<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 MARCH 31, 2002

                                       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                (I.R.S. Employer Identification No.)
of Incorporation or Organization)


 333 ALLEGHENY AVENUE, SUITE 301 NORTH
              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 May 10, 2002 was 23,863,167.




<PAGE>



                         SERVICEWARE TECHNOLOGIES, INC.
                                    FORM 10-Q
                                 MARCH 31, 2002
                                      INDEX

<TABLE>
<CAPTION>
PART I.  FINANCIAL INFORMATION                                                                                PAGE NO.
                                                                                                              --------

<S>                                                                                                              <C>
ITEM 1.  Consolidated Financial Statements (Unaudited)

         Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001...............................   2

         Consolidated Statements of Operations for the three months
         ended March 31, 2002 and 2001........................................................................   3

         Consolidated Statement of Stockholders' Equity for the three months ended
         March 31, 2002 ......................................................................................   4

         Consolidated Statements of Cash Flows for the three months ended
         March 31, 2002 and 2001..............................................................................   5

         Notes to Consolidated Financial Statements...........................................................   6

ITEM 2.  Management's Discussion and Analysis of Financial Condition and
             Results of Operations............................................................................  10

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk...........................................  21


PART II. OTHER INFORMATION

ITEM 5.  Other Information....................................................................................  23

ITEM 6.  Exhibits and Reports on Form 8-K.....................................................................  24
</TABLE>








<PAGE>



                          PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

                           CONSOLIDATED BALANCE SHEETS
                 AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS


<TABLE>
<CAPTION>
                                                                                        MARCH 31,  DECEMBER 31,
                                                                                           2002        2001
                                                                                         --------    --------
                                                                                          (Unaudited)
<S>                                                                                      <C>         <C>
                                        ASSETS
Current assets
   Cash and cash equivalents                                                             $  1,381    $  4,790
   Short term investments                                                                   1,001           -
   Accounts receivable, less allowance for doubtful accounts of $306 as of March 31,
      2002 and $376 in 2001                                                                 3,161       1,981
   Other current assets                                                                       785         998
                                                                                         --------    --------
            Total current assets                                                            6,328       7,769
Non current assets
   Purchased technology, net of amortization of $1,596 as of March 31, 2002 and
      $1,448 in 2001                                                                          185         333
   Property and equipment
      Office furniture, equipment, and leasehold improvements                               2,025       2,189
      Computer equipment                                                                    6,536       6,533
                                                                                         --------    --------
            Total property and equipment                                                    8,561       8,722
      Less accumulated depreciation                                                        (6,149)     (5,805)
                                                                                         --------    --------
   Property and equipment, net                                                              2,412       2,917
   Intangible assets, net of accumulated amortization of $12,191 as of March 31, 2002
      and $12,091 in 2001                                                                   2,717       2,817
   Other non current assets                                                                    50          50
                                                                                         --------    --------
            Total long term assets                                                          5,364       6,117
                                                                                         --------    --------
            Total assets                                                                 $ 11,692    $ 13,886
                                                                                         ========    ========

                         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
   Accounts payable                                                                           770         628
   Accrued compensation and benefits                                                          344         801
   Deferred revenue - licenses                                                                785         940
   Deferred revenue - services                                                              2,955       2,783
   Restructuring reserve                                                                      867       1,052
   Other current liabilities                                                                  855         929
                                                                                         --------    --------
            Total current liabilities                                                       6,576       7,133
Non current deferred revenue - licenses                                                       134           -
Non current deferred revenue - services                                                         -         293
Other non current liabilities                                                                 127         150
                                                                                         --------    --------
            Total liabilities                                                               6,837       7,576
Stockholders' equity
   Common stock, $0.01 par; 100,000 shares authorized, 24,655 and 24,655 shares issued
      and 23,863 and 23,828 shares outstanding in 2002 and 2001, respectively                 247         247
   Additional paid in capital                                                              71,852      71,774
   Treasury stock, 792 and 827 shares in 2002 and 2001, respectively                         (294)       (307)
   Deferred compensation and other                                                           (105)       (114)
   Warrants                                                                                 1,414       1,414
   Accumulated other comprehensive loss:
      Currency translation account                                                            (31)        (24)
   Retained deficit                                                                       (68,228)    (66,680)
                                                                                         --------    --------
            Total stockholders' equity                                                      4,855       6,310
                                                                                         --------    --------
            Total liabilities and stockholders' equity                                   $ 11,692    $ 13,886
                                                                                         ========    ========
</TABLE>

              See accompanying notes to the financial statements.




                                       2
<PAGE>



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

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED MARCH 31,
                                                             2002        2001
                                                         --------    --------
<S>                                                      <C>         <C>
Revenues
   Licenses                                              $  1,004    $    947
   Services                                                 1,549       1,394
                                                         --------    --------
      Total revenues                                        2,553       2,341
Cost of revenues
   Cost of licenses                                           304         863
   Cost of services                                         1,059       3,332
                                                         --------    --------
      Total cost of revenues                                1,363       4,195
                                                         --------    --------
Gross margin                                                1,190      (1,854)
Operating expenses
   Sales and marketing                                      1,198       5,252
   Research and development                                   499       2,089
   General and administrative                                 930         885
   Intangible assets amortization                             100       1,266
   Restructuring and other non-recurring charges               25       1,967
                                                         --------    --------
      Total operating expenses                              2,752      11,459
                                                         --------    --------
Loss from operations                                       (1,562)    (13,313)
Other income (expense)
   Interest expense                                           (13)        (21)
   Other (net)                                                 27         368
                                                         --------    --------
Other income (expense), net                                    14         347
                                                         --------    --------
Net loss from continuing operations                        (1,548)    (12,966)
Net income (loss) from discontinued operations                  -         399
                                                         --------    --------
Net loss                                                 $ (1,548)   $(12,567)
                                                         ========    ========

Net (loss) income per common share, basic and diluted:
   Continuing operations                                 $  (0.06)   $  (0.54)
   Discontinued operations                                      -        0.02
                                                         --------    --------
Net loss per share                                       $  (0.06)   $  (0.52)
                                                         ========    ========

Shares used in computing per share amounts                 23,856      24,356
                                                         ========    ========
</TABLE>

              See accompanying notes to the financial statements.




