<PAGE>
                       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 SEPTEMBER 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)


           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)


       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 November 9, 2001 was 23,713,659.




<PAGE>




                         SERVICEWARE TECHNOLOGIES, INC.
                                    FORM 10-Q
                               SEPTEMBER 30, 2001
                                      INDEX

<TABLE>
<CAPTION>
PART I.  FINANCIAL INFORMATION                                                               PAGE NO.
                                                                                             --------
<S>      <C>                                                                                   <C>
ITEM 1.  Consolidated Financial Statements (Unaudited)

         o   Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000........  2

         o   Consolidated Statements of Operations for the three and nine months
             ended September 30, 2001 and 2000.................................................  3

         o   Consolidated Statement of Stockholders' Equity for the six months ended
             June 30, 2001 and the three months ended September 30, 2001 ......................  4

         o   Consolidated Statements of Cash Flows for the nine months ended
             September 30, 2001 and 2000.......................................................  5

         o   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........................ 21


PART II. OTHER INFORMATION

ITEM 6.  Exhibits and Reports on Form 8-K...................................................... 22

</TABLE>

<PAGE>


                          PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

                           CONSOLIDATED BALANCE SHEETS
                 AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
              (PRIOR PERIODS RESTATED FOR DISCONTINUED OPERATIONS)

<TABLE>
<CAPTION>
                                                                          SEPTEMBER 30,     DECEMBER 31,
                                                                              2001              2000
                                                                          -------------     ------------
                                                                           (Unaudited)
<S>                                                                         <C>              <C>
                                        ASSETS
Current assets
   Cash and cash equivalents                                                $    325         $ 12,048
   Short term investments                                                      3,583           13,715
   Accounts receivable, less allowance for doubtful accounts of $513
      as of September 30, 2001 and $460 in 2000                                4,012            4,438
   Other current assets                                                          852            2,661
                                                                            --------         --------
            Total current assets                                               8,772           32,862

Non current assets
   Purchased technology, net of amortization of $1,300 as of
      September 30, 2001 and $854 in 2000                                        481              928
   Property and equipment
      Office furniture, equipment, and leasehold improvements                  2,192            1,938
      Computer equipment                                                       6,532            6,132
                                                                            --------         --------
            Total property and equipment                                       8,724            8,070

      Less accumulated depreciation                                           (5,290)          (3,795)
                                                                            --------         --------
   Property and equipment, net                                                 3,434            4,275
   Intangible assets, net of accumulated amortization of $10,958
      as of September 30, 2001 and $7,263 in 2000                              3,950            7,645

   Non current receivables                                                      --              1,100
   Other non current assets                                                       73              262
                                                                            --------         --------
            Total long term assets                                             7,938           14,210
                                                                            --------         --------
            Total assets                                                    $ 16,710         $ 47,072
                                                                            ========         ========

                         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
   Revolving line of credit                                                 $  1,000         $   --
   Accounts payable                                                              360            2,230
   Accrued compensation and benefits                                           1,361            1,029
   Deferred revenue - licenses                                                   840            1,090
   Deferred revenue - services                                                 2,604            3,505
   Restructuring reserve                                                       1,432             --
   Other current liabilities                                                     630            1,364
   Net liabilities of discontinued operations                                   --              1,807
                                                                            --------         --------
            Total current liabilities                                          8,227           11,025

Non current debt                                                                --                258
Non current deferred revenue - licenses                                         --                785
Non current deferred revenue - services                                          236              315
Other non current liabilities                                                    161              120
                                                                            --------         --------
            Total liabilities                                                  8,624           12,503

Stockholders' equity
   Common stock, $0.01 par; 100,000 shares authorized, 24,578 and
      24,366 shares issued and 23,714 and 24,346 shares outstanding
      in 2001 and 2000, respectively                                             246              244
   Additional paid in capital                                                 73,934           74,208
   Treasury stock, 864 and 20 shares in 2001 and 2000                           (313)            (146)
   Deferred compensation and other                                            (1,236)          (1,801)
   Warrants                                                                    1,414            1,379
   Notes receivable from stockholders                                           (325)          (2,350)
   Accumulated other comprehensive loss:
      Currency translation account                                               (22)             (18)
      Unrealized gain on short term investments                                   54               19
   Retained deficit                                                          (65,666)         (36,966)
                                                                            --------         --------
            Total stockholders' equity                                         8,086           34,569
                                                                            --------         --------
            Total liabilities and stockholders' equity                      $ 16,710         $ 47,072
                                                                            ========         ========

</TABLE>

               See accompanying notes to the financial statements.


                                       2
<PAGE>


                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
              (PRIOR PERIODS RESTATED FOR DISCONTINUED OPERATIONS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED SEPTEMBER 30,      NINE MONTHS ENDED SEPTEMBER 30,
                                                            2001              2000                2001             2000
                                                          ---------         --------            --------         --------
<S>                                                       <C>              <C>                <C>               <C>
Revenues
   Licenses                                                $    707         $  4,593            $  3,204         $  8,222
   Services                                                   1,406            1,619               4,459            4,507
                                                           --------         --------            --------         --------
      Total revenues                                          2,113            6,212               7,663           12,729
Cost of revenues
   Cost of licenses                                             594              231               2,092              588
   Cost of services                                             871            2,055               7,207            5,499
                                                           --------         --------            --------         --------
      Total cost of revenues                                  1,465            2,286               9,299            6,087
                                                           --------         --------            --------         --------
Gross margin                                                    648            3,926              (1,636)           6,642
Operating expenses
   Sales and marketing                                        2,161            4,289              11,882           11,865
   Research and development                                   1,568            1,048               5,614            3,296
   General and administrative                                   756              825               2,867            2,407
   Intangible assets amortization                             1,166            1,266               3,695            3,793
   Restructuring and other non-recurring charges              2,929               16               5,186              303
                                                           --------         --------            --------         --------
      Total operating expenses                                8,580            7,444              29,244           21,664
                                                           --------         --------            --------         --------
Loss from operations                                         (7,932)          (3,518)            (30,880)         (15,022)
Other income (expense)
   Interest expense                                             (30)            (129)                (73)            (362)
   Other (net)                                                  (49)             190                 481              383
                                                           --------         --------            --------         --------
Other income (expense), net                                     (69)              61                 408               21
                                                           --------         --------            --------         --------
Net loss from continuing operations                          (8,001)          (3,457)            (30,472)         (15,001)
Net income (loss) from discontinued operations                  557             (108)              1,240            2,910
Net gain from disposal of a business segment                    532             --                   532             --
                                                           --------         --------            --------         --------
Net loss                                                   $ (6,912)        $ (3,565)           $(28,700)        $(12,091)
                                                           ========         ========            ========         ========

