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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-KSB/A

|    |                                                                                             
|--- | --------------------------------------------------------------------------------------------
|[X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR
        15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|   
|    | For the fiscal year ended December 31,
        2001                                         

|      |                                                                                                 
|----- | ------------------------------------------------------------------------------------------------
|[   ] | 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: 0-14793

TEKNOWLEDGE CORPORATION

(Name of small business isuuer as specified in its charter)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 94-2760916                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)

1810 Embarcadero Road, Palo Alto, California 94303

(Address of principal executive
offices)(Zip Code)


Issuers telephone number:(650) 424-0500

Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $0.01 Par ValueSeries A Preferred Stock Purchase Rights


Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [   ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no will be contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.     [X]

State issuers revenues for its most recent fiscal year: $17,263,958

The aggregate  market value of Common Stock,  $.01 par value per share,  held by  non-affiliates  of the registrant was  $10,696,020 on
March 22,  2002 (based on the  average  bid and ask price per share of Common  Stock on that date as  reported  by the Nasdaq  SmallCap
Market).  Shares of Common Stock held by each officer and  director  and by each person who owns 5% or more of the  outstanding  Common
Stock  have been  excluded  in that such  persons  may be  deemed to be  affiliates.  This  determination  of  affiliate  status is not
necessarily a conclusive determination for other purposes.

On March 22, 2002, there were 5,715,751 shares of Common Stock, $.01 par value per share, of the registrant outstanding.

Documents Incorporated by ReferenceProxy Statement for the 2001 Annual Meeting of Stockholders
          Part III

Teknowledge®, TekPortal and Sales Associate are trademarks of Teknowledge Corporation. All other brand names, product names,
trademarks and registered trademarks are the property of their respective holders.

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PART I

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Item 1.  Description of Business

Teknowledge Corporation provides advanced software and services to transform business data into value. Teknowledge is a leading
provider of financial account aggregation software worldwide and a prime contractor for R&D in Internet security, Web-based
training, distributed systems and knowledge processing. Founded in 1981, Teknowledge holds an extensive intellectual property
portfolio, including nine software patents.

The Company operates five business units within two reporting segments, commercial and government. The commercial segment includes
Financial Systems, patent and technology licensing, and the commercial business applications of Security Systems. The government
segment includes the governmentsponsored operations of the following business units: Security Systems, Training Systems,
Distributed Systems and Knowledge Systems.

The fastest growing part of Teknowledge is the Financial  Systems  operating unit. This unit is focused on  Teknowledges
TekPortal solution,  which provides customer  information  aggregation for the financial services industry.  This focus is strengthened
by  Teknowledges  knowledge  processing  capabilities,   network  security,  webbased  training,  and  distributed  systems
solutions.  Teknowledge is a Value Added Reseller  (VAR)  for components  such as  CheckPoints  Firewall1
security product, as well as application  solutions from Financial Fusion and Fincentric. In addition,  Teknowledge is qualified as a
Microsoft Certified Partner.

Teknowledge has four other operating units in complementary  technical  application areas.  Security  Systemsprovides
network security  solutions that protect the information  stored in computer  networks and ensure that information is accessible by the
right people at the right time. Training  Systems  encapsulates  traditional courseware into reusable electronic media, develops
intelligent  tutoring  systems,  and is  developing  software  to  distribute  the  resulting  courseware  solutions  on the  Internet.
Distributed  Systems  is  focused  on  improving  the  quality,  timeliness,  and  selective  access  to  information  services.
Knowledge  Systems is developing  solutions for processing  knowledge and making inferences about  customersupplied  data.
All of the  Companys  contract research and development  services have been performed in these operating units,  although each has
done some work related to the Companys commercial operations.

Many of  Teknowledges  customers need to provide or utilize  knowledgebased  transactions,  supported by security,
training,  and distributed  application  performance  solutions.  Teknowledge supports its  cuttingedge  research and development
capabilities by winning national competitions sponsored by the Defense Advanced Research Projects Agency  (DARPA),  and the
Small Business  Innovation  Research  (SBIR)  Programs  sponsored by other agencies.  The contracts  awarded by these agencies  provide
Teknowledge with a very rich source of technology for its own focused product development,  patents,  and licensing.  Teknowledge has a
large intellectual property program for a company its size, with nine fundamental U.S. software patents available for license.