                                       3
<PAGE>


                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                 ACCUMULATED
                                             ADDITIONAL                   DEFERRED                  OTHER                  TOTAL
                              COMMON STOCK    PAID IN   TREASURY STOCK  COMPENSATION            COMPREHENSIVE           STOCKHOLDERS
                              SHARES  AMOUNT  CAPITAL   SHARES  AMOUNT    AND OTHER   WARRANTS   (LOSS) GAIN   DEFICIT    EQUITY
                              ------  ------  -------   ------  ------    ---------   --------   -----------   -------    ------
<S>                           <C>      <C>    <C>       <C>    <C>        <C>         <C>         <C>        <C>          <C>
Balance at December 31, 2001  23,828   $ 247  $71,774    827   $ (307)     $(114)     $1,414      $ (24)      $(66,680)   $ 6,310
Exercise of stock options         35                     (35)      13                                                          13
Stock based compensation                           78                                                                          78
Amortization of warrants                                                       9                                                9
Comprehensive (loss) gain:
Currency translation adjustment                                                                      (7)                       (7)
Net loss                                                                                                        (1,548)    (1,548)
                                                                                                  -----       --------    -------
Total comprehensive (loss) gain
                              ------   -----  -------    ---   ------     ------      ------      -----       --------    -------
Balance at March 31, 2002     23,863   $ 247  $71,852    792   $ (294)    $ (105)     $1,414      $ (31)      $(68,228)   $ 4,855
                              ======   =====  =======    ===   ======     ======      ======      =====       ========    =======
</TABLE>

              See accompanying notes to the financial statements.


















                                       4
<PAGE>



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

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED MARCH 31,
                                                                       2002        2001
                                                                     --------    --------
<S>                                                                  <C>         <C>
Cash flows from operating activities
Net loss                                                             $ (1,548)   $(12,567)
Adjustments to reconcile net loss to net cash used in operations:
   Non cash items:
      Depreciation and amortization                                       752       2,030
      Stock based compensation                                             78        (102)
      Other non cash items                                                 (5)        (19)
   Changes in operating assets and liabilities:
      (Increase) decrease in accounts receivable                       (1,180)      1,351
      Decrease in other assets                                            213          98
      Increase in accounts payable                                        142         327
      Decrease in accrued compensation                                   (457)        (28)
      Decrease in deferred revenue                                       (143)       (105)
      (Decrease) increase in other liabilities                           (209)      1,223
      Decrease in net current liability of discontinued operations          -        (212)
                                                                     --------    --------
Net cash used in operating activities                                  (2,357)     (8,004)
                                                                     --------    --------

Cash flows from investing activities
   Purchases of short term investments                                 (1,001)     (1,697)
   Sales of short term investments                                          -       4,000
   Property and equipment acquisitions                                     (7)       (452)
                                                                     --------    --------
Net cash (used in) provided by investing activities                    (1,008)      1,851
                                                                     --------    --------

Cash flows from financing activities
   Repayments of principal of capital lease obligations                    (8)        (17)
   Repayments of principal of term loans                                  (43)        (43)
   Proceeds from stock option exercises                                    13          19
                                                                     --------    --------
Net cash used in financing activities                                     (38)        (41)

Effect of exchange rate changes on cash                                    (6)         (7)

Decrease in cash and cash equivalents                                  (3,409)     (6,201)
Cash and cash equivalents at beginning of period                        4,790      12,048
                                                                     --------    --------
Cash and cash equivalents at end of period                           $  1,381    $  5,847
                                                                     ========    ========

Supplemental disclosures of cash flow information:
   Cash paid for interest                                            $     10    $     15
                                                                     ========    ========
</TABLE>

              See accompanying notes to the financial statements.







                                       5
<PAGE>



                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2002
                                   (UNAUDITED)

NOTE 1. ORGANIZATION OF THE COMPANY

ServiceWare is a leading provider of enterprise Knowledge Management (KM)
solutions that enable organizations to deliver superior service for customers,
employees and partners by transforming information into knowledge.

ServiceWare's Web-based eService Suite(TM) software, powered by MindSync(TM), a
patented self-learning search technology, enables organizations to first capture
intellectual capital and then manage this repository of corporate knowledge. The
knowledge base can then be easily accessed via a browser to effectively answer
inquiries made either over the Web or through the telephone to a customer
contact center or help desk.

Customers use ServiceWare's Knowledge Management solutions to:
     -  Strengthen relationships with customers, partners, suppliers and
        employees
     -  Decrease operating costs
     -  Improve creation, dissemination and sharing of enterprise knowledge
     -  Integrate seamlessly with existing technology investments

eService Suite is a software solution that allows ServiceWare customers to
provide personalized, automated Web-based service tailored to the needs of their
users. eService Suite enables businesses to capture enterprise knowledge, solve
customer problems, reuse solutions and share captured knowledge throughout the
extended enterprise. It also enables the extended enterprise to access this
knowledge online. In addition, through the self-learning features of
ServiceWare's patented MindSync technology, the solutions generated by these
products are intelligent in that they have the capability to learn from each
interaction and automatically update themselves accordingly. eService Suite
includes the software products eService Site(TM) (Web-based self-service for
customers, partners and employees), eService Professional(TM) (for customer
service, sales and field service personnel) and eService Architect(TM) (for
knowledge managers, subject matter experts and system administrators).