Net (loss) income per common share, basic and diluted:
   Continuing operations                                   $  (0.34)        $  (0.25)           $  (1.25)        $  (1.59)
   Discontinued operations                                     0.05            (0.01)               0.07             0.31
                                                           --------         --------            --------         --------
Net loss per share                                         $  (0.29)        $  (0.26)           $  (1.18)        $  (1.28)
                                                           ========         ========            ========         ========

Shares used in computing per share amounts                   23,871           13,853              24,220            9,442
                                                           ========         ========            ========         ========

</TABLE>
               See accompanying notes to the financial statements.




                                       3
<PAGE>


                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
              (PRIOR PERIODS RESTATED FOR DISCONTINUED OPERATIONS)
                                   (UNAUDITED)
<Table>
<Caption>                                                                                         ACCUMULATED
                                                                                          NOTES     OTHER
                                                                                       RECEIVABLE  COMPRE-
                                            ADDITIONAL             DEFERRED               FROM     HENSIVE               TOTAL
                           COMMON STOCK      PAID IN   TREASURY  COMPENSATION            COMMON    (LOSS)             STOCKHOLDERS'
                          SHARES   AMOUNT    CAPITAL    STOCK     AND OTHER  WARRANTS STOCKHOLDERS  GAIN     DEFICIT     EQUITY
                          ------   ------   --------   --------   ---------  -------- ------------  -----    -------  -------------
<S>                      <C>       <C>      <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    $(36,966)    $ 34,569
Exercise of stock
options                       69      --       (114)       146         --         --         --       --          --           32
Issuance of stock for
Employee Stock
Purchase Plan                163       2        138         --         --         --         --       --          --          140
Stock based compensation      --      --       (298)        --        303         --         --       --          --            5
Issuance of warrants          --      --         --         --        (35)        35         --       --          --           --
Amortization of warrants      --      --         --         --        146         --         --       --          --          146
Repurchase of common
stock                       (100)     --         --        (76)        --         --        250       --          --          174
Comprehensive
(loss) gain:                  --      --         --         --         --         --         --       --          --           --
Currency translation
adjustment                    --      --         --         --         --         --         --      (15)         --          (15)
Unrealized gain on
short term investments        --      --         --         --         --         --         --       35          --           35

Net loss                      --      --         --         --         --         --         --       --     (21,788)     (21,788)
                                                                                                    ----    --------     --------
Total comprehensive
(loss) gain                                                                                           20     (21,788)     (21,768)
                          ------   -----   --------   --------   --------   --------   --------     ----    --------     --------
Balance at
June 30, 2001             24,478   $ 246   $ 73,934   $    (76)  $ (1,387)  $  1,414   $ (2,100)    $ 21    $(58,754)    $ 13,298
Stock based
compensation                  --      --         --         --        111         --         --       --          --          111
Amortization of
warrants                      --      --         --         --         40         --         --       --          --           40
Repurchase of common
stock                       (764)     --         --       (237)        --         --      1,775       --          --        1,538
Comprehensive
(loss) gain:
Currency translation
adjustment                    --      --         --         --         --         --         --       11          --           11
Net loss                      --      --         --         --         --         --         --       --      (6,912)      (6,912)
                                                                                                    ----    --------     --------
Total comprehensive
(loss) gain                   --      --         --         --         --         --         --       11      (6,901)      (6,912)
                          ------   -----   --------   --------   --------   --------   --------     ----    --------     --------
Balance at
September 30, 2001        23,714   $ 246   $ 73,934   $   (313)  $ (1,236)  $  1,414   $   (325)    $ 32    $(65,666)    $  8,086
                          ======   =====   ========   ========   ========   ========   ========     ====    ========     ========

</Table>

               See accompanying notes to the financial statements.




                                       4
<PAGE>


                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
              (PRIOR PERIODS RESTATED FOR DISCONTINUED OPERATIONS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                           NINE MONTHS ENDED SEPTEMBER 30,
                                                                               2001             2000
                                                                             --------         --------
<S>                                                                          <C>             <C>
Cash flows from operating activities
Net loss                                                                     $(28,700)        $(12,091)
Adjustments to reconcile net loss to net cash used in operations:
   Non cash items:
      Depreciation and amortization                                             6,013            5,537
      Stock based compensation and loan forgiveness                             1,834              674
      Gain on disposal of a business segment                                     (532)            --
      Other non cash items                                                          8               (2)
   Changes in operating assets and liabilities:
      Decrease (increase) in accounts receivable                                1,526           (5,264)
      Decrease (increase) in other assets                                       1,998           (1,637)
      (Decrease) increase in accounts payable                                  (1,870)           1,120
      Increase in accrued compensation                                            332              314
      (Decrease) increase in deferred revenue                                  (2,015)             105
      Increase in other liabilities                                               574              880
      Decrease in net current liability of discontinued operations             (1,300)            --
                                                                             --------         --------
Net cash used in operating activities                                         (22,132)         (10,366)
                                                                             --------         --------

Cash flows from investing activities
   Purchases of short term investments                                         (1,951)            --
   Sales of short term investments                                             12,100             --
   Property and equipment acquisitions                                           (769)          (2,055)
   Proceeds from sale of equipment                                                 42             --
                                                                             --------         --------
Net cash provided by (used in) investing activities                             9,422           (2,055)
                                                                             --------         --------