Teknowledges  direct  revenue  mix from  operations  for the year  ending  December  31,  2001,  was  approximately  42%
commercial and 58% government.  In 2000, 36% was from commercial and 64% was from government.  Almost all of the commercial revenues, in
2000  and 88% in 2001 were from the sale of Financial  Systems  products and services.  In 2001,  12% of commercial  revenue came from
patent and security  operations.  The proportion of revenue  attributed to the commercial segment is expected to increase as investment
and  capabilities  in Financial  Systems grow over the coming years.  Teknowledge is increasing  its internal focus and  investments on
commercial software products and services, particularly in financial account aggregation and related markets.

Since the  terrorist  attacks on the World Trade Center and the Pentagon on  September  11, 2001,  security has been a primary
national priority.  Teknowledge has deep computer security experience,  and almost two decades of service to the Department of Defense.
The Company intends to propose and deliver on new requests for defense and  intelligence  capabilities.  Management  believes that this
work will serve the  country,  help grow the revenues of the Security  Systems  unit,  and provide  significant  new computer  security
software and data mining technology that can be utilized commercially, particularly in the financial arena.

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Teknowledge was incorporated on July 8, 1981 under the laws of the State of Delaware. The Companys principal executive and
technical offices are located at 1810 Embarcadero Road, Palo Alto, California 94303. In addition, Teknowledge has technical
operations offices located in: Fairfax, Virginia; Marina Del Rey and San Diego, California; and Cleveland, Ohio. The availability of
distributed talent pools, real estate price differentials, and improved communications infrastructure make utilizing multiple
locations a viable solution for the Company. Teknowledges business is currently concentrated in the United States, although it
has signed a number of resellers recently to provide TekPortal solutions internationally.

Overview

Teknowledge  started more than 20 years ago as a software  technology  company with the vision of codifying  and  distributing
knowledge via computers.  Today,  Teknowledge is becoming a financial products and services supplier with significant contract research
and  development  (R&D)  capability.  Teknowledge  is shifting  its focus from  contract  research and  development  to
delivering  application solutions for financial services customers.  The first few financial services to be converted to the World Wide
Web were just static information  sources,  using technologies with few barriers to entry. In spite of the recent market slowdown,  the
next generation of financial services applications will place an increasing  competitive premium on an  organizations  ability to
process and apply its customer  information  securely and effectively.  Account  aggregation  products like TekPortal provide extensive
information about the financial  transactions of customers.  Teknowledge has the technical foundation for strong competitive advantages
in helping both financial institutions and their customers utilize this information and process it securely.

Knowledge systems are software programs that enable combinations of people and computers to capture, refine, distribute, and
apply knowledge to solve business application problems. Teknowledge develops systems that integrate conventional software with
advanced knowledge processing methods in high-value application solutions. These solutions are developed with software products and
services that support integration, processing, and systematic utilization of an organizations key knowledge assets. Increasingly, an
organizations knowledge assets are encoded in knowledge processing applications and distributed to customers via the Internet to
make solutions available globally, seven days a week, 24 hours a day. When the knowledge in this information  chain is specialized for financial  applications  and combined with specific  customer
information, it can provide significant value.

Each of Teknowledges operating units utilizes internally developed and third-party software components in its application
solutions. Utilizing third-party components in an application solution allows for faster and more robust solutions. It also allows
Teknowledge to focus on developing TekPortal in the context of a robust application solution. For example, TekPortal can be sold with
specialized interfaces, databases from companies such as Oracle or Microsoft, and a security firewall from CheckPoint. This strategy
allows Teknowledge to provide innovative components in the context of delivering basic value to the customer with leading commercial
products. The Company delivers to the customer a faster and more robust solution, and Teknowledge typically receives a VAR license
fee on each third-party commercial product delivered.

Some of the Companys current and future business focus is on developing software to make it possible to delegate
knowledge-intensive tasks to computer software associate systems. These associate systems may integrate several special-purpose
software agents to accomplish routine tasks. They may also accelerate knowledge gathering, refinement, dissemination, and utilization
over computer networks. Teknowledges strategic plans include specializing associate systems software that amplifies human
productivity with the ability to apply financial knowledge effectively. Teknowledge has built six prototype associate systems. One of
these prototypes, called Sales Associate, has been commercialized. Some of Sales Associates capabilities have been specialized,
simplified, and incorporated into TekPortals TekMarketer features. Other capabilities may become value-added modules in the future.

Operating Units

Teknowledge has distributed  operations,  with its headquarters located in Palo Alto, California and has offices in: Marina Del Rey and
San Diego,  California;  Fairfax,  Virginia;  and  Cleveland,  Ohio.  The Company  operates  five  business  units within two reporting
segments,  commercial and government.  The commercial  segment  includes  Financial  Systems,  patent and technology  licensing, and the
commercial business applications of Security Systems. The government segment includes the  governmentsponsored  operations of the
following business units:  Security Systems,  Training Systems,  Distributed  Systems,  and Knowledge Systems.  The operating units are
interdependent in terms of infrastructure, talent, technology, and management incentives.