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 March 31, 2002 and related
unaudited consolidated statements of operations for the three months ended March
31, 2002 and 2001, unaudited consolidated statement of cash flows for the three
months ended March 31, 2002 and 2001 and the unaudited consolidated statement of
stockholders' equity for the three months ended March 31, 2002 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 months ended March 31, 2002 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2002. 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 2001 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. Effective January 1, 2002, the Company adopted Emerging Issues
Task Force Number 01-14, "Income Statement Characterization of Reimbursements
Received for 'Out-of-Pocket' Expenses Incurred" (EITF 01-14), which requires
that reimbursements received for out-of-


                                       6
<PAGE>

pocket expenses be classified as revenues and not as cost reductions. Before the
effective date of EITF 01-14, the Company netted out-of-pocket reimbursements
from customers with the applicable costs. These items include primarily travel,
meals and certain telecommunication costs. EITF 01-14 requires restatement of
all periods presented in order to reflect reimbursed expenses as both revenues
and costs. During the three months ended March 31, 2002 and 2001, reimbursed
expenses totaled approximately $92,000 and $75,000, respectively. Total
reimbursed expenses for the full-year 2001 totaled approximately $480,000. While
the adoption of EITF 01-14 has no impact on income from operations or net
income, it does reduce total operating margins since both revenues and costs
increase by the same amount.

NOTE 3. NET LOSS PER SHARE

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

                                                  THREE MONTHS ENDED MARCH 31,
                                                      2002        2001
                                                    --------    --------
                                                       (in thousands)
Numerator:
   Net loss from continuing operations              $ (1,548)   $(12,966)
   Net income (loss) from discontinued operations          -         399
                                                    --------    --------
   Net loss                                           (1,548)    (12,567)
                                                    ========    ========

Denominator:
   Denominator for basic and diluted earnings per
      share-weighted average shares                   23,856      24,356
                                                    ========    ========


Basic and diluted net (loss) income per share:
   Continuing operations                            $  (0.06)   $  (0.54)
   Discontinued operations                                 -        0.02
                                                    --------    --------
Net loss per share                                  $  (0.06)   $  (0.52)
                                                    ========    ========


Dilutive securities include options and warrants as if converted. Potentially
dilutive securities totaling 7,099,943 and 4,922,410 for the three months ended
March 31, 2002 and 2001, respectively, were excluded from historical basic and
diluted loss per share because of their antidilutive effect.

NOTE 4. ADOPTION OF NEW ACCOUNTING STANDARD

Effective January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). This statement modifies the financial accounting and reporting for
goodwill and other intangible assets, including the requirement that goodwill
and certain intangible assets no longer be amortized. This new standard also
requires an annual impairment review to be performed. As a result of the
adoption of SFAS 142, amortization expense for the three months ended March 31,
2002 decreased by approximately $1,033,000 compared to the three months ended
March 31, 2001 due to the lack of amortization expense related to goodwill.
Aside from this change in accounting for goodwill, no other change in accounting
for intangible assets was required as a result of the adoption of SFAS 142 based
on the nature of the Company's intangible assets. In accordance with SFAS 142,
the Company has six months from the initial date of adoption, or until June 30,
2002, to complete its transitional impairment review and does not anticipate
recognizing an impairment loss.

The following table reflects the effect of the adoption of SFAS 142 on net
income and net income per share as if SFAS 142 had been in effect for the period
presented:

                                                    THREE MONTHS ENDED MARCH 31,
                                                       2002           2001
                                                    ----------     ----------
          Net income:                                     (in thousands)

          As reported                               $   (1,548)    $  (12,567)
          Goodwill amortization                              -          1,033
                                                    ----------     ----------
          As adjusted                                   (1,548)    $  (11,534)
                                                    ==========     ==========

          Basic and diluted net income per share
          As reported                               $    (0.06)    $    (0.54)
          Goodwill amortization                              -           0.04
                                                    ----------     ----------
          As adjusted                               $    (0.06)    $    (0.50)
                                                    ==========     ==========


                                       7
<PAGE>

Intangible assets resulted primarily from the acquisition of Molloy Group on
July 23, 1999 and consist of the following:

<TABLE>
<CAPTION>
                                                                              Amortization
Description                                                        Amount        Period
----------------------------------------------------------------------------------------
                                                               (in thousands)

<S>                                                               <C>           <C>
Value of employees                                                $  1,042      2 years
Customer list                                                        1,043      4 years
Noncompetition agreement                                               345      3 years
Goodwill                                                            12,394      3 years
Total intangible assets resulting from the Molloy acquisition       14,824
Payment for rights to the "ServiceWare" name                            75      3 years
Other                                                                    9      1 year
                                                                  --------
Total intangible assets                                             14,908
Less accumulated amortization                                      (12,191)
                                                                  --------
Intangible assets, net                                            $  2,717
                                                                  ========
</TABLE>

Intangible assets are recorded at cost, net of accumulated amortization.
Amortization is computed using the straight-line method over the estimated
useful lives of the related assets (one to four years).

Future aggregate amortization expense related to other intangible assets is as
follows:

        Year ending December 31,
        ------------------------                          (in thousands)
                   Remainder of 2002                           $  246
                   2003                                           147
                                                       --------------------
                                                               $  393
                                                       ====================

NOTE 5. RECEIVABLES

Receivables consist of the following:

                                                 MARCH 31,       DECEMBER 31,
                                                   2002             2001
                                                  -------          -------
                                                       (in thousands)
Billed receivables                                $ 2,372          $ 1,262
Unbilled receivables                                1,095            1,095
                                                  -------          -------
                                                    3,467            2,357
Allowance for doubtful accounts                      (306)            (376)
                                                  -------          -------
Net receivables                                   $ 3,161          $ 1,981
                                                  =======          =======

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

As of March 31, 2002, the Company had a secured credit facility with PNC Bank.
This facility originally consisted of three sub-facilities: a revolving credit
facility, a convertible equipment loan and a term loan. On June 8, 2000, the
equipment loan was converted to a term loan. At March 31, 2002 and December 31,
2001, $215,164 and $258,197, respectively, was outstanding and classified as
other current liabilities due to the uncertainty of the Company's ability to
meet the new loan covenants. In April 2002, this loan was repaid in full.

