued operations.....................       0.01       0.10        0.03        0.42
                                                     -------    -------    --------    --------
                                                     $ (0.38)   $ (0.68)   $  (0.89)   $  (1.18)
                                                     =======    =======    ========    ========
</Table>

     Dilutive securities include options, warrants, and preferred stock as if
converted. Potentially dilutive securities totaling 4,676,941 and 14,228,604 for
the three and six months ended June 30, 2001 and 2000, respectively, were
excluded from historical basic and diluted loss per share because of their
antidilutive effect.

NOTE 4.  OTHER COMPREHENSIVE INCOME

     The following table reconciles net loss as reported to total comprehensive
loss for the three and six months ended June 30, 2001 and 2000:

<Table>
<Caption>
                                                      THREE MONTHS ENDED     SIX MONTHS ENDED
                                                           JUNE 30,              JUNE 30,
                                                      ------------------    -------------------
                                                       2001       2000        2001       2000
                                                      -------    -------    --------    -------
                                                                   (IN THOUSANDS)
<S>                                                   <C>        <C>        <C>         <C>
Net loss..........................................    $(9,220)   $(5,104)   $(21,788)   $(8,526)
Other comprehensive income:
  Unrealized foreign currency loss................         (8)        --         (15)        --
  Unrealized gain on short term investments.......         --         --          35         --
                                                      -------    -------    --------    -------
Total comprehensive loss..........................    $(9,228)   $(5,104)   $(21,768)   $(8,526)
                                                      =======    =======    ========    =======
</Table>

NOTE 5.  RECEIVABLES

     Receivables consist of the following:

<Table>
<Caption>
                                                                JUNE 30,    DECEMBER 31,
                                                                  2001          2000
                                                                --------    ------------
                                                                     (IN THOUSANDS)
<S>                                                             <C>         <C>
Billed receivables..........................................     $2,876        $3,764
Unbilled receivables........................................         38         1,134
                                                                 ------        ------
                                                                  2,914         4,898
Allowance for doubtful accounts.............................       (513)         (460)
                                                                 ------        ------
     Total receivables......................................     $2,401        $4,438
                                                                 ======        ======
</Table>

                                        7
<PAGE>   9

     Unbilled receivables represent non-cancelable, non-refundable amounts that
are billable by the Company at future dates based on contractual payment terms.

NOTE 6.  DEBT

     The Company has a secured credit facility with PNC bank. This facility
consists of three sub-facilities: a revolving credit facility, a convertible
equipment loan and a term loan. All amounts outstanding under the revolving
credit facility and term loan were paid in August 2000.

     On July 1, 2000, the equipment loan was converted to a term loan, and
principal repayments are being made as required in 36 equal installments which
began July 1, 2000.

     On June 15, 2001, the credit facility was amended primarily to reduce the
availability of funds under the revolving credit facility from $7.5 million less
the principal outstanding on the term loan to $5.0 million, add financial debt
covenant levels for 2001, and effect the name change and reincorporation of
ServiceWare, Inc. to ServiceWare Technologies, Inc.

NOTE 7.  DISCONTINUED OPERATIONS

     On July 20, 2001, the Company completed the sale of its Content business to
RightAnswers. The sale was completed in accordance with the terms of a Purchase
and Sale Agreement (the "Agreement"), dated July 20, 2001, between the Company
and RightAnswers.

     RightAnswers is a newly formed limited liability company that was organized
to acquire the Company's Content business. RightAnswers' Chief Executive
Officer, Mark Finkel, was the Company's Chief Financial Officer from January
2000 to July 2001. In addition, Mr. Finkel owns an equity interest in
RightAnswers. The 12 employees who were employed as the Company's Content
development team are now employed by RightAnswers.

     The consideration received on July 20, 2001 by the Company was determined
on the basis of arm's length negotiations between the parties and consisted of
an assumption by RightAnswers of approximately $0.7 million of net liabilities
associated with the Company's Content business in excess of the assets and
properties transferred to RightAnswers, subject to post-closing adjustments. The
Company's Board of Directors unanimously approved the Agreement.

NOTE 8.  RESTRUCTURING CHARGE

     In February 2001, the Company announced a strategic restructuring to focus
on revenue growth opportunities in the eService software market and confirmed
that it had actively engaged in discussions regarding the sale of its Content
business. The plan of restructuring approved by the Board of Directors included
taking a restructuring charge of $1.9 million. This restructuring charge
included severance benefits and costs of $471,000, reduction and relocation of
certain facilities costs of $1,231,000, termination costs for certain services
of $115,000 and an equipment write off of $39,000. As part of the restructuring
plan, 55 employees were laid off on February 28, 2001, primarily from the
Company's Oakmont, Pennsylvania facility. Accordingly, office space in Oakmont
was reduced. In connection with the sale of the Content business in July 2001,
the Company subleased a portion of its Oakmont facility to RightAnswers, and the
Company plans to sublet additional portions of this facility or the entire
facility and move to an alternative location.

     As of June 30, 2001, $414,000 of severance benefits and costs had been paid
and $1,442,000 of the total charge remained. The remaining amount is expected to
be paid by December 31, 2001.

NOTE 9.  SUBSEQUENT EVENTS

     On July 10, 2001, the Company announced an update to its organizational
structure and a workforce reduction of 75 employees, or approximately 40% of its
workforce. As a result, the Company will take a charge of approximately $0.6
million in the third quarter of 2001 and expects to save approximately $6.8
million per year in personnel costs.

                                        8
<PAGE>   10

     On July 20, 2001, the Company completed the sale of its Content business to
RightAnswers. See Note 7.

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

     The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes contained in this Quarterly Report on
Form 10-Q ("Form 10-Q").

     Certain statements contained in this Form 10-Q that are not historical
facts, including those statements that refer to our plans, prospects,
expectations, strategies, intentions, hopes and beliefs, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. You should not place undue reliance on these
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different than any
expressed or implied by these forward-looking statements. We assume no
obligation to update these forward-looking statements as circumstances change in
the future. In some cases, you can identify forward-looking statements by
terminology such as "may", "will", "should", "expects", "plans", "anticipates",
"believes", "estimates", "predicts", "potential", "continue", or the negative of
these terms or other comparable terminology. Please refer to the risk factors
set forth in the section entitled "Additional Factors that May Affect Future
Results" on page 16 of this Form 10-Q, as well as to our other filings with the
Securities and Exchange Commission and to the factors discussed elsewhere in
this Form 10-Q for a description of some of the risk factors that could cause
our results to differ materially from our forward looking statements.

OVERVIEW

     We are a leading provider of intelligent service applications that enable
companies to win on service in their competitive markets. Our eService Suite(TM)
software empowers organizations to deliver superior service and support, while
reducing expenses. Powered by MindSync(TM) (formerly the Cognitive Processor), a
patented self-learning search technology, eService Suite enables businesses to
develop and manage a repository of knowledge to effectively answer inquiries
over the Web and in the call center.

     Founded in 1991 in Oakmont, Pennsylvania, we now have operations across the
United States and a European subsidiary based in the United Kingdom.

RECENT EVENTS

     In February 2001 and July 2001, we announced a strategic corporate
restructuring pursuant to which we will focus our business exclusively on
revenue growth opportunities in our Software business. The plan of restructuring
approved by our Board of Directors included taking a restructuring charge of
$1.9 million. As part of the restructuring plan, 55 employees were laid off on
February 28, 2001, and an additional 75 employees were laid off on July 10,
2001.

     In July 2001, we announced that our Content business was sold to
RightAnswers. The sale was completed in accordance with the terms of a Purchase
and Sale Agreement dated July 20, 2001, between RightAnswers and us.
RightAnswers is a newly formed limited liability company that was organized to
acquire our Content business. RightAnswers' Chief Executive Officer, Mark
Finkel, was our Chief Financial Officer from January 2000 to July 2001. In
addition, Mr. Finkel owns an equity interest in RightAnswers.

     The consideration we received was determined on the basis of arm's length
negotiations between the parties and consisted of an assumption by RightAnswers
of approximately $0.7 million of net liabilities associated with our Content
business in excess of the assets and properties transferred to RightAnswers,
subject to post-closing adjustments. Our Board of Directors unanimously approved
the Agreement.