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Financial Systems. The Financial Systems unit focuses on solutions for the financial services industry. This unit produces
TekPortal, the No. 1 selling onpremise account aggregation software worldwide. TekPortal provides a secure data
warehouse of consolidated customer information acquired from multiple financial institutions. TekPortal enables financial
institutions like retail banks, brokerage firms, and fund managers to collate and analyze information about their online consumers on
an optin basis. Teknowledge also provides value added software and services leveraging the aggregated data, including
transfers, bill presentment, and other capabilities. TekPortal is an enterprise application platform that leverages Teknowledges
deep R&D, and helps drive innovations in areas including web based security, and data mining.

TekPortal has  approximately 40 financial  institution  customers.  TekPortal  enables  institutions to provide a consolidated
view of their customers  financial portfolio  seamlessly  integrated into their own website.  TekPortal acts as an authorized agent of
the customer to access and consolidate account balance and transaction  information from various  institutions  including banks, credit
unions,  brokerages,  credit card companies,  billing companies, and frequent travel reward sites. TekPortal also offers funds transfer
services between multiple  institutions,  sweep capabilities to automatically move funds, and proactive  notification services to alert
customers  when  specific  events  occur  on an  account  in  their  portfolio.  The  financial  industry  is  currently  undergoing  a
transformation  under the  GrammLeachBliley  Act. This  legislation  permits banks to offer a more complete set of banking,
brokerage,  and insurance services.  Teknowledge believes that financial  institution customers will be attracted by the convenience of
onestop  shopping for managing  their  financial  portfolio,  and  acquiring  new products and  services.  Some of  Teknowledges
customers  provide  TekPortal  account  aggregation  as an  application  service  provider  (ASP)  solution.  TekPortal  is
positioned well to provide financial  institutions with an onpremise or ASP capability to retain customers at their website,  and
then use that opportunity to sell new products and services.

TekPortal provides an account aggregation  solution that places the power of portfolio  management into the hands of financial
institution  customers.  The product seamlessly integrates into existing Internet banking applications and enables banks to offer their
customers a  consolidated  and  personalized  view of their  financial  portfolio.  Banks can use  TekPortals  onsite  data
warehouse to effectively  mine their  customers  financial  portfolio  information  and offer their own  competitive  products or
services.

TekPortal was designed with security and privacy in mind. The financial institution owns and manages the onpremise solution.
All data and operations reside within the institutions data center, giving the financial institution control of all security
privacy procedures and policies that are not set by users. This can increase customer confidence that their financial information is
protected appropriately.

TekPortal enables banks and other financial institutions to offer customers the capability to:

| |  | Aggregate accounts to collect account balance and transaction history information                    
|- |  | -----------------------------------------------------------------------------------------------------
| |  | Set alert notifications of triggered events on aggregated accounts                                   
| |  | Enable third-party views to grant others the right to co-manage an individuals financial portfolio
| |  | Categorize assets and liabilities, track net worth, and view portfolio reports.                      

Teknowledges Financial Systems business unit provides assessments of customers needs for TekPortal and additional software
solutions. This may provide pull-through opportunities for selling Teknowledges security, training, distributed systems, or
knowledge systems solutions.

The Sales  Associate is a powerful  technology  that is designed to provide  unassisted  sales on a website.  It  incorporates
rules of selling and utilizes  specific product  knowledge to emulate the best practices of the most productive sales person in a firm.
It goes beyond the typical  browsing  interaction  on the World Wide Web by  engaging  the  customer  in an  interactive  dialog  about
products.  The Sales  Associate  creates a unique profile of every  customer and tailors the sales  presentation  to each prospect.  It
remembers a customers  profile and preferences,  and applies all available information towards the next sale. The Sales Associate
incorporates  both generic and  domainspecific  rules of  selling  to guide the sales process.  It matches a customer
profile with the products in a product knowledge base. It can deliver  uptotheminute  information on product features
and  availability,  as well as news of special  discounts and other promotions.  This  knowledgebased  technology is designed for
delivery  with other  commercial  components  such as web servers,  databases,  tutors and other  website  components.  The Company has
incorporated  parts of Sales Associate into TekMarketer and has continued to evolve its  capabilities by incorporating  software from
contracts that demand fast knowledge  servers.  Potential  customers have been daunted by the need to specialize its domain  knowledge.
In response,  Teknowledge  has  continued to  specialize a new version of the Sales  Associates  software for  TekPortal  and the
financial  services  industry.  The working

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configurations of this system will depend on specific  customer needs over time.  However,
there are uncertainties and risks associated with the introduction of any complex software module (see Part II, Item 6).