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 $1.6 million for the three months ended March 31, 2001.


                                       8
<PAGE>

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 Knowledge
Management 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. In the
fourth quarter 2001, the Company reduced this accrual by $0.2 million to reflect
changes in assumptions made for the initial charge.

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.

In October 2001, the Company announced a workforce reduction of approximately 50
people to further reduce its cost structure. As a result, the Company recognized
a charge of approximately $0.4 million in the fourth quarter of 2001.

As of March 31, 2002, $1,693,000 of severance benefits and other costs related
to the restructuring plans had been paid of which $185,000 was during the first
three months of 2002. The remaining restructuring liability of $867,000,
principally related to reduction of facilities and certain contracts, is
expected to be fully amortized through June 2003.

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 MARCH 31,
                                                               2002        2001
                                                              ------      ------
                                                                (in thousands)
<S>                                                           <C>        <C>
   Restructuring costs                                        $    -     $1,856

   Other severance costs                                          25        111
                                                              ------     ------
   Total restructuring and other non-recurring charges        $   25     $1,967
                                                              ======     ======
</TABLE>


NOTE 9. SUBSEQUENT EVENTS

On April 1, 2002, the Company signed a binding commitment letter to sell a total
of $3,000,000 of Convertible Notes to affiliates of a current investor who is
also a director of the Company. The first tranche of $1,425,000, less
transaction costs of approximately $165,000, was received on May 7, 2002. The
notes mature 18 months from the closing date, bear interest at 10% per annum,
and, subject to stockholder approval, are convertible at any time at the option
of the holder, into shares of the Company's common stock at a conversion price
of $0.30 per share for the first tranche of notes. Interest can be paid in cash
or additional notes, at the option of the Company. The Notes are senior
unsecured obligations that will rank senior to all future subordinated
indebtedness, pari passu to all existing and future senior, unsecured
indebtedness and subordinated to all existing and future senior secured
indebtedness. The Company is seeking shareholder approval to sell an additional
$1,575,000 of Notes under the arrangement.



                                       9
<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 15 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

ServiceWare is a leading provider of enterprise Knowledge Management (KM)
solutions that enable organizations to deliver superior service for customers,
employees and partners by transforming information into knowledge.

ServiceWare's Web-based eService Suite(TM) software, powered by MindSync(TM), a
patented self-learning search technology, enables organizations to first capture
intellectual capital and then manage this repository of corporate knowledge. The
knowledge base can then be easily accessed via a browser to effectively answer
inquiries made either over the Web or through the telephone to a customer
contact center or help desk.

Customers use ServiceWare's Knowledge Management solutions to:
     -  Strengthen relationships with customers, partners, suppliers and
        employees
     -  Decrease operating costs
     -  Improve creation, dissemination and sharing of enterprise knowledge
     -  Integrate seamlessly with existing technology investments

eService Suite is a software solution that allows ServiceWare customers to
provide personalized, automated Web-based service tailored to the needs of their
users. eService Suite enables businesses to capture enterprise knowledge, solve
customer problems, reuse solutions and share captured knowledge throughout the
extended enterprise. It also enables the extended enterprise to access this
knowledge online. In addition, through the self-learning features of
ServiceWare's patented MindSync technology, the solutions generated by these
products are intelligent in that they have the capability to learn from each
interaction and automatically update themselves accordingly. eService Suite
includes the software products eService Site(TM) (Web-based self-service for
customers, partners and employees), eService Professional(TM) (for customer
service, sales and field service personnel) and eService Architect(TM) (for
knowledge managers, subject matter experts and system administrators).

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 6.

Founded in 1991 in Oakmont, Pennsylvania, we sell our products throughout the
United States and have a European subsidiary based in the United Kingdom.

In response to poor financial performance and the economic downturn, during 2001
we announced strategic corporate restructuring programs pursuant to which we
would significantly reduce costs and focus our business exclusively on revenue
growth opportunities in our Software business. As part of the restructuring
plans, approximately 55, 75 and 50 employees were laid off in February, July and
October 2001, respectively. As a result, our net loss for first quarter 2002
decreased to $1.5 million, or $0.06 per share, compared to a loss of $12.6
million, or $0.52 per share for the first quarter 2001.

     On February 14, 2002, we received a compliance notice from The Nasdaq Stock
Market. In this letter, Nasdaq informed us that our common stock had failed to
maintain a minimum bid price per share of $1.00 over the last 30 consecutive
trading days, as required by The Nasdaq National Market under Marketplace Rule
4450(a)(5).


                                       10
<PAGE>


     In response to the letter from Nasdaq, we submitted an application to
transfer the listing of our common stock to The Nasdaq SmallCap Market. This
application was granted and our common stock has been trading on the Nasdaq
Small Cap Market since April 24, 2002. As a result, we will be afforded an
additional 180-day grace period which will extend the delisting determination
until August 13, 2002. We may also be eligible for an additional 180-day grace
period provided that we meet the initial listing criteria for the SmallCap
Market under Market Place Rule 4310(c)(2)(A). There can be no assurance that we
will remain compliant with the applicable continued listing requirements.

     If our common stock is unable to meet the minimum maintenance requirements
during the extended grace period, then we would be subject to delisting from the
Nasdaq SmallCap Market. In that event, we would be notified of any Nasdaq staff
determination to this effect and we would then have the right to appeal such a
delisting determination to the Nasdaq Listings Qualifications Panel.