     On May 15, 2001, we received a letter from the Nasdaq Stock Market, Inc.
notifying us that our securities have failed to meet the continued listing
requirements for minimum bid price under the Nasdaq National Market rules. We
plan to file an appeal of the Nasdaq Staff Determination to remove our listing
on the National Market for failure to maintain a minimum bid price of $1.00 for
30 consecutive trading days as required by Marketplace Rule 4310(c)(8)(B). We
will continue to trade under the symbol SVCW on the Nasdaq National Market
pending
                                        9
<PAGE>   11

the outcome of the proceedings. In the event that our request for continued
listing on a Nasdaq market is not granted, our securities would then be eligible
for quotation on the OTC Bulletin Board maintained by Nasdaq, another
over-the-counter quotation system, or on the pink sheets.

     If our securities trade on the OTC Bulletin Board maintained by Nasdaq,
another over-the-counter quotation system, or on the pink sheets, an investor
may find it more difficult to dispose of or obtain accurate quotations as to the
market value of our common stock. In addition, we would be subject to a Rule
promulgated by the Securities and Exchange Commission that, if we fail to meet
criteria set forth in that Rule, imposes various practice requirements on
broker-dealers who sell securities governed by the Rule to persons other than
established customers and accredited investors. For these types of transactions,
the broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transactions
prior to sale. Consequently, the Rule may deter broker-dealers from recommending
or selling our common stock, which may further negatively affect the liquidity
of our common stock.

     Delisting could make trading our shares more difficult for investors,
potentially leading to further declines in our share price. It would also make
it more difficult for us to raise additional capital. We would also incur
additional costs under state blue sky laws to sell equity if we are delisted.

FACTORS AFFECTING FUTURE OPERATIONS

     Our operating losses, as well as our negative operating cash flow, have
been significant to date. We expect to have positive operating margins over time
by increasing the number of our customers and selling them additional services
and decreasing capital expenditures and other operating costs. We do not know if
we will be able to achieve these objectives.

     As of June 30, 2001, we had $1.2 million in cash and cash equivalents.
Additionally, we had $7.0 million in investments. Based upon internal
projections, we expect that this amount together with our existing credit line
will allow us to remain funded through the end of this fiscal year. Accordingly,
we will require significant capital to finance our operations and the
development of our business in the future. We expect that we will need to raise
additional capital to fund our 2002 operations by the end of the first quarter
of 2002. Our future capital needs will be highly dependent on our ability to
control expenses, to manage the restructuring of operations and to have market
demand for our products and services. Thus, any projections we make concerning
future cash needs and cash flows are subject to substantial uncertainty.

REVENUES

     We market and sell our products in North America through our direct sales
force. Internationally, we market products primarily through value-added
resellers, software vendors and system integrators. International revenues
historically have not been a significant percentage of total revenues. We derive
our revenues from licenses for software products and from providing related
services, including installation, training, consulting, customer support and
maintenance contracts. Licenses revenues primarily include fees for perpetual
licenses. Services revenues contain variable fees for installation, training and
consulting, as well as fixed fees for customer support and maintenance
contracts. We recognize revenues on license fees after a non-cancelable license
agreement has been signed, the product has been delivered, the fee is fixed,
determinable and collectable, and there is vendor-specific objective evidence to
support the allocation of the total fee to elements of a multiple-element
arrangement using the residual method. We recognize revenues on installation,
training and consulting on a time-and-material basis. We recognize revenues on
customer support and maintenance contracts over the life of the contract.

COST OF REVENUES

     Cost of licenses revenues consists primarily of the expenses related to
royalties, the cost of media on which our product is delivered, product
fulfillment costs, amortization of purchased technology, and salaries, benefits,
direct expenses and allocated overhead costs related to product fulfillment.
Cost of services revenues consists of the salaries, benefits, direct expenses
and allocated overhead costs of customer support and services personnel, fees
for sub-contractors and the costs associated with maintaining our customer
support site.
                                        10
<PAGE>   12

OPERATING COSTS

     We classify our operating costs into five general categories: sales and
marketing, research and development, general and administrative, intangible
assets amortization, and restructuring charge, based upon the nature of the
costs. We allocate the total costs for overhead and facilities, based upon
headcount, to each of the functional areas that use these services. These
allocated charges include general overhead items such as building rent,
equipment-leasing costs, telecommunications charges and depreciation expense.
Sales and marketing expenses consist primarily of employee compensation for
direct sales and marketing personnel, travel, public relations, sales and other
promotional materials, trade shows, advertising and other sales and marketing
programs. Research and development expenses consist primarily of expenses
related to the development and upgrade of our proprietary software and other
technologies. These expenses include employee compensation for software
developers and quality assurance personnel and for third-party contract
development costs. General and administrative expenses consist primarily of
compensation for personnel and fees for outside professional advisors.
Intangible assets amortization expense consists primarily of the amortization of
intangible assets acquired through our acquisition of the Molloy Group. These
assets are amortized on a straight line basis over their respective estimated
useful lives. Restructuring charge consists of costs incurred and accrued for
reduction in staff and certain facilities and services related to our shift to
focus on revenue growth opportunities in the eService software market.

DISCONTINUED OPERATIONS

     Net income from discontinued operations represents the net operations of
the Content business that was sold on July 20, 2001. Revenues were derived from
licenses for content products including both perpetual licenses and periodic
subscription access and from providing content writing services under contract
with a customer. We recognized revenues on license fees after a non-cancelable
license agreement had been signed, the product had been delivered, the fee was
fixed, determinable and collectable, and there was vendor-specific objective
evidence to support the allocation of the total fee to elements of a
multiple-element arrangement using the residual method. We recognized revenues
on periodic subscription licenses over the subscription term. We recognized
revenues on content writing services as performed over the life of the contract.

     Cost of licenses revenues consisted primarily of the expenses related to
royalties, the cost of media on which our product was delivered, product
fulfillment costs, and the costs associated with maintaining our
RightAnswers.com Web site. Cost of services revenues consisted of the salaries,
benefits, direct expenses and allocated overhead costs of personnel providing
content writing services.

     Operating costs consisted of sales and marketing efforts related to the
Content business and research and development expenses consisting primarily of
expenses related to the development and upgrade of our content technologies and
employee compensation for content developers.

                                        11
<PAGE>   13

RESULTS OF OPERATIONS

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

<Table>
<Caption>
                                                             THREE MONTHS         SIX MONTHS
                                                            ENDED JUNE 30,      ENDED JUNE 30,
                                                           ----------------    ----------------
                                                            2001      2000      2001      2000
                                                           ------    ------    ------    ------
<S>                                                        <C>       <C>       <C>       <C>
Revenues
  Licenses.............................................      47.2%     61.8%     45.0%     55.7%
  Services.............................................      52.8      38.2      55.0      44.3
                                                           ------    ------    ------    ------
     Total revenues....................................     100.0     100.0     100.0     100.0
                                                           ------    ------    ------    ------
Cost of revenues
  Cost of licenses.....................................      19.3       4.4      27.0       5.5
  Cost of services.....................................      96.1      48.5     115.5      52.8
                                                           ------    ------    ------    ------
     Total cost of revenues............................     115.4      52.9     142.5      58.3
                                                           ------    ------    ------    ------
Gross margin...........................................     (15.4)     47.1     (42.5)     41.7
                                                           ------    ------    ------    ------
Operating expenses
  Sales and marketing..................................     136.1     104.7     176.2     117.2
  Research and development.............................      59.6      31.4      72.9      34.5
  General and administrative...........................      43.9      16.1      42.9      27.7
  Intangible assets amortization.......................      38.5      29.1      45.6      38.8
  Restructuring charge.................................        --        --      33.4        --
                                                           ------    ------    ------    ------
     Total operating expenses..........................     277.9     181.3     371.0     218.2
                                                           ------    ------    ------    ------
Loss from operations...................................    (293.3)   (134.2)   (413.5)   (176.5)
Other income (expense), net............................       4.0      (0.8)      8.6      (0.6)
                                                           ------    ------    ------    ------
Net loss from continuing operations....................    (289.3)   (135.0)   (404.9)   (177.1)
Net income from discontinued operations................       8.6      17.2      12.3      46.3
                                                           ------    ------    ------    ------
Net loss...............................................    (280.7)%  (117.8)%  (392.6)%  (130.8)%
                                                           ======    ======    ======    ======
</Table>

THREE MONTHS ENDED JUNE 30, 2001 AND 2000

REVENUES

     Total revenues decreased 24.2% to $3.3 million in second quarter 2001 from
$4.3 million in second quarter 2000. Licenses revenues decreased 42.1% to $1.6
million in second quarter 2001 from $2.7 million in second quarter 2000. The
decrease in licenses revenues was attributable to a decreased number of
contracts with new customers where revenue was recognized during the quarter
although the average amount of the license component of these contracts
increased. In second quarter 2001, we recognized revenue for 6 contracts versus
24 contracts in second quarter 2000. The average license revenue recognized for
these contracts increased 122.3% to $213,000 in second quarter 2001 from $96,000
in second quarter 2000. Services revenues remained steady at $1.7 million in
second quarter 2001 compared with $1.7 million in second quarter 2000.