Cash flows from financing activities
   Repayments of principal of capital lease obligations                           (44)            (101)
   Repayments of principal of term loans                                         (129)          (2,543)
   Repayments of principal of revolving line of credit                           --             (2,250)
   Proceeds from borrowing under revolving line of credit                       1,000            1,000
   Proceeds from stock option exercises                                           165              269
   Net proceeds from issuance of Series F convertible preferred stock            --             10,567
   Net proceeds from initial public offering                                     --             31,635
   Dividends paid                                                                --               (157)
                                                                             --------         --------
Net cash provided by financing activities                                         992           38,409

Effect of exchange rate changes on cash                                            (5)              (2)

(Decrease) increase in cash and cash equivalents                              (11,723)          25,986
Cash and cash equivalents at beginning of period                               12,048            6,623
                                                                             --------         --------
Cash and cash equivalents at end of period                                   $    325         $ 32,609
                                                                             ========         ========

Supplemental disclosures of cash flow information:
   Cash paid for interest                                                    $     55         $    345
                                                                             ========         ========
</TABLE>

               See accompanying notes to the financial statements.



                                       5
<PAGE>



                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 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 enhance their customer
service capabilities. ServiceWare delivers a comprehensive, integrated family of
eService solutions that enable organizations to easily provide customers with
fast, accurate answers to inquiries across various touch points - Web, e-mail,
phone or in-person. Based on the Company's knowledge management software and
MindSync(TM) technology (formerly the Cognitive Processor), eService Suite(TM)
software empowers organizations to deliver superior service and support, while
reducing expenses.

         The Company's products include:

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

         eService Professional 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 build additional knowledge.

         eService Architect 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 business segments: Software and Content. However,
on July 20, 2001, the Company completed the sale of all of its Content segment
to RightAnswers LLC ("RightAnswers"). The Content segment is reported as a
discontinued operation, and all previously reported financial information has
been restated accordingly. See Note 7.

NOTE 2.  UNAUDITED INTERIM FINANCIAL INFORMATION

The accompanying unaudited balance sheet as of September 30, 2001 and related
unaudited consolidated statements of operations for the three and nine months
ended September 30, 2001 and 2000, unaudited consolidated statement of cash
flows for the nine months ended September 30, 2001 and 2000 and the unaudited
consolidated statement of stockholders' equity for the six months ended June 30,
2001 and three months ended September 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.
Management believes that 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 nine month periods ended September 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.

RECLASSIFICATION

Certain prior period amounts have been reclassified to conform to current year
presentation. The cause of the reclassifications is due to classifying the
content business segment as discontinued operations and classifying certain
expenses as other non-recurring charges.


                                       6
<PAGE>


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 SEPTEMBER 30,   NINE MONTHS ENDED SEPTEMBER 30,
                                                           2001             2000             2001            2000
                                                         --------         --------         --------         --------
                                                                               (in thousands)
<S>                                                     <C>              <C>              <C>              <C>
Numerator:
   Net loss from continuing operations                   $ (8,001)        $ (3,457)        $(30,472)        $(15,001)
   Net income (loss) from discontinued operations             557             (108)           1,240            2,910
   Net gain from disposal of a business segment               532             --                532             --
                                                         --------         --------         --------         --------
   Net loss                                                (6,912)          (3,565)         (28,700)         (12,091)
                                                         ========         ========         ========         ========

Denominator:
   Denominator for basic and diluted earnings per
      share -weighted average shares                       23,871           13,853           24,220            9,442
                                                         ========         ========         ========         ========


Basic and diluted net (loss) income per share:
   Continuing operations                                 $  (0.34)        $  (0.25)        $  (1.25)        $  (1.59)
   Discontinued operations                                   0.05            (0.01)            0.07             0.31
                                                         --------         --------         --------         --------
Net loss per share                                       $  (0.29)        $  (0.26)        $  (1.18)        $  (1.28)
                                                         ========         ========         ========         ========
</TABLE>


Dilutive securities include options, warrants, and preferred stock as if
converted. Potentially dilutive securities totaling 5,437,004 and 14,228,604 for
the three and nine months ended September 30, 2001 and 2000, respectively, were
excluded from historical basic and diluted loss per share because of their
antidilutive effect.

NOTE 4.  TOTAL COMPREHENSIVE LOSS

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

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED SEPTEMBER 30,   NINE MONTHS ENDED SEPTEMBER 30,
                                                      2001             2000             2001             2000
                                                    --------         --------         --------         --------
                                                                           (in thousands)
<S>                                                 <C>              <C>              <C>              <C>
Net loss                                            $ (6,912)        $ (3,565)        $(28,700)        $(12,091)
Comprehensive income (loss):
   Unrealized foreign currency gain (loss)                11               (2)              (2)              (4)
   Unrealized gain on short term investments            --               --                 35             --
                                                    --------         --------         --------         --------
Total comprehensive loss                            $ (6,901)        $ (3,567)        $(28,669)        $(12,093)
                                                    ========         ========         ========         ========
</TABLE>

NOTE 5. RECEIVABLES

Receivables consist of the following:

<TABLE>
<CAPTION>
                                                SEPTEMBER 30,       DECEMBER 31,
                                                    2001               2000
                                                  -------             -------
                                                        (in thousands)
<S>                                               <C>                 <C>
Billed receivables                                $ 3,400             $ 3,409
Unbilled receivables                                1,125               1,714
                                                  -------             -------
                                                    4,525               5,123
Allowance for doubtful accounts                      (513)               (460)
                                                  -------             -------
Net receivables                                   $ 4,012             $ 4,663
                                                  =======             =======
</TABLE>

Unbilled receivables consist of non-cancelable, non-refundable amounts that are
billable by the Company at future dates based on contractual payment terms and
travel expenses to be billed to customers.

NOTE 6. DEBT

The Company has a secured credit facility with PNC Bank "the Bank". This
facility originally consisted of three sub-facilities: a revolving credit
facility, a convertible equipment loan and a term loan. On July 1, 2000, the
equipment loan was converted to a term loan. Principal repayments are being made
in 36 equal installments beginning July 1, 2000.