     If our common stock would be delisted by Nasdaq, we believe that 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 from Nasdaq 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 could also incur additional costs under state blue sky laws in
connection with any sales of our securities.

     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 options to sell or merge our business, or liquidate.

     There can be no assurance that additional capital will be available to us
on reasonable terms, if at all, when needed or desired. 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.

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

REVENUES

We market and sell our products primarily in North America through our direct
sales force. Internationally, we market our products through value-added
resellers, software vendors and system integrators as well as our direct sales
force. International revenues were 2% and 8% of total revenues in first quarter
2002 and fiscal 2001. 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, reimbursements for
travel expenses that are billed to customers, 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.


                                       11
<PAGE>

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 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,
reimbursable expenses for travel that are billed to customers, 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.




                                       12
<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 MARCH 31,
                                                                2002           2001
                                                               ------         ------
<S>                                                              <C>            <C>
      Revenues
         Licenses                                               39.3%          40.5%
         Services                                               60.7           59.5
                                                              ------         ------
            Total revenues                                     100.0          100.0
      Cost of revenues
         Cost of licenses                                       11.9           36.9
         Cost of services                                       41.5          142.3
                                                              ------         ------
            Total cost of revenues                              53.4          179.2
                                                              ------         ------
      Gross margin                                              46.6          (79.2)
      Operating expenses
         Sales and marketing                                    46.9          224.4
         Research and development                               19.5           89.3
         General and administrative                             36.4           37.8
         Intangible assets amortization                          3.9           54.1
         Restructuring and other non-recurring charges           1.0           84.0
                                                              ------         ------
            Total operating expenses                           107.8          489.6
                                                              ------         ------
      Loss from operations                                     (61.2)        (568.9)
      Other income (expense), net                                0.5           14.8
                                                              ------         ------
      Net loss from continuing operations                      (60.6)        (554.0)
      Net income from discontinued operations                    0.0           17.1
                                                               ------         ------
      Net loss                                                 (60.6)%       (536.9)%
                                                              ======         ======

</TABLE>

THREE MONTHS ENDED MARCH 30, 2002 AND 2001

REVENUES

Total revenues increased 9.1% to $2.6 million in first quarter 2002 from $2.3
million in first quarter 2001. License revenues increased 6.0% to $1.0 million
in first quarter 2002 from $0.9 million in first quarter 2001. The increase in
license revenues was primarily attributable to an increase in the number of
sales of licenses to both new and existing customers. The average license
revenue recognized from sales to existing customers increased 56.1% to $47,000
in first quarter 2002 from $30,000 in first quarter 2001. In first quarter 2002,
we recognized revenue from 8 new customers versus 3 new customers in first
quarter 2001.

Service revenues in total increased 11.2% to $1.5 million in first quarter 2002
from $1.4 million in first quarter 2001. The net increase is primarily a result
of increased billable hours.

COST OF REVENUES

Cost of revenues decreased to $1.4 million in first quarter 2002 from $4.2
million in first quarter 2001. Cost of revenues as a percentage of revenues
decreased to 53.4% from 179.2%, resulting in gross margin of 46.6% for the first
quarter 2002 compared to negative 79.2% for first quarter 2001.

Cost of license revenues decreased to $0.3 million in first quarter 2002 from
$0.9 million in first quarter 2001. Cost of license revenues as a percentage of
revenues decreased to 11.9% from 36.9%. The decrease in the cost of license
revenues was primarily attributable to a decrease in product royalties payable
to third parties and costs incurred only in 2001 for equipment for specific
implementations.

Cost of service revenues decreased to $1.1 million in first quarter 2002 from
$3.3 million in first quarter 2001, and as a percentage of revenues decreased to
41.5% from 142.3%. 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 67.3% decrease in staff to 18 in first
quarter 2002 from 55 in first quarter 2001.


                                       13
<PAGE>

OPERATING EXPENSES

Sales and Marketing. Sales and marketing expenses decreased to $1.2 million, or
46.9% of revenues, in first quarter 2002 from $5.3 million, or 224.4% of
revenues, in first quarter 2001. The decrease is attributable to a reduction in
sales and marketing staff of 74.3% to 19 in first quarter 2002 from 74 in first
quarter 2001, and a decrease in expenses for marketing programs of 91.5% to
$64,000 in first quarter 2002 from $0.8 million in first quarter 2001.

Research and Development. Research and development expenses decreased to $0.5
million, or 19.5% of revenues, in first quarter 2002 from $2.1 million, or 89.3%
of revenues, in first quarter 2001. The decrease is principally the result of a
85.7% reduction in software development staffing levels to 6 in first quarter
2002 from 42 in first quarter 2001 and decreased use of third parties.

General and Administrative. General and administrative expenses remained steady
at $0.9 million, or 36.4% of revenues in first quarter 2002 and $0.9 million, or
37.8% of revenues in first quarter 2001. Decreases from a 42.1% reduction in
staff to 11 in first quarter 2002 from 19 in first quarter 2001 and a reduction
of bad debt expense were offset by increases in legal and accounting expenses.

Intangible Assets Amortization. Intangible assets amortization decreased to $0.1
million, or 3.9% of revenues in first quarter 2002 from $1.3 million, or 54.1%
of revenues in first quarter 2001. 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 decrease is primarily the result of the
implementation of new accounting rules that discontinue the amortization of
goodwill.

Restructuring and other non-recurring charges. Restructuring and other
non-recurring charges decreased to $25,000, or 1.0% of revenues, in first
quarter 2002 from $2.0 million, or 84.0% of revenues, in first quarter 2001. In
first quarter 2001, we incurred a restructuring charge of $1.9 million
representing severance benefits and costs resulting from the lay off of 55
employees in February 2001 of $0.5 million, reduction and relocation of certain
facilities costs of $1.2 million, and termination costs for certain services and
equipment write off of $0.2 million. Other non-recurring charges in first
quarter 2002 of $25,000 consist of a tax gross-up related to forgiveness of
stockholder loans. Other non-recurring charges in first quarter 2001 of $111,000
consist of severance charges for senior executives.