COST OF REVENUES

     Cost of revenues increased to $3.8 million in second quarter 2001 from $2.3
million in second quarter 2000. Cost of revenues as a percentage of revenues
increased to 115.4% from 52.9%. Cost of licenses revenues increased to $0.6
million in second quarter 2001 from $0.2 million in second quarter 2000. Cost of
licenses revenues as a percentage of revenues increased to 19.3% from 4.4%. The
increase in the cost of licenses revenues was primarily attributable to an
increase in product royalties as a result of new agreements entered into late in
2000.

                                        12
<PAGE>   14

     Cost of services revenues increased to $3.2 million in second quarter 2001
from $2.1 million in second quarter 2000. Cost of services revenues as a
percentage of revenues increased to 96.1% from 48.5%. The increase in the cost
of services revenues was primarily attributable to the use of third parties to
perform services and customer support and a 12.0% increase in staff to 56 in
second quarter 2001 from 50 in second quarter 2000.

OPERATING EXPENSES

     Sales and Marketing.  Sales and marketing expenses remained steady at $4.5
million, or 136.1% of revenues, in second quarter 2001 and $4.5 million, or
104.7% of revenues, in second quarter 2000. Staff dedicated to software
activities decreased slightly by 4.3% to 66 in second quarter 2001 from 69 in
second quarter 2000, and expenses for marketing programs were steady quarter to
quarter. The increase as a percentage of revenues was attributable to the
decrease in revenues.

     Research and Development.  Research and development expenses increased to
$2.0 million, or 59.6% of revenues, in second quarter 2001 from $1.4 million, or
31.4% of revenues, in second quarter 2000. The increase was primarily
attributable to an increase in staff dedicated to software activities of 26.7%
to 38 in second quarter of 2001 from 30 in second quarter 2000.

     General and Administrative.  General and administrative expenses increased
to $1.4 million, or 43.9% of revenues in second quarter 2001 from $0.7 million,
or 16.1% of revenues, in second quarter 2000. The increase in general and
administrative expenses was primarily the result of increased legal and
accounting expenses and other expenses related to being a public company.

     Intangible Assets Amortization.  Intangible assets amortization remained
steady at $1.3 million, or 38.5% of revenues in second quarter 2001 and $1.3
million, or 29.1% of revenues, in second quarter 2000. Intangible assets
amortization consists of the amortization expense in respect of the
consideration in excess of the fair value of assets acquired and liabilities
assumed in our acquisition of the Molloy Group in July 1999. The increase as a
percentage of revenues was attributable to the decrease in revenues.

OTHER INCOME (EXPENSE), NET

     Other income (expense), net consists primarily of interest income received
from the investment of proceeds from our financing activities, offset by
interest expense and other fees related to our bank borrowings. Other income
(expense), net increased to $130,287, or 4.0% of revenues, in second quarter
2001 from $(34,081), or (0.8)% of revenues, in second quarter 2000. The increase
was a result of interest earned exceeding interest paid on outstanding loans.

SIX MONTHS ENDED JUNE 30, 2001 AND 2000

REVENUES

     Total revenues decreased 14.8% to $5.6 million in the first six months of
2001 from $6.5 million in the first six months of 2000. Licenses revenues
decreased 31.2% to $2.5 million in the first six months of 2001 from $3.6
million in the first six months of 2000. The decrease in licenses revenues was
attributable to a decreased number of contracts with new customers where revenue
was recognized during the six months although the average amount of the license
component of these contracts increased. In the first six months of 2001, we
recognized revenue for 9 contracts versus 30 contracts in the first six months
of 2000. The average license revenue recognized for these contracts increased
107.6% to $222,000 in the first six months of 2001 from $107,000 in the first
six months of 2000. Services revenues increased 5.7% to $3.1 million in the
first six months of 2001 from $2.9 million in the first six months of 2000. The
increase was due to an increase in the amount of software maintenance contracts
offsetting a decrease in the amount of professional services performed.

COST OF REVENUES

     Cost of revenues increased to $7.9 million in the first six months of 2001
from $3.8 million in the first six months of 2000. Cost of revenues as a
percentage of revenues increased to 142.5% from 58.3%. Cost of licenses revenues
increased to $1.5 million in the first six months of 2001 from $0.4 million in
the first six months of
                                        13
<PAGE>   15

2000. Cost of licenses revenues as a percentage of revenues increased to 27.0%
from 5.5%. The increase in the cost of licenses revenues was primarily
attributable to an increase in product royalties as a result of new agreements
entered into late in 2000.

     Cost of services revenues increased to $6.4 million in the first six months
of 2001 from $3.4 million in the first six months of 2000. Cost of services
revenues as a percentage of revenues increased to 115.5% from 52.8%. The
increase in the cost of services revenues was primarily attributable to the use
of third parties to perform services and customer support and a 12.0% increase
in staff.

OPERATING EXPENSES

     Sales and Marketing.  Sales and marketing expenses increased to $9.8
million, or 176.2% of revenues, in the first six months of 2001 from $7.6
million, or 117.2% of revenues, in the first six months of 2000. The increase
was primarily attributable to an increase in marketing programs and sales
efforts focused on the software business.

     Research and Development.  Research and development expenses increased to
$4.0 million, or 72.9% of revenues, in the first six months of 2001 from $2.2
million, or 34.5% of revenues, in the first six months of 2000. The increase was
primarily attributable to an increase in staff dedicated to software activities
of 26.7% to 38 in the first six months of 2001 from 30 in the first six months
of 2000 and increased use of third party contractors to perform research and
development work.

     General and Administrative.  General and administrative expenses increased
to $2.4 million, or 42.9% of revenues in the first six months of 2001 from $1.8
million, or 27.7% of revenues, in the first six months of 2000. The increase in
general and administrative expenses was primarily the result of increased legal
and accounting expenses and other expenses related to being a public company.

     Intangible Assets Amortization.  Intangible assets amortization remained
steady at $2.5 million, or 45.6% of revenues in the first six months of 2001 and
$2.5 million, or 38.8% of revenues, in the first six months of 2000. Intangible
assets amortization consists of the amortization expense in respect of the
consideration in excess of the fair value of assets acquired and liabilities
assumed in our acquisition of the Molloy Group in July 1999.

     Restructuring Charge.  Restructuring charge in the first six months of 2001
consisted of costs incurred and accrued for reduction in staff and certain
facilities and services related to our shift to focus on revenue growth
opportunities in the eService software market. We recorded a restructuring
charge of $1.9 million in the first six months of 2001 which was 33.4% of
revenues. This restructuring charge included severance benefits and costs of
$471,000, reduction and relocation of certain facilities costs of $1,231,000,
termination costs for certain services of $115,000 and equipment write off of
$39,000. As part of the restructuring plan, 55 employees were laid off on
February 28, 2001 primarily from the Company's Oakmont, Pennsylvania facility.

OTHER INCOME (EXPENSE), NET

     Other income (expense), net consists primarily of interest income received
from the investment of proceeds from our financing activities, offset by
interest expense and other fees related to our bank borrowings. Other income
(expense), net increased to $477,770 in the first six months of 2001 from
$(40,368) in the first six months of 2000. The increase was a result of interest
earned exceeding interest paid on outstanding loans.