                                       7
<PAGE>

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 of 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.

On October 4, 2001, the Bank notified the Company that although it had failed to
comply with two loan covenants as of August 31, 2001, the Bank had chosen not to
call the loans, but may do so at any time in the future. As a result, at
September 30, 2001 outstanding debt of $1.0 million under the credit facility
and $0.3 million under the term loan is classified as current. The credit
facility will be amended in November 2001 to provide for repayment and
cancellation of the revolving credit facility in November 2001.

NOTE 7. DISCONTINUED OPERATIONS

     On July 20, 2001, the Company completed the sale of its Content business
segment 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 limited liability company that was formed to acquire the
Company's Content business. The Chief Executive Officer of RightAnswers, 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 consideration for the business consisted of the assumption of
approximately $0.5 million of net liabilities associated with the business.
Revenues for the Content segment were $2.9 million and $10.3 million for the
nine months ended September 30, 2001 and 2000, respectively.

NOTE 8. RESTRUCTURING AND OTHER NON-RECURRING CHARGES

In February 2001, the Company announced a strategic restructuring to reduce its
cost structure and focus on revenue growth opportunities in the eService
software market. The plan of restructuring approved by the Board of Directors
required a charge to operations of $1.9 million. Costs of the plan included
severance and other benefit costs of $471,000, costs for reduction and
relocation of facilities of $1,231,000, termination costs for certain service
contracts 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. Savings
from this plan are expected to approximate $4.9 million per year in personnel
costs, rent and other services.

In July 2001, the Company announced a revision to its organizational structure
and a workforce reduction of 75 employees, or approximately 40% of its
workforce. As a result, the Company recognized a charge of approximately $0.6
million in the third quarter of 2001. Savings from this plan are expected to
approximate $6.8 million per year in personnel costs.

As of September 30, 2001, $974,000 of severance benefits and other costs related
to the restructuring plans had been paid. The remaining restructuring liability
of $1,432,000 generally is expected to be paid by March 31, 2002.

Other non-recurring charges consist of severance costs for senior executives,
forgiveness of loans in connection with the repurchases of common stock, and
income tax gross-ups related to the loan forgiveness. The restructuring and
other non-recurring charges of separated executives consist of the following
amounts:

<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED SEPTEMBER 30,     NINE MONTHS ENDED SEPTEMBER 30,
                                                            2001          2000                   2001          2000
                                                           ------        ------                 ------        ------
                                                                                 (in thousands)
<S>                                                        <C>           <C>                    <C>           <C>
Restructuring costs                                        $  550        $ --                   $2,406        $ --
Other severance costs                                         391            16                    579           303
Executive loan forgiveness and related tax costs            1,987          --                    2,201          --
                                                           ------        ------                 ------        ------
Total restructuring and other non-recurring charges        $2,928        $   16                 $5,186        $  303
                                                           ======        ======                 ======        ======
</TABLE>


NOTE 9. SUBSEQUENT EVENTS

On October 22, 2001, the Company announced that it had taken steps to further
reduce its cost structure in light of the reduced level of revenues as a result
of the economic downturn. Such steps included a company wide workforce reduction
of approximately 50 people. As a result, the Company will take a charge of
approximately $0.4 million in the fourth quarter of 2001. Savings from this
action consisting of reduced personnel costs are expected to approximate $3.9
million per year.


                                       8
<PAGE>


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 from 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. For a description of some of the risk factors that could
cause our results to differ materially from our forward looking statements
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 other
factors discussed elsewhere in this Form 10-Q.

OVERVIEW

We are a leading provider of intelligent service applications that enable
companies to enhance their customer service capabilities. ServiceWare delivers a
comprehensive, integrated family of eService solutions that enable organizations
to easily provide customers with fast, accurate answers to inquiries across
various touch points - Web, e-mail, phone or in-person. Based on the Company's
knowledge management software and MindSync(TM) technology (formerly the
Cognitive Processor), eService Suite(TM) software empowers organizations to
deliver superior service and support, while reducing expenses.

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

RECENT DEVELOPMENTS

Our net loss for the quarter ended September 30, 2001 totaled $6.9 million, or
$0.29 per share, compared to a loss of $3.6 million, or $0.26 per share for the
prior year period. The substantial decline in revenues more than offset the cost
reductions achieved through recent restructuring programs.

In February 2001, we announced a strategic corporate restructuring program
pursuant to which we would reduce costs and focus our business exclusively on
revenue growth opportunities in our Software business. Another restructuring
plan was implemented in July 2001. As part of the restructuring plans, 55
employees were laid off on February 28, 2001, and an additional 75 employees
were laid off on July 10, 2001. The costs recognized for these plans totaled
$2.4 million. On October 22, 2001, we announced that in order to address the
challenges of the on-going economic downturn, we had taken aggressive steps to
further reduce our cost structure, including a company wide workforce reduction
of approximately 50 people. In total, the annualized savings from these plans
are expected to approximate $11.7 million

On September 5, 2001, we announced that Kent Heyman was appointed CEO and
president by our Board of Directors. Prior to joining ServiceWare, Mr. Heyman
was one of three founding employees and a senior vice president at Mpower
Communications.

In October 2001, we also announced a strategic partnership with EPAm Systems, a
provider of outsourced application development services. EPAm is knowledgeable
about our products because of its past involvement in our product development.
In the near term, EPAm's commitment will enable us to deliver customer focused
product enhancements and improved product functionality. Under the agreement, we
will be a strategic reseller of EPAm's development services within the United
States.

In July 2001, we announced that our Content business segment was sold to
RightAnswers in accordance with the terms of a Purchase and Sale Agreement dated
July 20, 2001. RightAnswers is a limited liability company that was formed to
acquire our Content business. The Chief Executive Officer of RightAnswers, 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 for the sale was determined on the basis of arm's length
negotiations between the parties and consisted of an assumption by RightAnswers
of approximately $0.5 million of net liabilities associated with the business.