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. First quarter 2002 results reflect a net other income of $14,000 or
0.5% of revenues compared to a net other income of $347,000 or 14.8% of revenues
in first quarter 2001. The decrease was primarily a result of a decrease in
interest earned on investments.

LIQUIDITY AND CAPITAL RESOURCES

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

     We have incurred a net loss of $1.5 million in the first quarter 2002. We
have taken substantial measures to reduce our costs and improve our chances to
achieve profitability in 2002, however 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
substantially lower during 2002 due to lower personnel and office costs as a
result of our restructuring activities.

     The significant increase in accounts receivable in first quarter 2002
compared to the decrease in first quarter 2001 is the result of an unusually low
accounts receivable balance at December 31, 2001 due to a significant payment
received promptly from a major customer in December 2001 for a sale made that
month. Decreases in accrued compensation and other liabilities in first quarter
2002 are the result of severance payments made. The significant increase in
other liabilities in first quarter 2001 is the result of the accrual for
restructuring charges.

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


                                       14
<PAGE>

     On April 1, 2002, we signed a binding commitment letter to sell a total of
$3,000,000 of Convertible Notes to a current investor. The first tranche of
$1,425,000,less transaction costs of approximately $165,000, was received on
May 7, 2002. The notes mature 18 months from the closing date, bear interest at
10% per annum, and, subject to approval, are convertible at any time at the
option of the holder, into shares of our common stock at a conversion price of
$0.30 per share for the first tranche of notes. Interest can be paid in cash or
additional notes, at our option. The Notes will be senior unsecured obligations
that will rank senior to all future subordinated indebtedness, pari passu to all
existing and future senior, unsecured indebtedness and subordinated to all
existing and future senior secured indebtedness. We are seeking stockholder
approval to sell an additional $1,575,000 of Notes under the arrangement

     As of March 31, 2002, we had $2.4 million in cash and cash equivalents and
short term investments. We believe that our existing cash balances along with
the proceeds of the Convertible Notes should be sufficient to meet anticipated
cash requirements for the next 12 months. We have taken steps to reduce our
recurring costs to approximate our anticipated levels of revenue which included
lay offs in February, July and October 2001 of approximately 55,75, and 50
employees, respectively.

     There can be no assurance that additional capital will be available to us
on reasonable terms, if at all, when needed or desired. 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 a term loan.
No additional borrowings can be made under this facility. The term loan of
approximately $215,000 at March 31, 2002 was repaid in full in April 2002.

RECENT ACCOUNTING PRONOUNCEMENTS

     Effective January 1, 2002, we adopted Emerging Issues Task Force Number
01-14, "Income Statement Characterization of Reimbursements Received for
'Out-of-Pocket' Expenses Incurred" (EITF 01-14), which requires that
reimbursements received for out-of-pocket expenses be classified as revenues and
not as cost reductions. Before the effective date of EITF 01-14, we netted
out-of-pocket reimbursements from customers with the applicable costs. These
items include primarily travel, meals and certain telecommunication costs. EITF
01-14 requires restatement of all periods presented in order to reflect
reimbursed expenses as both revenues and costs. During the three months ended
March 31, 2002 and 2001, reimbursed expenses totaled approximately $92,000 and
$75,000, respectively. Total reimbursed expenses for the full-year 2001 totaled
approximately $480,000. While the adoption of EITF 01-14 has no impact on income
from operations or net income, it does reduce total operating margins since both
revenues and costs increase by the same amount.

     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. As a result, expense of $2.3 million will not be recognized during
the first six months of 2002 that would have fully amortized the balance of
goodwill. During 2002, we will perform the new required impairment tests of
goodwill and indefinite lived intangible assets as of January 1, 2002 and we
do not anticipate recognizing an impairment loss.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

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

WE MAY NEED ADDITIONAL CAPITAL TO FUND CONTINUED BUSINESS OPERATIONS 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
continue to experience negative cash flow from operations for the next few
quarters. We cannot, however, assure investors that we will attain break-even
cash flow from operations at any particular time in the future, or at all.


                                       15
<PAGE>

     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
next 12 months. However, we may pursue additional financing to fund operations.
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 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 March 31, 2002, we had
an accumulated deficit of $68.2 million. We have not achieved profitability on a
quarterly or annual basis to date. In the first quarter 2002, we incurred net
losses of $1.5 million and in fiscal 2001, we incurred net losses of $29.7
million. We expect to have decreased operating expenses as a result of our
restructuring activities. However, if revenues do not increase, our losses will
continue.

OUR CASH FLOW MAY NOT BE SUFFICIENT TO PERMIT REPAYMENT OF OUR CONVERTIBLE NOTES
WHEN DUE.

The convertible notes we issued in May 2002 and intend to issue after
stockholder approval in June 2002 will be due in fourth quarter 2003. If our
stockholders do not ratify this transaction or to the extent the note purchasers
do not elect to convert the notes into common stock, our ability to retire or to
refinance our indebtedness will depend on our ability to generate cash flow in
the future. We cannot give assurance that our business will generate sufficient
cash flow from operations to meet this repayment requirement. Our cash flow from
operations may be insufficient to repay this indebtedness at scheduled maturity
and some or all of such indebtedness may have to be refinanced. If we are unable
to refinance our debt or if additional financing is not available on acceptable
terms, or at all, we could be forced to dispose of assets under certain
circumstances that might not be favorable to realizing the highest price for the
assets or to default on our obligations with respect to this indebtedness.

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 could result in the release
of deficient software products. Any such delays or defective products would
likely result in lower sales. We 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,business, and prospects.