LIQUIDITY AND CAPITAL RESOURCES

     Historically to date, we have satisfied our cash requirements primarily
through private placements of convertible preferred stock and common stock and
our initial public offering.

     We have incurred net losses of $21.8 million for the six months ended June
30, 2001. Although our current projections forecast net income for 2002, we may
continue to incur net losses for the foreseeable future and the rate at which we
will incur such losses could increase from current levels. As of June 30, 2001
we had an accumulated deficit of $58.8 million. We have not achieved
profitability on a quarterly or annual basis to date.

                                        14
<PAGE>   16

     Net cash used in operating activities resulted primarily from net losses.
We expect the levels of cash used by current operations to be lower during the
next four quarters due to lower personnel and office costs as a result of our
restructuring and sale of the Content business. However, we also expect lower
levels of revenue as a result of the sale of the Content business. Sizeable
increases in operating activities or lower than anticipated levels of revenues
would result in higher than anticipated levels of cash used by operating
activities.

     The significant changes in accounts receivable and deferred revenue in the
six months ended June 30, 2001 compared to the six months ended June 30, 2000
are a result of a decrease in bookings. Amounts booked decreased 62.6% in the
six months ended June 30, 2001 compared to the six months ended June 30, 2000.

     Net cash provided by investing activities was primarily attributable to net
sales of short term investments.

     Net cash used in financing activities resulted from repayments of capital
lease obligations and our equipment line offset by proceeds from stock option
issuances.

     As of June 30, 2001, we had $1.2 million in cash and cash equivalents.
Additionally, we had $7.0 million in investments. We believe that our existing
cash and investment balances combined with our existing credit line will be
sufficient to meet anticipated cash requirements for this fiscal year. However,
we will need to raise additional funds in the next year and we may seek
additional financing to support our activities during this fiscal year.

     There can be no assurance that additional capital will be available to us
on reasonable terms, if at all, when needed or desired. On May 15, 2001, we
received a letter from the Nasdaq Stock Market, Inc. notifying us that our
securities have failed to meet the continued listing requirements for minimum
bid price under the Nasdaq National Market rules. If we trade on the OTC
Bulletin Board maintained by Nasdaq, another over-the-counter quotation system,
or on the pink sheets, this may make it more difficult to raise funds in the
future. Changes in equity markets in the past year have adversely affected our
ability to raise equity financing and have adversely affected the markets for
debt financing for companies with a history of losses such as ours. If
additional financing is not available to us we may need to dramatically change
our business strategy and direction, including the option to sell or merge our
business, or liquidate.

     If we raise additional funds through the issuance of equity, equity-related
or debt securities, these securities may have rights, preferences or privileges
senior to those of the rights of our common stock. Furthermore, because of the
low trading price of our common stock, the number of shares of new equity or
equity-related securities that we may be required to issue may be greater than
it otherwise would be. As a result, our stockholders may suffer significant
additional dilution. Further, the issuance of debt securities could increase the
risk or perceived risk of our company.

     We have a secured credit facility with PNC Bank. This facility consists of
three sub-facilities: a revolving credit facility, a convertible equipment loan
and a term loan.

     The revolving credit facility provides for $5.0 million of availability.
Any amounts drawn under this facility bear interest at the Base Rate plus 0.50%.
Base Rate is defined as the lesser of the bank's prime rate or the Federal Funds
Effective Rate plus 2%. The availability of credit is based on a percentage of
eligible accounts receivable. At June 30, 2001, $1.7 million was available for
use and $0 was outstanding under the revolving credit facility. The revolving
credit facility matures on December 10, 2001. Because we have not generated
enough cash to support our operating costs, lenders may not be willing to enter
into credit facilities with us in the future.

     The convertible equipment loan is for $750,000. On June 8, 2000,
outstanding amounts under this loan were converted to a single term loan which
matures on June 1, 2003, and the line is no longer available for use. At June
30, 2001, $0 had been drawn within the year, and $0.3 million was outstanding on
the equipment loan from the previous equipment line. Principal repayments of
this loan are being made as required in 36 equal installments which began July
1, 2000.

     The term loan is for $2.5 million and was due in two equal installments on
June 10, 2001 and December 10, 2001. However, upon the completion of our initial
public offering, we repaid the term loan and it is no longer available for use.

                                        15
<PAGE>   17

     On June 15, 2001, the credit facility was amended primarily to reduce the
availability of funds under the revolving credit facility from $7.5 million less
the principal outstanding on the term loan to $5.0 million, add financial debt
covenant levels for 2001, and effect the name change and reincorporation of
ServiceWare, Inc. to ServiceWare Technologies, Inc.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because we do
not currently hold any derivative instruments and do not engage in hedging
activities, the adoption of SFAS No. 133 did not have a significant impact on
our financial position, results of operations or cash flows.

     In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142
"Goodwill and Other Intangible Assets" effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives.

     We will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is expected to result in an increase
in net income of $2.3 million. During 2002, we will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets as
of January 1, 2002 and we have not yet determined what the effect of these tests
will be on our earnings and financial position.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

     Set forth below and elsewhere in this Form 10-Q and in other documents we
file with the Securities and Exchange Commission are risks and uncertainties
that could cause actual results to differ materially from the results
contemplated by the forward-looking statements contained in this Form 10-Q.

WE WILL NEED SUBSTANTIAL ADDITIONAL CAPITAL TO FUND CONTINUED BUSINESS
OPERATIONS IN 2002 AND WE CANNOT BE SURE THAT ADDITIONAL FINANCING WILL BE
AVAILABLE

     We require substantial amounts of capital to fund our business operations.
We have experienced negative cash flow from operations and may experience
significant negative cash flow from operations for the foreseeable future.

     We continue to evaluate alternative means of financing to meet our needs on
terms that are attractive to us. We currently anticipate that our available
funds and existing credit line will be sufficient to meet our projected needs to
fund operations through the end of this fiscal year. Accordingly, we will need
to raise additional capital to fund operations during 2002. From time to time,
we have considered and discussed various financing alternatives and expect to
continue such efforts to raise additional funds to support our operational plan.
However, we do not know whether additional financing will be available to us on
favorable terms when required, or at all.

     If we are not able to obtain such capital, we may need to dramatically
change our business strategy and direction, including the option to sell or
merge our business, or liquidate.

     In the past, we have funded our operating losses and capital expenditures
through proceeds from equity offerings. Changes in equity markets in the past
year have adversely affected our ability to raise equity financing and have
adversely affected the markets for debt financing for companies with a history
of losses such as ours. If we raise additional funds through the issuance of
equity, equity-linked or debt securities, those securities may have rights,
preferences or privileges senior to those of the rights of our common stock and,
in light of our current market capitalization, our stockholders may experience
substantial dilution.

                                        16
<PAGE>   18

WE HAVE A HISTORY OF LOSSES, MAY CONTINUE TO INCUR LOSSES FOR THE FORESEEABLE
FUTURE AND MAY NEVER ACHIEVE PROFITABILITY

     Our limited operating history in our current line of business and the
uncertain nature of the markets in which we compete make it difficult or
impossible to predict future results of operations. As of June 30, 2001, we had
an accumulated deficit of $58.8 million. We have not achieved profitability on a
quarterly or annual basis to date. In the first six months of 2001, we incurred
net losses of $21.8 million and in fiscal 2000, we incurred net losses of $19.8
million. We expect to have decreased operating expenses as a result of our
restructuring and the sale of the Content business. However, we also anticipate
lower levels of revenue as a result of the sale of the Content business. If the
decrease in expenses precede or are not followed by increased revenues, our
losses will continue to grow.