Security Systems. The need for information security on computer networks has created tremendous demand in both government and
industry. Keeping Internet sites and transactions secure from hackers and thieves is critical to effective military and financial
institution operations. Security systems go beyond simply protecting information. It is relatively easy to protect information if it
does not need to be accessible. However, both military and financial information needs to be accessible by people globally, seven
days a week, 24 hours a day. This requirement shifts the focus from information protection to assured information access to the
appropriate customers. Techniques for accomplishing systems security, such as authentication, encryption, and firewall protection are
constantly evolving. Teknowledge is the prime contractor on a number of DARPA-sponsored projects focused on advanced techniques of
Internet or cyber security, including an associate system for website intrusion detection and response. There are many third-party
commercial opportunities in this arena. Some commercial products, such as CheckPoints firewall for website security, have emerged as
commercial market leaders. Teknowledges Security Systems unit is certified as a VAR to deliver CheckPoints Firewall-1 product, which provides
an opportunity for product license and services sales for commercial security systems applications.

Training  Systems.  The  Internet  and the  World  Wide  Web  have  created  an  opportunity  to  distribute  formerly  isolated
computeraided  instruction that ran on desktop systems. Not only have the techniques of computeraided  instruction improved
dramatically  in recent  years,  but also the means to distribute  them have  undergone a veritable  revolution.  Now it is possible to
provide  distance  learning  via an  interactive  course  delivered  through  a  standard  World  Wide Web  browser.  There  are  major
opportunities  to  deliver   inhouse   corporate   training  over  intranets,   K12   education  over  the  Internet,   and
justintime  adult training on the job or in the home.  Teknowledge  has been involved in education and training since 1981,
and in 1998 it created a business unit devoted entirely to this growing  opportunity.  Teknowledge served as the Cluster Leader for the
USs  largest  multiinstitution  project on  Intelligent  Tutors and  Associates  between 1995 and 1998.  The DARPA Computer
Assisted Education and Training Initiative  sponsored  Teknowledges  prototype work on associate systems.  Teknowledge has played
an important  role in the  governmentsponsored  Advanced  Distance  Learning  Initiative,  which is advancing  distance  learning
technology to provide cost  effective and  industrial  strength  courseware  over the Internet.  Teknowledge is developing a Courseware
Factory for  converting  podiumbased  traditional  courses for delivery over the World Wide Web. This work has been sponsored by
the National  Institute of Standards and  Technology  (NIST),  and has already  provided  several key  technology  results.
During 2000,  Teknowledge  won several Small Business  Innovation  Research  grants to provide  advanced  computerbased  tutoring
systems over the web. The work  performed  with these  grants led to expanded  Phase  II  grants  during 2001,  for example
Dialog Agent for Distance Learning.

Distributed Systems. Chief Technology Officer and Distributed Systems Program Manager Dr. Robert Balzer and his team from the
Information Sciences Institute at the University of Southern California are doing a variety of advanced contract R&D projects,
which are mostly DARPAsponsored. These projects involve software wrappers for uniform access to heterogeneous software,
associate systems to provide distributed and personalized briefings, and a system for instrumenting and controlling software
components. The technology resulting from these projects has promising applications in commercial security, search engines,
extensions to popular desktop software, and personalized financial briefings.

Operations that are widely distributed require extensive objectoriented systems infrastructure and the ability to extract
reliable performance from distributed resources. Currently, the World Wide Web provides little of this systems infrastructure, but
instead relies on the distribution of linked web pages or multimedia documents. In the future, complex webs of objects and knowledge
will have to be distributed systematically, updated dynamically, and monitored for rogue behavior (e.g. viruses or worms). This
requires the ability to provide reliable monitoring of software behavior, and the security of operations. Distribution of knowledge
by intelligent push and pull techniques has already become a critical technology for providing personalized
briefings and reports. Teknowledges Distributed Systems business unit focuses on providing new systems infrastructure to
address these needs. It was a prime contractor on the recently completed DARPAsponsored QUITE project, where the objective was
to integrate innovative solutions to the problem of optimizing the quality of service of distributed resources on a network.