A SIGNIFICANT PERCENTAGE OF OUR PRODUCT DEVELOPMENT IS PERFORMED BY A THIRD
PARTY INTERNATIONALLY, THE LOSS OF WHICH COULD SUBSTANTIALLY HARM OUR PRODUCT
DEVELOPMENT EFFORTS.

     A significant percentage of our product development work, and some of our
implementation services, are performed by a third-party development organization
in Minsk, Belarus. Unpredictable developments in the political, economic and
social conditions in Belarus, or our failure to maintain or renew our business
relationship with this organization on terms similar to those which exist
currently, could reduce or eliminate product development and implementation
services. If access to these services were to be unexpectedly eliminated or
significantly reduced, our ability to meet development objectives vital to our
ongoing strategy would be hindered, and our business could be seriously harmed.



                                       16
<PAGE>

OUR HISTORICAL FINANCIAL RESULTS MAY NOT BE HELPFUL IN EVALUATING OUR PROSPECTS
BECAUSE OUR CURRENT LINE OF PRODUCTS IS RELATIVELY NEW.

     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' Knowledge Management solutions.

     Since the announcement of our corporate restructuring in February 2001, we
have reallocated 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 $3.5 million in second quarter 2001 to $2.3 million in third quarter 2001
to $4.4 million in fourth quarter 2001 to $2.6 million in first quarter 2002.
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 in a shorter time
frame 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 from existing customers.

     Revenues in any one quarter are not indicative of revenues in any future
period because of these and other factors 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 KNOWLEDGE MANAGEMENT MARKET IS EVOLVING AND, IF IT DOES NOT GROW RAPIDLY,
OUR BUSINESS WILL BE ADVERSELY AFFECTED.

     The Knowledge Management 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 Knowledge Management 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. We may not realize forecasted revenues
from a specific customer in the quarter in which we expend these significant
resources because of the lengthy sales cycle for our products and services.


                                       17
<PAGE>

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 and continental Europe. To date, we have only limited experience in
providing our products and services internationally. If we are not able to
market our products and services successfully in international markets, our
expenses may exceed our revenues. By doing business in international markets we
face risks, such as unexpected changes in tariffs and other trade barriers,
fluctuations in currency exchange rates, difficulties in staffing and managing
foreign operations, political instability, reduced protection for intellectual
property rights in some countries, seasonal reductions in business activity
during the summer months in Europe and certain other parts of the world, and
potentially adverse tax consequences, any of which could adversely impact our
international operations and may contribute further to our net losses.

IF WE ARE NOT ABLE TO KEEP PACE 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 CRM 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, or
impossible, 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 INTENSE COMPETITION FROM BOTH ESTABLISHED AND RECENTLY FORMED ENTITIES,
AND THIS COMPETITION MAY ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY BECAUSE
WE COMPETE IN THE EMERGING MARKET FOR KNOWLEDGE MANAGEMENT SOLUTIONS.

     We compete in the emerging market for Knowledge Management solutions and
changes in the Knowledge Management 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 Knowledge Management solutions
market. It is also possible that alliances or mergers may occur among our
competitors and that these newly consolidated companies could rapidly acquire
significant market share. Greater competition may result in price erosion for
our products and services, which may significantly affect our future operating
margins.


                                       18
<PAGE>

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 Knowledge Management 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 believe that our customers and potential customers have a great
sensitivity to product defects.

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

     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.

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 ACQUIRE OR MAKE INVESTMENTS IN COMPANIES OR TECHNOLOGIES THAT COULD CAUSE
DISRUPTIONS TO OUR BUSINESS.

     We intend to explore opportunities to acquire companies or technologies in
the future. Entering into an acquisition entails many risks, any of which could
adversely affect our business, including:
     -  failure to integrate the acquired assets and/or companies with our
        current business;
     -  the price we pay may exceed the value we eventually realize;
     -  potential loss of share value to our existing stockholders as a result
        of issuing equity securities as part of all of the purchase price;
     -  potential loss of key employees from either our current business or the
        acquired business;
     -  entering into markets in which we have little or no prior experience;
     -  diversion of management's attention from other business concerns;
     -  assumption of unanticipated liabilities related to the acquired assets;
        and
     -  the business or technologies we acquire or in which we invest may have
        limited operating histories and may be subject to many of the same risks
        we are.

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 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.


                                       19
<PAGE>

     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.

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

A DECLINE IN INFORMATION TECHNOLOGY SPENDING COULD REDUCE THE SALE OF OUR
PRODUCTS.

     The license fees for our products typically range from approximately
several hundred thousand to several million dollars. These fees often represent
a significant expenditure of Information Technology ("IT") capital for our
customers. It is possible for our customers' and potential customers' IT
spending to decline as a result of a weakened economy, or due to other factors.
Such a decline could cause us to be unable to maintain or increase our sales
volumes and achieve our targeted revenue growth.

INCREASING GOVERNMENT REGULATION OF THE INTERNET COULD HARM OUR BUSINESS.

     As e-business, Knowledge Management and the Internet continue to evolve, we
expect that federal, state and foreign


                                       20
<PAGE>

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 Knowledge
Management 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 Knowledge Management 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 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.

     If our common stock is delisted by Nasdaq and our securities begin to trade
on the OTC Bulletin Board maintained by Nasdaq, another over-the-counter
quotation system, or on the pink sheets, investors 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 from Nasdaq 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 could 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, and might establish other
foreign subsidiaries. Revenues from international clients were 2% in the first
quarter 2002 and 8% in fiscal 2001, but historically 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, consider the use of 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.


                                       21
<PAGE>

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.