OUR CORPORATE RESTRUCTURING MAY NOT PRODUCE ANY OF THE EXPECTED BENEFITS, AND
THE RESTRUCTURING CHARGE WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001

     On February 28, 2001, we announced a strategic corporate restructuring
plan. There can be no assurance that we will recognize any of the expected
benefits of this restructuring plan. The purpose of our restructuring was to
focus on revenue growth opportunities in the eService software market. In 2000
and 1999, our Content business accounted for 41.3% and 61.6% of our total
revenues, respectively, and our continuing Software business will not be able to
offset the loss of revenues from our Content business in 2001 or possibly in
future years. In addition, in connection with our restructuring, we have taken a
restructuring charge of $1.9 million in the first quarter of 2001 and plan to
take a charge of approximately $0.5 million in the third quarter of 2001. This
restructuring charge will have a material adverse effect on our results of
operation for the year ending December 31, 2001.

WE MAY NOT SUCCEED IN ATTRACTING AND RETAINING THE PERSONNEL WE NEED FOR OUR
BUSINESS AND THE INTEGRATION OF NEW MANAGEMENT AND PERSONNEL MAY STRAIN OUR
RESOURCES

     Our business requires the employment of highly skilled personnel,
especially experienced software developers. The inability to recruit and retain
experienced software developers in the future could result in delays in
developing new versions of our software products or the release of deficient
software products. Any such delays or defective products would likely result in
lower sales. Even though we expect further growth in the number of our software
developers, competition for this type of personnel is intense, and we have
experienced difficulty in hiring and retaining software developers. We have also
experienced difficulty in hiring and retaining sales personnel, product managers
and professional services employees.

     We have experienced a high turn-over rate in some of our senior management
positions in the past few years. These departures require us to fill executive
positions to compete effectively. Continued high turn-over in management
positions could have an adverse effect on our operations and business. In
addition, the average tenure of our current employees is 2.3 years. If we are
unable to integrate new management or employees, we could lose actual or
potential customers who believe they will not receive the support they require
from us. In addition, we could face product delivery delays and product quality
problems as a result of inadequate management supervision.

BECAUSE OUR CURRENT LINE OF PRODUCTS IS RELATIVELY NEW, OUR HISTORICAL FINANCIAL
RESULTS ARE NOT HELPFUL IN EVALUATING OUR PROSPECTS

     We have undergone a number of changes in our business model. We began in
1991 as a provider of consulting services, and later developed and sold content
relating to technology products for use by customer service operations. In July
1999, we acquired the Molloy Group and its complementary software product suite.
Last year we integrated our product offerings with those of the Molloy Group and
launched a suite of software and content products intended to form the basis of
businesses' eService solutions.

     Since the announcement of our corporate restructuring in February 2001, we
have re-allocated our resources to the ongoing enhancement of our eService Suite
software product and in July 2001 sold our Content business. Because our current
line of software products is relatively new, our historical financial results
are not helpful in evaluating our prospects.
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<PAGE>   19

BECAUSE A SIGNIFICANT PORTION OF OUR REVENUES IS DERIVED FROM NON-RECURRING
SALES TO A LIMITED NUMBER OF CUSTOMERS, BECAUSE OUR EXPENSES ARE RELATIVELY
FIXED AND BECAUSE OF OUR REVENUE RECOGNITION POLICIES, OUR QUARTERLY OPERATING
RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST, AND IT IS DIFFICULT TO DRAW
CONCLUSIONS ABOUT OUR FUTURE PERFORMANCE BASED ON OUR PAST PERFORMANCE

     Our projected expense levels are based on our expectations regarding future
revenues and are relatively fixed in the short term. If revenue levels are below
expectations in a particular quarter, operating results and net income are
likely to be disproportionately adversely affected because our expenses are
relatively fixed. In addition, a significant percentage of our revenues is
typically derived from non-recurring sales to a limited number of customers, so
it is difficult to estimate accurately future revenues.

     Our quarterly results are also impacted by our revenue recognition
policies. Our revenues are unpredictable and in the past few quarters have
fluctuated from $6.2 million in third quarter 2000 to $4.1 million in fourth
quarter 2000 to $2.3 million in first quarter 2001 to 3.3 million in second
quarter 2001. Because we generally recognize license revenues upon installation
and training, sales orders from new customers in a quarter might not be
recognized during that quarter. Delays in the implementation and installation of
our software near the end of a quarter could also cause recognized quarterly
revenues and, to a greater degree, results of operations to fall substantially
short of anticipated levels. We often recognize revenues for existing customers
shortly after an order is received because installation and training can
generally be completed in significantly less time than for new customers.
However, we may miss recognizing expected revenues at the end of a quarter due
to delays in the receipt of expected orders by existing customers.

     Because of these and other factors, revenues in any one quarter are not
indicative of revenues in any future period and, accordingly, we believe that
certain period-to-period comparisons of our results of operations are not
necessarily meaningful and should not be relied upon as indicators of future
performance.

THE ESERVICE SOLUTIONS MARKET IS NEW AND EVOLVING AND, IF IT DOES NOT GROW
RAPIDLY, OUR BUSINESS WILL BE ADVERSELY AFFECTED

     The eService solutions market is an emerging industry, and it is difficult
to predict how large or how quickly it will grow, if at all. Customer service
historically has been provided primarily in person or over the telephone with
limited reference materials available for the customer service representative.
Our business model assumes that companies which provide customer service over
the telephone will find value in aggregating institutional knowledge by using
our eService Suite. Our business model also assumes that companies will find
value in providing some of their customer service over the Internet rather than
by telephone. Our success will depend on the broad commercial acceptance of, and
demand for, these eService solutions.

IF WE FAIL TO MAINTAIN OUR DIRECT SALES FORCE OUR GROWTH WILL BE IMPEDED

     Our ability to achieve significant growth in the future will largely depend
on our success in maintaining a sufficient number of direct sales personnel. Our
products and services require a sophisticated sales effort targeted at the
senior management of our prospective customers. If we fail to maintain our
direct sales force, our revenue may not grow or it may decline.

DUE TO THE LENGTHY SALES CYCLES OF OUR PRODUCTS AND SERVICES, THE TIMING OF OUR
SALES ARE DIFFICULT TO PREDICT AND MAY CAUSE US TO MISS OUR REVENUE EXPECTATIONS

     Our products and services are typically intended for use in applications
that may be critical to a customer's business. In certain instances, the
purchase of our products and services involves a significant commitment of
resources by prospective customers. As a result, our sales process is often
subject to delays associated with lengthy approval processes that accompany the
commitment of significant resources. These delays may worsen in the future as we
focus on our eService Suite, which has a high average contract size. For these
and other reasons, the sales cycle associated with the licensing of our products
and services typically ranges between six and eighteen months and is subject to
a number of significant delays over which we have little or no control. While
our customers are evaluating whether our products and services suit their needs,
we may incur substantial sales and marketing expenses and expend significant
management effort. Because of the lengthy sales cycle for our
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<PAGE>   20

products and services, we may not realize forecasted revenues from a specific
customer in the quarter in which we expend these significant resources.

WE MAY NOT BE ABLE TO EXPAND OUR BUSINESS INTERNATIONALLY, AND, IF WE DO, WE
FACE RISKS RELATING TO INTERNATIONAL OPERATIONS

     A component of our strategy is our planned increase in efforts to attract
more international customers. We are currently exploring business opportunities
in the United Kingdom, France, Germany, Italy, Norway and Sweden. To date, we
have only limited experience in providing our products and services
internationally. If we are not able to market our products and services
successfully in international markets, our expenses may exceed our revenues. By
doing business in international markets we face risks, such as unexpected
changes in tariffs and other trade barriers, fluctuations in currency exchange
rates, difficulties in staffing and managing foreign operations, political
instability, reduced protection for intellectual property rights in some
countries, seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world, and potentially adverse tax
consequences, any of which could adversely impact our international operations
and may contribute further to our net losses.

IF WE ARE NOT ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE, SALES OF OUR
PRODUCTS MAY DECREASE

     The software industry is characterized by rapid technological change,
including changes in customer requirements, frequent new product and service
introductions and enhancements and evolving industry standards. If we fail to
keep pace with the technological progress of our competitors, sales of our
products may decrease.