On May 15, 2001, we received a letter from the Nasdaq Stock Market, Inc.
notifying us that our securities had failed to meet the continued listing
requirements for minimum bid price under the Nasdaq National Market rules. We
requested 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) and had a hearing date set for September 27,


                                       9
<PAGE>

2001. On September 6, 2001, we received a letter from Nasdaq Stock Market,
Inc. notifying us that in addition to the bid price deficiency, we were no
longer in compliance with the market value of public float requirement as set
forth in Nasdaq Marketplace Rule 4450(a)(2). This matter was scheduled to be
addressed at the September 27, 2001 hearing as well.

In the week prior to the hearing date, we received notification that Nasdaq
implemented a moratorium on the minimum bid price and market value of public
float requirements for continued listing on The Nasdaq National Market. Under
the moratorium, those requirements will be suspended until January 2, 2002, at
which time the 30 and 90-day periods provided by Marketplace Rule 4310(c)(8)(B)
would start anew. Therefore, we would be considered non-compliant if we failed
to satisfy the applicable standard for 30 consecutive trading days following
January 1, 2002. Thereafter, we would be afforded a 90 calendar day grace period
in which to regain compliance.

We continue to trade under the symbol SVCW on the Nasdaq National Market. Should
we fail to meet the requirements for continued listing on a Nasdaq market as
outlined above and our request for continued listing is not granted, our
securities would then be eligible for quotation on the OTC Bulletin Board
maintained by Nasdaq or on the pink sheets.

If our securities trade on the OTC Bulletin Board maintained by Nasdaq 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 will 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. Further, if we are delisted we
would also incur additional costs under state blue sky laws in connection with
any sales of our securities.

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
without significantly increasing related capital expenditures and other
operating costs. We do not know if we will be able to achieve these objectives.

As of September 30, 2001, we had $3.9 million in cash and short-term
investments. Based upon internal projections, we expect that this amount will
allow us to remain funded in the near term. We also expect to pursue additional
funding to finance our operations and the development of our business. We have
several one-time obligations to be paid generally by March 31, 2002 including
items such as severances, but have taken steps to reduce our recurring costs to
approximate our anticipated level of revenues. These steps included a lay off in
October 2001 of approximately 50 employees. Our future capital needs will be
highly dependent on market demand for our products and services as well as our
ability to control expenses and to manage the restructuring of operations. Thus,
any projections of 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. Generally, international revenues 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.
License revenues primarily represent fees for perpetual licenses. Service
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 is signed, the
product is 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. Customer support and maintenance contracts are
recognized over the life of the contract.

COST OF REVENUES

Cost of license 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


                                       10
<PAGE>

related to product fulfillment. Cost of service 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.

OPERATING COSTS

We classify our core operating costs into four general categories: sales and
marketing, research and development, general and administrative, and intangible
assets amortization based upon the nature of the costs. Special one time
charges, including restructuring costs, are presented separately as
restructuring and other non-recurring charges to enable the reader to determine
core operating costs. We allocate the total costs for overhead and facilities,
based upon headcount, to each of the functional areas that benefit from these
services. 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 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 in 1999. These assets are
amortized on a straight line basis over their respective estimated useful lives.
Restructuring and other non-recurring charges consist of costs incurred for
restructuring plans and other costs related to the separation of senior
executives.

DISCONTINUED OPERATIONS

We sold our Content business segment in July 2001. As a result, all financial
data for the Content business has been presented separately as discontinued
operations. Financial information for prior periods has been restated
accordingly.

Net income from discontinued operations represents the net results of operations
of the Content business through July 20, 2001, the date of sale. Revenues from
discontinued operations were derived from licenses for content products
including both perpetual licenses and periodic subscription access and from
providing content writing services under contract. We recognized revenues on
license fees after a non-cancelable license agreement was signed, the product
was 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 license revenues from discontinued operations 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 service revenues from discontinued
operations consisted of the salaries, benefits, direct expenses and allocated
overhead costs of personnel providing content writing services.

Operating costs from discontinued operations 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.

The gain on the sale of the segment of $532,000 represents the net liabilities
assumed by the buyer. No other consideration was involved.



                                       11
<PAGE>


RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED SEPTEMBER 30,       NINE MONTHS ENDED SEPTEMBER 30,
                                                          2001          2000                    2001           2000
                                                        -------        -------                 -------        -------
<S>                                                    <C>            <C>                     <C>            <C>
Revenues
   Licenses                                                33.5%          73.9%                   41.8%          64.6%
   Services                                                66.5           26.1                    58.2           35.4
                                                        -------        -------                 -------        -------
      Total revenues                                      100.0          100.0                   100.0          100.0
Cost of revenues
   Cost of licenses                                        28.2            3.7                    27.3            4.6
   Cost of services                                        41.2           33.1                    94.0           43.2
                                                        -------        -------                 -------        -------
      Total cost of revenues                               69.4           36.8                   121.3           47.8
                                                        -------        -------                 -------        -------
Gross margin                                               30.6           63.2                   (21.3)          52.2
Operating expenses
   Sales and marketing                                    102.3           69.0                   155.0           93.3
   Research and development                                74.2           16.9                    73.3           25.9
   General and administrative                              35.8           13.3                    37.4           18.9
   Intangible assets amortization                          55.2           20.4                    48.2           29.8
   Restructuring and other non-recurring charges          138.6            0.3                    67.7            2.4
                                                        -------        -------                 -------        -------
      Total operating expenses                            406.1          119.9                   381.6          170.3
                                                        -------        -------                 -------        -------
Loss from operations                                     (375.5)         (56.7)                 (402.9)        (118.1)
Other income (expense), net                                (3.3)           1.0                     5.3            0.2
                                                        -------        -------                 -------        -------
Net loss from continuing operations                      (378.8)         (55.7)                 (397.6)        (117.9)
Net income from discontinued operations                    26.4           (1.7)                   16.2           22.9
Net gain from disposal of a business segment               25.2           --                       6.9           --
                                                        -------        -------                 -------        -------
Net loss                                                 (327.2)%        (57.4)%                (374.5)%        (95.0)%
                                                        =======        =======                 =======        =======
</TABLE>



THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

REVENUES

Total revenues decreased 66.0% to $2.1 million in third quarter 2001 from $6.2
million in third quarter 2000. License revenues decreased 84.6% to $0.7 million
in third quarter 2001 from $4.6 million in third quarter 2000. The decrease in
license revenues was primarily attributable to material cutbacks in spending for
information technology products by many companies throughout the United States.
As a result, we finalized fewer contracts with new customers where revenue was
recognized during the quarter and a decrease in the average amount of the
license component of these contracts. In third quarter 2001, we recognized
revenue for 3 contracts versus 22 contracts in third quarter 2000. Our average
license revenue recognized for these contracts decreased 44.5% to $95,000 in
third quarter 2001 from $172,000 in third quarter 2000.

Service revenues in total decreased 13.2% to $1.4 million in third quarter 2001
from $1.6 million in third quarter 2000. The net decrease is the result of a
decrease in professional service revenue offset by an increase in maintenance
revenues. Professional service revenues decreased 47.2% to $0.5 million in third
quarter 2001 from $1.0 in third quarter 2000 as a result of fewer billable
hours. Maintenance revenues increased 47.3% to $0.9 million in third quarter
2001 from $0.6 million in third quarter 2000 as the number of existing customers
continued to increase.

COST OF REVENUES

Cost of revenues decreased to $1.5 million in third quarter 2001 from $2.3
million in third quarter 2000. Cost of revenues as a percentage of revenues
increased to 69.4% from 36.8%, resulting in gross margin of 30.6% for the third
quarter 2001 compared to 63.2% for third quarter 2000.

Cost of license revenues increased to $0.6 million in third quarter 2001 from
$0.2 million in third quarter 2000. Cost of license revenues as a percentage of
revenues increased to 28.2% from 3.7%. The increase in the cost of license
revenues was primarily attributable to an increase in product royalties payable
to third parties.

Cost of service revenues decreased to $0.9 million in third quarter 2001 from
$2.1 million in third quarter 2000, although as a percentage of revenues it
increased to 41.2% from 33.1%. The decrease in the cost of service revenues was
primarily attributable to a decrease in the use of third parties to perform
services, a decrease in travel expenses, and a 40.5% decrease in staff to 25 in
third quarter 2001 from 42 in third


                                       12
<PAGE>

quarter 2000. The increase as a percentage of revenues is the result of the
rate of decrease in revenues exceeding the rate of decrease in these costs.

OPERATING EXPENSES

Sales and Marketing. Sales and marketing expenses decreased to $2.2 million, or
102.3% of revenues, in third quarter 2001 from $4.3 million, or 69.0% of
revenues, in third quarter 2000. The decrease is attributable to a reduction in
sales and marketing staff of 55.1% to 31 in third quarter 2001 from 69 in third
quarter 2000, and a decrease in expenses for marketing programs of 46.0% to $0.5
million in third quarter 2001 from $0.9 million in third quarter 2000. The
increase as a percentage of revenues was attributable to the decrease in
revenue.

Research and Development. Research and development expenses increased to $1.6
million, or 74.2% of revenues, in third quarter 2001 from $1.0 million, or 16.9%
of revenues, in third quarter 2000. Although software development staffing
levels decreased 19.4% to 29 in third quarter 2001 from 36 in third quarter
2000, research and development costs increased due to higher overhead
allocations in 2001, higher average salaries and professional services personnel
used in development activities.

General and Administrative. General and administrative expenses remained steady
at $0.8 million, or 35.8% of revenues in third quarter 2001 and $0.8 million, or
13.3% of revenues in third quarter 2000. Increases in legal and accounting
expenses, insurance and other expenses related to being a public company for the
full third quarter 2001 were offset by savings from a 50.0% decrease in staff to
12 in third quarter 2001 from 24 in third quarter 2000. The increase as a
percentage of revenues was attributable to the decrease in revenue.

Intangible Assets Amortization. Intangible assets amortization decreased
slightly to $1.2 million, or 55.2% of revenues in third quarter 2001 from $1.3
million, or 20.4% of revenues in third 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 revenue.

Restructuring and other non-recurring charges. Restructuring and other
non-recurring charges were $2.9 million, or 138.6% of revenues, in third quarter
2001 while there were essentially no such costs in third quarter 2000. We
incurred a restructuring charge of $0.6 million representing severance benefits
and costs resulting from the lay off of 75 employees on July 10, 2001. Other
non-recurring charges in third quarter 2001 consist of severance charges for
senior executives of $0.4 million, as well as costs associated with forgiveness
of stockholder loans and related tax gross-up.

OTHER INCOME (EXPENSE), NET

Other income (expense), net consists primarily of interest income on short-term
investments, offset by interest expense and other fees related to our bank
borrowings. Third quarter 2001 results reflect an net expense of $69,000 or 3.3%
of revenues compared to a net income of $61,000 or 1.0% of revenues in third
quarter 2000. The decrease was primarily a result of a decrease in interest
earned on investments, a reversal of interest earned on stockholder loans that
were forgiven and a decrease in interest paid on outstanding debt.

NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

REVENUES

Total revenues decreased 39.8% to $7.7 million in the first nine months of 2001
from $12.7 million in the first nine months of 2000. License revenues decreased
61.0% to $3.2 million in the first nine months of 2001 from $8.2 million in the
first nine months of 2000. The decrease in license revenues was attributable to
a decreased number of contracts with new customers where revenue was recognized
during the nine months although the average amount of the license component of
these contracts increased. In the first nine months of 2001, we recognized
revenue for 12 contracts versus 52 contracts in the first nine months of 2000.
Our average license revenue recognized for these contracts increased 17.8% to
$190,000 in the first nine months of 2001 from $134,000 in the first nine months
of 2000. Service revenues remained steady with $4.5 million reported in both
periods. An increase in the amount of software maintenance revenue was offset by
a decrease in the amount of professional service revenues.