                                       22
<PAGE>


                          PART II -- OTHER INFORMATION

ITEM 5. OTHER INFORMATION

         Pursuant to the terms of a binding commitment letter signed on April 1,
2002, we entered into a Note Purchase Agreement on May 6, 2002 with C.E.
Unterberg, Towbin Private Equity Partners II-Q, L.P., C.E. Unterberg, Towbin
Private Equity Partners II, L.P., certain other entities affiliated with Thomas
Unterberg, a member of our Board of Directors, and other investors (the
"Investors") pursuant to which we expect to issue and sell to the Investors in
two separate closings, 10% convertible promissory notes (the "Notes") for up to
an aggregate principal amount of $3,000,000. The Notes will bear interest at 10%
per annum payable semi-annually, at our option, in cash, or in additional
promissory notes (the "Additional Notes") or a combination of cash and
Additional Notes. The Notes shall be due and payable within eighteen months of
the applicable closing date, at which time, unless earlier converted (as
discussed more fully below), the Notes shall be repaid at 100% of the principal
amount, plus accrued and unpaid interest. Subject to stockholder approval, the
Notes shall be convertible at any time, at the option of the Investors, into
that number of shares of Common Stock equal to the principal amount of the
Notes, plus accrued and unpaid interest, divided by the applicable Conversion
Price (as defined below).

         At the first closing on May 6, 2002, we issued promissory notes to the
Investors for the aggregate principal amount of $1,425,000 (the "Initial
Notes").

         The Note Purchase Agreement provides for a second closing at which we
intend to issue to the Investors promissory notes for up to the aggregate
principal amount of $1,575,000 (the "Second Notes"). If the second closing does
not occur on or prior to June 30, 2002, for any reason, the obligations of the
Company and the Investors to effect the second closing may terminate. In
addition, in the event our stockholders do not approve the conversion of the
Notes into shares of our Common Stock, the second closing will not occur.

         The Conversion Price of the Initial Notes is equal to $0.30. The
Conversion Price of the Second Notes (if issued) shall be negotiated among the
parties, however, such Conversion Price shall be equal to no less than 60% of
the average closing price of our Common Stock as listed on the Nasdaq SmallCap
Market for the ten trading days immediately preceding the second closing.

         Assuming the Conversion Price of the Second Notes is $0.2934 (60% of
the average closing price of our Common Stock for the ten trading days
immediately preceding April 22, 2002, the record date for our annual stockholder
meeting), and assuming the conversion of the Notes into Common Stock (excluding
accrued and unpaid interest), the Notes will be convertible into an aggregate of
approximately 10,118,098 shares of our Common Stock, representing approximately
29.8% of the outstanding shares of our Common Stock as of the record date of our
annual stockholder meeting, including the shares of Common Stock issuable upon
conversion of the Notes. The number of shares of our Common Stock issuable upon
conversion of the Second Notes, however, will depend on the Conversion Price we
negotiate with the Investors.

         The Notes may not be converted into shares of our Common Stock unless
and until our stockholders approve the terms and conditions of such conversion.
The Notes are unsecured and contain no financial covenants. We expect to use the
proceeds from the issuance of the Notes for working capital and general
corporate purposes.

         C.E. Unterberg, Towbin Private Equity Partners II-Q, L.P., C.E.
Unterberg, Towbin Private Equity Partners II, L.P. and certain other entities
affiliated with Mr. Unterberg acquired $1,390,000 of the Initial Notes and,
subject to stockholder approval, are expected to purchase all of the Second
Notes. The Note Purchase Agreement requires us to pay the placement agent, C.E.
Unterberg, Towbin (the "Agent"), an aggregate cash fee of up to $250,000,
$125,000 of which was paid on the date the Initial Notes were issued, and the
remaining $125,000 of which shall be payable, if at all, upon the issuance in
full of the Second Notes. Mr. Unterberg currently serves as a managing member of
the general partner of each of C.E. Unterberg, Towbin Private Equity Partners
II-Q, L.P. and C.E. Unterberg, Towbin Private Equity Partners II, L.P., and is
the Chairman of the Agent. Currently, Mr. Unterberg and entities affiliated with
Mr. Unterberg beneficially own an aggregate of approximately 20% of our Common
Stock prior to this transaction.

         In connection with the execution of the Note Purchase Agreement, we
entered into a registration rights agreement pursuant to which we will register
for resale by the Investors the Common Stock, if issued, underlying the Initial
Notes and the Second Notes. Under the registration rights agreement, we will be
required to file a registration statement relating to the resale of the Common
Stock underlying the Notes within 30 days of the issuance of the Initial Notes,
and that registration statement must be declared effective by the Securities and
Exchange Commission within 120 days of such date. If these filing dates and
effective dates are not met or the registration statement's effectiveness lapses
for any reason, we will be required to pay to the Investors, in either cash or
notes, an amount equal to 5% per annum of the principal amount of the Notes and
any Additional Notes, if any.


                                       23
<PAGE>

         The number of shares issuable upon conversion of the Notes, if such
conversion is approved by our stockholders, is subject to adjustment in the case
of any stock dividend, stock split, combination, capital reorganization,
reclassification or merger or consolidation. Subject to certain exceptions, the
applicable Conversion Price of the Notes is subject to adjustment in the case of
an issuance of shares of Common Stock or securities exercisable for or
convertible into Common Stock, at a per share price less than the applicable
Conversion Price of the Notes then outstanding (a "Dilutive Issuance"). In the
event of a Dilutive Issuance, the applicable Conversion Price of the Notes will
be reduced by using a weighted average anti-dilution calculation based on the
number of shares of Common Stock issued or deemed issued and the price per share
received by us in the Dilutive Issuance. No adjustment will be made to the
Conversion Price of the Initial Notes as a result of the issuance of the Second
Notes.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

10.1 Note Purchase Agreement dated as of May 6, 2002 between the Company and the
purchasers identified therein.


(b)  Reports on Form 8-K

    None






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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:  May 15, 2002                  By:   /s/ RICHARD LIEBMAN
                                        ----------------------------------------
                                               Richard Liebman
                                               Chief Financial Officer









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