WE DEPEND ON TECHNOLOGY LICENSED TO US BY THIRD PARTIES, AND THE LOSS OF THIS
TECHNOLOGY COULD DELAY IMPLEMENTATION OF OUR PRODUCTS, INJURE OUR REPUTATION OR
FORCE US TO PAY HIGHER ROYALTIES

     We rely, in part, on technology that we license from a small number of
software providers for use with our products. After the expiration of these
licenses, this technology may not continue to be available on commercially
reasonable terms, if at all, and may be difficult to replace. The loss of any of
these technology licenses could result in delays in introducing or maintaining
our products until equivalent technology, if available, is identified, licensed
and integrated. In addition, any defects in the technology we may license in the
future could prevent the implementation or impair the functionality of our
products, delay new product introductions or injure our reputation. If we are
required to enter into license agreements with third parties for replacement
technology, we could be subject to higher royalty payments.

OUR SUCCESS DEPENDS UPON OUR ABILITY TO HIRE AND RETAIN KEY PERSONNEL,
ESPECIALLY SOFTWARE DEVELOPERS

     Our business requires the employment of highly skilled personnel,
especially experienced software developers. The inability to recruit and retain
experienced software developers in the future could result in delays in
developing new versions of our software products or the release of deficient
software products. Any such delays or defective products would likely result in
lower sales. Even though we expect further growth in the number of our
personnel, competition for this type of personnel is intense. In particular, we
have experienced difficulty in hiring and retaining sales personnel, product
managers, software developers and professional services employees.

PROBLEMS ARISING FROM THE USE OF OUR PRODUCTS WITH OTHER VENDORS' PRODUCTS COULD
CAUSE US TO INCUR SIGNIFICANT COSTS, DIVERT ATTENTION FROM OUR PRODUCT
DEVELOPMENT EFFORTS AND CAUSE CUSTOMER RELATIONS PROBLEMS

     Our customers generally use our products together with products from other
companies. As a result, when problems occur in a customer's systems, it may be
difficult to identify the source of the problem. Even when these problems are
not caused by our products, they may cause us to incur significant warranty and
repair costs, divert the attention of our technical personnel from our product
development efforts and cause significant customer relations problems.

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<PAGE>   21

IF CERTAIN COMPANIES CEASE TO PROVIDE OPEN PROGRAM INTERFACES FOR THEIR CUSTOMER
RELATIONSHIP MANAGEMENT SOFTWARE IT WILL BE DIFFICULT TO INTEGRATE OUR SOFTWARE
WITH THEIRS. THIS WILL DECREASE THE ATTRACTIVENESS OF OUR PRODUCTS

     Our ability to compete successfully also depends on the continued
compatibility and interoperability of our products with products and systems
sold by various third parties, specifically including customer relationship
management software sold by Clarify, Oracle, Peregrine Systems, Remedy and
Siebel Systems. Currently, these vendors have open applications program
interfaces, which facilitate our ability to integrate with their systems. If any
one of them should close their programs' interface or if they should acquire one
of our competitors, our ability to provide a close integration of our products
could become more difficult and could delay or prevent our products' integration
with future systems. Inadequate integration with other vendors' products would
make our products less desirable and could lead to lower sales.

WE FACE SIGNIFICANT GOODWILL COSTS RELATED TO OUR ACQUISITION OF THE MOLLOY
GROUP WHICH WILL ADVERSELY AFFECT OUR OPERATING RESULTS FOR THE FORESEEABLE
FUTURE, AND THESE COSTS COULD INCREASE

     We face significant goodwill costs as a result of our acquisition of the
Molloy Group in July 1999. In addition, we may not achieve value from the
acquisition of the Molloy Group commensurate with the purchase price we paid. As
a result of the Molloy Group acquisition, we have recorded a significant amount
of goodwill that will adversely affect our operating results for the foreseeable
future. As of June 30, 2001, we had goodwill and other intangibles of
approximately $5.1 million, which we are amortizing over two to four years from
the date of the acquisition. If the amount of recorded goodwill is increased or
we have future losses and are unable to demonstrate our ability to recover the
amount of the goodwill, the amount of amortization could be increased, or the
period of amortization could be shortened. This would either increase annual
amortization charges or result in the write-off of goodwill in a one-time,
non-cash charge, either of which could be significant and would likely harm our
operating results. Additionally, we will apply the new rules on accounting for
goodwill and other intangible assets beginning in the first quarter of 2002.
Application of the nonamortization provisions of the new rules is expected to
result in an increase in net income of $2.3 million. During 2002, we will
perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of January 1, 2002 and we have not yet determined
what the effect of these tests will be on our earnings and financial position.

BECAUSE WE COMPETE IN THE EMERGING MARKET FOR ESERVICE SOLUTIONS, WE FACE
INTENSE COMPETITION FROM BOTH ESTABLISHED AND RECENTLY FORMED ENTITIES, AND THIS
COMPETITION MAY ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY

     We compete in the emerging market for eService solutions and changes in the
eService solutions market could adversely affect our revenues and profitability.
We face competition from many firms offering a variety of products and services.
In the future, because there are relatively low barriers to entry in the
software industry, we expect to experience additional competition from new
entrants into the eService solutions market. In particular, software vendors or
strategic partners may enter our market with competitive products. Many of these
potential competitors have well-established relationships with our current and
potential customers, extensive knowledge of the eService industry, better name
recognition, significantly greater financial, technical, sales, marketing and
other resources and the capacity to offer single vendor solutions. It is also
possible that alliances or mergers may occur among our competitors and that
these newly consolidated companies could rapidly acquire significant market
share. Greater competition may result in price erosion for our products and
services, which may significantly affect our future operating margins.

IF OUR SOFTWARE PRODUCTS CONTAIN ERRORS OR FAILURES, SALES OF THESE PRODUCTS
COULD DECREASE

     Software products frequently contain errors or failures, especially when
first introduced or when new versions are released. In the past, we have
released products that contained defects, including software errors in certain
new versions of existing products and in new products after their introduction.
In the event that the information contained in our products is inaccurate or
perceived to be incomplete or out-of-date, our customers could purchase our
competitors' products or decide they do not need eService solutions at all. In
either case, sales would decrease. Our products are typically intended for use
in applications that may be critical to a customer's
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<PAGE>   22

business. As a result, we expect that our customers and potential customers have
a great sensitivity to product defects.

BECAUSE OUR PRODUCTS ARE CRITICAL TO THE OPERATIONS OF OUR CUSTOMERS'
BUSINESSES, WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF PRODUCT LIABILITY
CLAIMS

     Our products are critical to the operations of our customers' businesses.
Any defects or alleged defects in our products entail the risk of product
liability claims for substantial damages, regardless of our responsibility for
the failure. Although our license agreements with our customers typically
contain provisions designed to limit our exposure to potential product liability
claims, these provisions may not be effective under the laws of certain
jurisdictions. In addition, product liability claims, even if unsuccessful, may
be costly and divert management's attention from our operations. Software
defects and product liability claims may result in a loss of future revenue, a
delay in market acceptance, the diversion of development resources, damage to
our reputation or increased service and warranty costs.

BECAUSE WE HAVE ISSUED OPTIONS TO EMPLOYEES BELOW THE THEN CURRENT FAIR MARKET
VALUE AND MAY DO SO AGAIN IN THE FUTURE, WE WILL INCUR ADDITIONAL NON-CASH
CHARGES ASSOCIATED WITH STOCK-BASED COMPENSATION ARRANGEMENTS

     We have issued options to employees and non-employees which are subject to
various vesting schedules of up to 48 months. Because we have issued options to
employees below the then current fair market value and may do so again in the
future, we will incur additional non-cash charges for these options. This
expense could directly reduce our operating results and indirectly affect the
price of our common stock.

BECAUSE OUR SUCCESS DEPENDS ON THE UNINTERRUPTED OPERATION OF OUR COMPUTER
SYSTEMS, THEIR SABOTAGE OR SIMILAR DISRUPTIONS WOULD LIKELY DAMAGE OUR ABILITY
TO SELL OUR PRODUCTS

     Our success largely depends on the efficient and uninterrupted operation of
our computer and communications hardware and network systems. Our network may be
vulnerable to disruptions due to electronic attacks. Because the techniques used
by computer hackers to sabotage networks change frequently and generally are not
recognized until launched against a target, we may be unable to anticipate these
techniques. An actual or perceived breach of Internet security in our internal
systems or those of our customers could adversely affect the market perception
of our products and services. Although we have typically had efficient and
uninterrupted operation of our computer and communications hardware and network
systems, our e-mail network and our network systems have been interrupted as a
result of viruses on two occasions in the past, which hampered our ability to
support our customers and our internal communications. In addition, a
substantial number of our computer and communications systems are located in
Oakmont, Pennsylvania. Our systems and operations are vulnerable to damage or
interruption from fire, power loss, telecommunications failure and similar
events.