COST OF REVENUES

Cost of revenues increased to $9.3 million in the first nine months of 2001 from
$6.1 million in the first nine months of 2000. Cost of revenues as a percentage
of revenues increased to 121.3% from 47.8%. Cost of license revenues increased
to $2.1 million in the first nine months of 2001 from $0.6 million in the first
nine months of 2000. As a percentage of revenues, it increased to 27.3% from
4.6%. The increase in the cost of license revenues was primarily attributable to
an increase in product royalties as a result of new agreements entered into late
in 2000.


                                       13
<PAGE>

Cost of service revenues increased to $7.2 million in the first nine months of
2001 from $5.5 million in the first nine months of 2000. As a percentage of
revenues, it increased to 94.0% from 43.2%. The increase in the cost of service
revenues was primarily attributable to the use of third parties to perform
services and customer support and higher personnel costs in the first nine
months of 2001.

OPERATING EXPENSES

Sales and Marketing. Sales and marketing expenses remained steady at $11.9
million, or 155.0% of revenues, in the first nine months of 2001 compared to
$11.9 million, or 93.3% of revenues, in the first nine months of 2000. An
increase in sales and marketing efforts focused on the software business was
offset by decreases in commissions and marketing programs. The increase as a
percentage of revenues was attributable to the decrease in revenue.

Research and Development. Research and development expenses increased to $5.6
million, or 73.3% of revenues, in the first nine months of 2001 from $3.3
million, or 25.9% of revenues, in the first nine months of 2000. The increase is
due to an increased focus on the software business and greater use of third
party contractors to perform research and development work.

General and Administrative. General and administrative expenses increased to
$2.9 million, or 37.4% of revenues in the first nine months of 2001 from $2.4
million, or 18.9% of revenues in the first nine months of 2000. The increase in
general and administrative expenses was primarily the result of increased legal,
accounting, insurance and other expenses related to being a public company for
the full first nine months of 2001.

Intangible Assets Amortization. Intangible assets amortization decreased
slightly to $3.7 million, or 48.2% of revenues in the first nine months of 2001
from $3.8 million, or 29.8% of revenues in the first nine 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 and other non-recurring charges. Restructuring and other
non-recurring charges increased to $5.2 million, or 67.7% of revenues, in the
first nine months of 2001 from $0.3 million, or 2.4% of revenues, in the first
nine months of 2000. In the first nine months of 2001, restructuring charges
totaling $2.4 million primarily represent excess facilities costs and severance
benefits resulting from reductions in force of 55 employees in February 2001 and
an additional 75 employees in July 2001.

Other non-recurring charges in the first nine months of 2001 consist of
severance costs for senior executives of $0.6 million, as well as other costs
recognized in conjunction with forgiveness of stockholder loans and the related
tax gross up. Other non-recurring charges in the first nine months of 2000
consist of severance charges for senior executives of $0.3 million.

OTHER INCOME (EXPENSE), NET

Other income (expense), net consists primarily of interest income received from
short-term investments, offset by interest expense and other fees related to our
bank borrowings. Other income (expense), net increased to $408,000 or 5.3% of
revenues in the first nine months of 2001 from $21,000 or 0.2% of revenues in
the first nine months of 2000. The increase was primarily the result of an
increase in interest earned on investments and a decrease in interest paid on
outstanding debt.

LIQUIDITY AND CAPITAL RESOURCES

Historically, 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 $28.7 million for the nine months ended September
30, 2001. Although we believe our cost structure following October's
restructuring actions will enable us to achieve profitability and positive cash
flow by the middle of next year, we may continue to incur net losses for the
foreseeable future.

We continue to use cash for operating activities as a result of our net losses.
We expect the levels of cash used by current operations to be lower during the
fourth quarter and next year due to lower personnel and office costs as a result
of our restructuring activities.

The significant changes in accounts receivable and deferred revenue in the nine
months ended September 30, 2001 compared to the nine months ended September 30,
2000 are a result of a decrease in customer orders. Customer orders decreased
62.8% in the nine months ended September 30, 2001 compared to the nine months
ended September 30, 2000. The significant fluctuations in other assets resulted
from the prepayment of royalties in late 2000 and the subsequent recognition of
the related expense in 2001.


                                       14
<PAGE>

Net cash provided by investing activities was primarily attributable to sales of
short-term investments. Consistent with the decline in revenues, our need for
capital spending for new equipment also declined.

Net cash provided by financing activities resulted primarily from proceeds
borrowed under the revolving line of credit. The revolving line of credit is
expected to be repaid in full in November 2001.

As of September 30, 2001, we had $0.3 million in cash and cash equivalents and
$3.6 million in short-term investments. We believe that our existing cash and
investment balances will be sufficient to meet anticipated cash requirements in
the near term. We have several one-time obligations to be paid, including items
such as severance benefits, but have taken steps to reduce our recurring costs
to approximate our anticipated levels of revenue. These steps included a lay off
in October 2001 of approximately 50 employees. We will pursue additional funding
in the near term to supplement our cash balances.

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 and
September 6, 2001 we received letters from the Nasdaq Stock Market, Inc.
notifying us that our securities have failed to meet the continued listing
requirements for minimum bid price and market value of public float under the
Nasdaq National Market rules. However, Nasdaq later suspended these requirements
until January 2, 2002. 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 pursuing the options to sell or merge our business, or
liquidate.

If we raise additional funds through the issuance of equity, equity-related or
debt securities, such 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 consisting of two
sub-facilities: a revolving credit facility and a term loan. No additional
borrowings can be made under this facility.

Amounts drawn under the revolving credit 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 September 30, 2001, $1.3 million
was available for use and $1.0 million was outstanding under the revolving
credit facility. The revolving credit facility matures on December 10, 2001;
however amounts outstanding at September 30, 2001 are expected to be repaid in
full in November 2001 and the underlying revolver cancelled.

The term loan of $0.3 million is payable in equal monthly principal installments
and matures on June 1, 2003. Any amounts drawn under this facility bear interest
at the Base Rate plus 0.75%.