IF OUR CUSTOMERS' SYSTEM SECURITY IS BREACHED AND CONFIDENTIAL INFORMATION IS
STOLEN, OUR BUSINESS AND REPUTATION COULD SUFFER

     Users of our products transmit their and their customers' confidential
information, such as names, addresses, social security numbers and credit card
information, over the Internet. In our license agreements with our customers, we
disclaim responsibility for the security of confidential data and have
contractual indemnities for any damages claimed against us. However, if
unauthorized third parties are successful in illegally obtaining confidential
information from users of our products, our reputation and business may be
damaged, and if our contractual disclaimers and indemnities are not enforceable,
we may be subject to liability.

WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH MAY CAUSE
US TO INCUR SIGNIFICANT COSTS IN LITIGATION AND AN EROSION IN THE VALUE OF OUR
BRANDS AND PRODUCTS

     Our business is dependent on proprietary technology and the value of our
brands. We rely primarily on patent, copyright, trade secret and trademark laws
to protect our technology and brands. We currently have two patents. One of
these patents pertains to certain proprietary data structures and the other
pertains to our Cognitive

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<PAGE>   23

Processor, now known as MindSync(TM). Our patents may not survive a legal
challenge to their validity or provide meaningful protection to us. Litigation
to protect our patents would be expensive and the loss of our patents would
decrease the value of our products. Defending against claims of patent
infringement would also be expensive and, if successful, we could be forced to
redesign our products, pay royalties, or cease selling them. In addition,
effective trademark protection may not be available for our trademarks. The use
by other parties of our trademarks would dilute the value of our brands.

     Notwithstanding the precautions we have taken, a third party may copy or
otherwise obtain and use our software or other proprietary information without
authorization or may develop similar software independently. Policing
unauthorized use of our technology is difficult, particularly because the global
nature of the Internet makes it difficult to control the ultimate destination or
security of software or other data transmitted. Further, we have granted certain
third parties limited contractual rights to use proprietary information which
they may improperly use or disclose. The laws of other countries may afford us
little or no effective protection of our intellectual property. The steps we
have taken may not prevent misappropriation of our technology, and the
agreements entered into for that purpose may not be enforceable. The
unauthorized use of our proprietary technologies could also decrease the value
of our products.

THE SUCCESS OF OUR SOFTWARE PRODUCTS DEPENDS ON ITS ADOPTION BY OUR CUSTOMERS'
EMPLOYEES. IF THESE EMPLOYEES DO NOT ACCEPT THE IMPLEMENTATION OF OUR PRODUCTS,
OUR CUSTOMERS MAY FAIL TO RENEW THEIR SERVICE CONTRACTS AND WE MAY HAVE
DIFFICULTY ATTRACTING NEW CUSTOMERS

     The effectiveness of our eService Suite depends in part on widespread
adoption and use of our software by our customers' customer service personnel
and on the quality of the solutions they generate. Resistance to our software by
customer service personnel and an inadequate development of the knowledge base
may make it more difficult to attract new customers and retain old ones.

     Some of our customers have found that customer service personnel
productivity initially drops while customer service personnel become accustomed
to using our software. If an enterprise deploying our software has not
adequately planned for and communicated its expectations regarding that initial
productivity decline, customer service personnel may resist adoption of our
software.

     The knowledge base depends in part on solutions generated by customer
service personnel and, sometimes, on the importation of our customers' legacy
solutions. If customer service personnel do not adopt and use our products
effectively, necessary solutions will not be added to the knowledge base, and
the knowledge base will not adequately address service needs. In addition, if
less-than-adequate solutions are created and left uncorrected by a user's
quality-assurance processes or if the legacy solutions are inadequate, the
knowledge base will similarly be inadequate, and the value of our eService Suite
to end-users will be impaired. Thus, successful deployment and broad acceptance
of our eService Suite will depend in part on whether our customers effectively
roll-out and use our software products and the quality of the customers'
existing knowledge base of solutions.

WE DEPEND ON INCREASED BUSINESS FROM OUR NEW CUSTOMERS AND, IF WE FAIL TO GROW
OUR CLIENT BASE OR GENERATE REPEAT BUSINESS, OUR OPERATING RESULTS COULD BE
ADVERSELY AFFECTED

     If we fail to grow our customer base or generate repeat and expanded
business from our current and future customers, our business and operating
results will be seriously harmed. Some of our customers initially make a limited
purchase of our products and services for pilot programs. If these customers do
not successfully develop and deploy such initial applications, they may choose
not to purchase complete deployment or development licenses. Some of our
customers who have made initial purchases of our software have deferred or
suspended implementation of our products due to slower than expected rates of
internal adoption by customer service personnel. If more customers decide to
defer or suspend implementation of our products in the future, we will be unable
to increase our revenue from these customers from additional licenses or
maintenance agreements, and our financial position will be seriously harmed.

     In addition, as we introduce new versions of our products or new products,
our current customers may not need our new products and may not ultimately
license these products. Because the total amount of maintenance and service fees
we receive in any period depends in large part on the size and number of
licenses that we have
                                        22
<PAGE>   24

previously sold, any downturn in our software licenses revenues would negatively
impact our future services revenues. In addition, if customers elect not to
renew their maintenance agreements, our services revenues could be significantly
adversely affected.

OUR BUSINESS DEPENDS ON THE GROWTH OF THE INTERNET, THE CAPACITY AND VIABILITY
OF THE INTERNET INFRASTRUCTURE AND OUR ABILITY TO ADAPT IN A RAPIDLY CHANGING
INDUSTRY

     Our products address a new and emerging market for eService solutions to
businesses' customer service needs. Therefore, our future success depends
substantially upon the widespread adoption of the Internet as a significant
medium for commerce and business applications. If this market fails to develop
or develops more slowly than expected, demand for our products and services will
be reduced and our revenues will decrease. Consumers and businesses may reject
the Internet as a viable commercial medium for a number of reasons, including
potentially inadequate network infrastructure, slow development of enabling
technologies or insufficient commercial support. The Internet infrastructure may
not be able to support the demands placed on it by increased usage and bandwidth
requirements. Moreover, critical issues like security, reliability, cost,
accessibility and quality of service remain unresolved and may negatively affect
the attractiveness of conducting commerce and business transactions over the
Internet. Even if the required infrastructure, standards, protocols or
complementary products, services or facilities are developed, we may incur
substantial expenses adapting our products and services to changing or emerging
technologies.

INCREASING GOVERNMENT REGULATION OF THE INTERNET COULD HARM OUR BUSINESS

     As e-business, eService and the Internet continue to evolve, we expect that
federal, state and foreign governments will adopt laws and regulations tailored
to the Internet covering issues like user privacy, taxation of goods and
services provided over the Internet, pricing, content and quality of products
and services. If enacted, these laws and regulations could limit the market for
e-business and eService and, therefore, the market for our products and
services.

     The Telecommunications Act of 1996 prohibits certain types of information
and content from being transmitted over the Internet. The prohibition's scope
and the liability associated with a violation of the Telecommunications Act's
information and content provisions are currently unsettled. The imposition upon
us and other software and service providers of potential liability for
information carried on or disseminated through our applications could require us
to implement measures to reduce our exposure to this liability. These measures
could require us to expend substantial resources or discontinue certain
services. In addition, although substantial portions of the Communications
Decency Act, the Act through which the Telecommunications Act of 1996 imposes
criminal penalties, were held to be unconstitutional, similar legislation may be
enacted and upheld in the future. It is possible that this new legislation and
the Communications Decency Act could expose companies involved in e-business to
liability, which could limit the growth of Internet usage and e-business
generally and, therefore, the demand for eService solutions. In addition,
similar or more restrictive laws in other countries could have a similar effect
and hamper our plans to expand overseas.

THE IMPOSITION OF SALES TAX AND OTHER TAXES ON PRODUCTS SOLD BY OUR CUSTOMERS
OVER THE INTERNET COULD HAVE A NEGATIVE EFFECT ON ONLINE COMMERCE AND,
INDIRECTLY, THE DEMAND FOR OUR PRODUCTS AND SERVICES

     The imposition of new sales taxes or other taxes could limit the growth of
Internet commerce generally and, as a result, the demand for our products and
services. Recent federal legislation limits the imposition of state and local
taxes on Internet-related sales. However, Congress may choose not to renew this
legislation, in which case state and local governments would be free to impose
additional taxes on electronically purchased goods.

     We believe that most companies that sell products over the Internet do not
currently collect sales or other taxes on shipments of their products into
states or foreign countries where they are not physically present. However, one
or more states or foreign countries may seek to impose sales or other tax
collection obligations on out-of-jurisdiction companies that engage in
e-business. A successful assertion by one or more states or foreign countries
that companies that engage in e-business should collect sales or other taxes on
the sale of their products

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over the Internet, even though not physically in the state or country, could
indirectly reduce demand for our products.

PRIVACY CONCERNS RELATING TO THE INTERNET ARE INCREASING, WHICH COULD RESULT IN
LEGISLATION THAT ADVERSELY AFFECTS OUR BUSINESS AND/OR REDUCES SALES OF OUR
PRODUCTS

     Businesses use our software to capture information regarding their
customers when those customers contact them online with customer service
inquiries. Privacy concerns may cause visitors to resist providing the personal
data necessary to allow our customers to use our software products most
effectively. More importantly, even the perception of privacy concerns, whether
or not valid, may indirectly inhibit market acceptance of our products.
Recently, a high-profile public company faced adverse and widely disseminated
publicity regarding its handling of customer information. In addition,
legislative or regulatory requirements may heighten these concerns if businesses
must notify Web site users that the data captured after visiting certain Web
sites may be used by marketing entities to unilaterally direct product promotion
and advertising to that user. While we are not aware of any legislation or
regulatory requirements of this type currently in effect in the United States,
other countries and political entities, like the European Union, have adopted
this kind of legislation or regulatory requirements and the United States may do
so as well. If consumer privacy concerns are not adequately addressed, our
business could be harmed.

WE MAY BECOME INVOLVED IN SECURITIES CLASS ACTION LITIGATION WHICH COULD DIVERT
MANAGEMENT'S ATTENTION AND HARM OUR BUSINESS

     The stock market is currently experiencing significant price and volume
fluctuations that have affected the market price for the common stocks of
technology companies, particularly Internet companies like ours. These broad
market fluctuations may cause the market price of our common stock to decline.
In the past, following periods of volatility in the market price of a particular
company's securities, securities class action litigation has often been brought
against that company. We may become involved in that type of litigation in the
future. Litigation is often expensive and diverts management's attention and
resources, which could harm our business and operating results.

OUR STOCK PRICE IS VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
STOCKHOLDERS

     The market price for our common stock is volatile and subject to
fluctuations in response to the risks described above and many others, some of
which are beyond our control. The market prices for stocks of Internet companies
and other companies whose businesses are heavily dependent on the Internet have
generally proven to be highly volatile.

THE LOW PRICE OF OUR COMMON STOCK COULD RESULT IN THE DELISTING OF OUR COMMON
STOCK

     The shares of our common stock are currently listed on the Nasdaq National
Market. On May 15, 2001, we received a letter from the Nasdaq Stock Market, Inc.
notifying us that our securities have failed to meet the continued listing
requirements for minimum bid price under the Nasdaq National Market rules. We
plan to file an appeal of the Nasdaq Staff Determination to remove the Company's
listing on the National Market for failure to maintain a minimum bid price of
$1.00 for 30 consecutive trading days as required by Marketplace Rule
4310(c)(8)(B). The Company will continue to trade under the symbol SVCW on the
Nasdaq National Market pending the outcome of the proceedings. In the event that
our request for continued listing on a Nasdaq market is not granted, our
securities would then be eligible for quotation on the OTC Bulletin Board
maintained by Nasdaq, another over-the-counter quotation system, or on the pink
sheets.

     If our securities trade on the OTC Bulletin Board maintained by Nasdaq,
another over-the-counter quotation system, or on the pink sheets, an investor
may find it more difficult to dispose of or obtain accurate quotations as to the
market value of our common stock. In addition, we would be subject to a Rule
promulgated by the Securities and Exchange Commission that, if we fail to meet
criteria set forth in that Rule, imposes various practice requirements on
broker-dealers who sell securities governed by the Rule to persons other than
established customers and accredited investors. For these types of transactions,
the broker-dealer must make a

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<PAGE>   26

special suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale. Consequently, the
Rule may deter broker-dealers from recommending or selling our common stock,
which may further affect the liquidity of our common stock.

     Delisting could make trading our shares more difficult for investors,
potentially leading to further declines in our share price. It would also make
it more difficult for us to raise additional capital. We would also incur
additional costs under state blue sky laws to sell equity if we are delisted.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Nearly all of our revenues recognized to date have been denominated in
United States dollars and are primarily from customers in the United States. We
have a European subsidiary located in London, England. Revenues from
international clients to date have not been substantial, and nearly all of these
revenues have been denominated in United States dollars. In the future, a
portion of the revenues we derive from international operations may be
denominated in foreign currencies. We incur costs for our overseas office in the
local currency of that office for staffing, rent, telecommunications and other
services. As a result, our operating results could become subject to significant
fluctuations based upon changes in the exchange rates of those currencies in
relation to the United States dollar. Furthermore, to the extent that we engage
in international sales denominated in United States dollars, an increase in the
value of the United States dollar relative to foreign currencies could make our
services less competitive in international markets. Although currency
fluctuations are currently not a material risk to our operating results, we will
continue to monitor our exposure to currency fluctuations and when appropriate,
use financial hedging techniques to minimize the effect of these fluctuations in
the future. We cannot assure you that exchange rate fluctuations will not harm
our business in the future. We do not currently utilize any derivative financial
instruments or derivative commodity instruments.

     Our interest income is sensitive to changes in the general level of United
States interest rates, particularly because the majority of our investments are
in short-term instruments. Borrowings under our existing credit lines are also
interest rate sensitive, because the interest rate charged by our bank varies
with changes in the prime rate of lending. We believe, however, that we are
currently not subject to material interest rate risk.

                                        25
<PAGE>   27

                           PART II--OTHER INFORMATION

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

     We held our Annual Meeting of Stockholders on June 11, 2001. Two matters
were considered and voted upon at the Annual Meeting: the election of two
persons to serve as Class I Directors for a three-year term and the ratification
of the appointment of Ernst & Young LLP as independent accountants to audit our
financial statements for the fiscal year ending December 31, 2001.

     The nominations of Thomas Unterberg and Robert Hemphill, Jr. to serve as
directors and the ratification of the appointment of Ernst & Young LLP were
considered and ultimately approved.

<Table>
<Caption>
                                                                VOTES       AUTHORITY
NOMINEE                                                          FOR        WITHHELD
-------                                                       ----------    ---------
<S>                                                           <C>           <C>
Thomas Unterberg............................................  18,350,644        --
Robert Hemphill, Jr.........................................  18,350,644        --
</Table>

<Table>
<Caption>
                                                                VOTES        VOTES       VOTES
                                                                 FOR        AGAINST    ABSTAINED
                                                              ----------    -------    ---------
<S>                                                           <C>           <C>        <C>
Ratification of the appointment of Ernst & Young LLP........  18,371,065    13,103         --
</Table>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

  (a) Exhibits
      None

  (b) Reports on Form 8-K

      None

                                        26
<PAGE>   28

                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                          SERVICEWARE TECHNOLOGIES, INC.

Date: August 14, 2001                     By:         /s/ MARK TAPLING
                                            ------------------------------------
                                                        Mark Tapling
                                                Chief Executive Officer and
                                                          President

                                          By:      /s/ CAROL L. ZANGRILLI
                                            ------------------------------------
                                                     Carol L. Zangrilli
                                                         Controller
                                                 (Chief accounting officer)

                                        27