RECENT ACCOUNTING PRONOUNCEMENTS

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 new 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.



                                       15
<PAGE>


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

We have historically required substantial amounts of capital to fund our
business operations. Despite efforts to reduce our cost structure, we may
experience negative cash flow from operations for the next few quarters.

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 will be sufficient to meet our projected needs to fund operations in the
near term. Accordingly, we will pursue additional financing 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 cannot be certain that
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 pursuing the options 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.

WE HAVE A HISTORY OF LOSSES, ANTICIPATE THAT WE WILL CONTINUE TO INCUR LOSSES
FOR THE NEXT SEVERAL QUARTERS 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 September 30, 2001, we had an
accumulated deficit of $65.7 million. We have not achieved profitability on a
quarterly or annual basis to date. In the first nine months of 2001, we incurred
net losses of $28.7 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 activities. However, if revenues do not stabilize or if they
continue to decline, our losses will continue.

OUR CORPORATE RESTRUCTURINGS IN 2001 MAY NOT PRODUCE THE EXPECTED BENEFITS.
FURTHERMORE, THE RESTRUCTURING CHARGES WILL HAVE A MATERIAL ADVERSE EFFECT ON
OUR RESULTS OF 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. In 2000 and 1999, our Content Segment business
accounted for 41.3% and 61.6% of our total revenues, respectively, and we cannot
assure you that our continuing Software Segment business will be able to offset
the loss of revenues from our Content Segment business in 2001 or in future
years. In addition, in connection with our restructuring, we have taken
restructuring charges of $2.4 million in the first nine months of 2001 and plan
to take a charge of approximately $0.4 million in the fourth 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. We
have may also experience difficulty in hiring and retaining sales personnel,
product managers and professional services employees. The average tenure of our
current employees is 2.7 years. Additionally, we have experienced a high
turn-over rate in some of our senior management positions in the past few years.
Continued high turn-over in management positions could have an adverse effect on
our operations and business.

BECAUSE OUR CURRENT LINE OF PRODUCTS IS RELATIVELY NEW, OUR HISTORICAL FINANCIAL
RESULTS MAY NOT BE 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.


                                       16
<PAGE>

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
may not be helpful in evaluating our prospects.

IT IS DIFFICULT TO DRAW CONCLUSIONS ABOUT OUR FUTURE PERFORMANCE BASED ON OUR
PAST PERFORMANCE DUE TO SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING
RESULTS.

Our projected expense levels are based on our expectations regarding future
revenues and are relatively fixed in the short term. Therefore, 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 recent 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 to $2.1
million in third 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 and will be willing to access our content over the Internet.
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.

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 a greater
proportion of our total revenues will be derived from our eService Suite, for
which contracts have a higher average dollar value. For these and other reasons,
the sales cycle associated with the licensing of our products and subscription
for our 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 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.

Our business strategy includes 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.


                                       17
<PAGE>

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.

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.

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, 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 AND OTHER INTANGIBLE ASSETS COSTS RELATED TO OUR
ACQUISITION OF THE MOLLOY GROUP WHICH WILL ADVERSELY AFFECT OUR OPERATING
RESULTS FOR THE FORESEEABLE FUTURE.

We face significant goodwill and other intangible assets 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 and other intangible assets that will
adversely affect our operating results for the foreseeable future. As of
September 30, 2001, we had goodwill and other intangibles of approximately $4.0
million, which we are amortizing over two to four years from the date of the
acquisition. If 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 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 Statement is expected to
result in an increase in net income of $2.3 million. During 2002, we will
perform the new required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002. 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. It is also possible that alliances
or mergers may occur among our competitors and that these


                                       18
<PAGE>

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 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.

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 Processor, now known as MindSync(TM) technology. 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 transmitted data. 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.


                                       19
<PAGE>

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

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.

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. These broad market fluctuations may cause the market price
of our common stock to



                                       20
<PAGE>

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.

THE LOW PRICE OF OUR COMMON STOCK AND THE LOW MARKET VALUE OF PUBLIC FLOAT 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
requested 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) and had a hearing date set for September 27, 2001. On September 6,
2001, we received a letter from Nasdaq Stock Market, Inc. notifying us that in
addition to the bid price deficiency, we were no longer in compliance with the
market value of public float requirement as set forth in Nasdaq Marketplace Rule
4450(a)(2). This matter was scheduled to be addressed at the September 27, 2001
hearing as well.

In the week prior to the hearing date, we received notification that Nasdaq
implemented a moratorium on the minimum bid price and market value of public
float requirements for continued listing on The Nasdaq National Market. Under
the moratorium, those requirements will be suspended until January 2, 2002, at
which time the 30 and 90-day periods provided by Marketplace Rule 4310(c)(8)(B)
would start anew. To clarify, we would be considered non-compliant if we failed
to satisfy the applicable standard for 30 consecutive trading days following
January 1, 2002. Thereafter, we would be afforded a 90 calendar day grace period
in which to regain compliance.

If our common stock would be delisted by Nasdaq, our securities would be
eligible to trade on the OTC Bulletin Board maintained by Nasdaq, another
over-the-counter quotation system, or on the pink sheets where an investor may
find it more difficult to dispose of or obtain accurate quotations as to the
market value of the securities. 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 such 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 affect the liquidity of our
common stock.

Delisting will 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. Further, if we are delisted we
would also incur additional costs under state blue sky laws in connection with
any sales of our securities.


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 facility 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.


                                       21
<PAGE>



                          PART II -- OTHER INFORMATION

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

     None

(b)  Reports on Form 8-K

On August 6, 2001, we filed a Current Report on Form 8-K stating that on July
20, 2001, we completed the sale of all of our right, title and interest in and
to the properties and assets used by our Content Business to RightAnswers LLC.




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<PAGE>


                                   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:  November 14, 2001             By: /s/ KENT HEYMAN
                                         ------------------------------
                                         Kent Heyman
                                         Chief Executive Officer and President


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



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