Knowledge  Systems.  Decisionmakers  have  noticed that using  satellite  and World Wide Web  information  systems is like
standing  in front of an information  fire  hose.  It is hard to take a sip without getting more information than is useful
or necessary.  Teknowledges  Knowledge Systems business unit focuses on providing  knowledgebased tools, applications,  and
ontology  (knowledge  structures)  that allow computers to aid humans in interpreting  the fire hose of data.  Teknowledge is advancing
techniques for creating  large  knowledge  systems that can apply  knowledge  about how to utilize the

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information in a database or an incoming  stream of  information.  These  knowledge  systems  are much larger and more  useful now than they have ever been  before.  A
threshold  has been reached  where the power gained from  applying  knowledgebased  technology  is much greater than in the past.
Teknowledges  Knowledge  Systems unit is leading  DARPA  sponsored  effort to create a Standard  Upper  Ontology.  This method of
defining  concepts  formally and  systematically  is an important step in developing  computer software that understands the meaning or
semantics  of the tasks it  performs,  rather than just  processing  numbers or words  blindly,  without  reference  to their  meaning.
Specialized  techniques  for creating and applying  knowledge  have matured.  The potential  payoff from  combining  elements from this
research into useful systems is considerable.  For example,  complex problem solving requires the ability to access and synthesize data
from multiple sources quickly and effectively.  The objective is to develop a dynamic assessment of an evolving  opportunity,  problem,
or competitive  position.  This  infrastructure  could  eventually  serve as a basis for pragmatic  problem  solving and  sophisticated
analysis  of the  information  in  financial  applications  such  as  TekPortal.  Teknowledge  is a prime  contractor  on a  number  of
governmentsponsored  programs and is participating in some  longterm  commercial  developments,  including a new and faster
knowledge server for a version of Sales Associate, which can be specialized for TekPortal and financial applications.

Sales and Marketing

Teknowledges employees, including the operating unit managers, full time sales professionals, and the CEO, market and
sell Teknowledges services and software. Each operating unit offers consulting services to help prospective customers define
their problems and projects. Prospective customers may fund consulting assignments to evaluate current corporate capabilities and
recommend next steps, including application work. However, government proposal work conducted in response to a Broad Area
Announcement or Request for Proposal is typically not funded.

In 2001, Teknowledge expanded its commercial sales and marketing efforts both domestically and internationally with the
addition of sales and marketing staff. This may provide increased license and services revenues, and broaden market acceptance of
TekPortal by increasing access to an expanded base of commercial customers. NCR and Financial Fusion are VARs for TekPortal.
Fincentric (formerly ProLogic) has an agreement with Teknowledge to OEM (private label) TekPortal. Macquarie Bank in Australia and
New Zealand, AccountOne in Japan, Matrix, Ltd. in Israel, Turkey, Cypress, Germany, France and Switzerland, and Edge IPK in Ireland
and the United Kingdom, joined the team of companies selling TekPortal aggregation services. In addition, Teknowledge is actively
seeking additional companies to serve as VARs for TekPortal, and where possible pull through the Companys other application
solutions.

Backlog

At December 31, 2001, the expected order backlog was approximately $11.8 million, which consisted of (i) new orders for
which work has not yet begun and (ii) revenue remaining to be recognized on work in progress. Most of the commercial backlog
is for short installation and on-demand customization projects, so there is little opportunity for long-term backlog development. 95%
of the December 31, 2001 backlog is from government customers. Approximately 48% of the backlog consists of government-sponsored
programs that are awarded but not yet authorized for funding. The government normally funds a contract in incremental amounts for the
tasks that are currently in production. Approximately 25% of the overall backlog will likely be fulfilled in the current fiscal year.

Teknowledge has seen a significant  increase in government  sponsored contract R&D  opportunities since the September 11th
attacks on World Trade Center and the Pentagon.  It will take several  months  before some of these  opportunities  can be  transformed
into working contracts.  The Company has been working for years in software technology areas related to countering  terrorism.  Many of
Teknowledges   current  DARPA,  Army,  Navy,  Air  Force,   Marines,  and  other  R&D  contracts  are  directly  relevant  to
counterterrorism  and the  Companys  relationships  with the relevant funding agencies are well established.  The September
11th attacks have increased the perceived urgency for accelerating  technology  solutions  relevant to safeguarding  national security.
Management  expects  several of these  opportunities  to result in funded  contracts  with a Federal  fiscal  year start in November or
December of 2003. New and advanced  R&D  programs are just now being defined by the relevant  agencies,  and many of those programs
may result in funded projects later in 2003 or 2004.  Management  believes that  Teknowledge is well  positioned to receive  additional
funds for pursuing  network  security and data mining  solutions.  The Security  Systems and  Distributed  Systems  business units have
working  software  solution  prototypes for  information  intrusion and advanced  email  security.  The Knowledge  Systems and Training
Systems units have prototypes for mining,  processing,  and serving  knowledge.  These prototypes may provide  significant  competitive
advantages  in obtaining  new contracts  over the next few years.  They may also result in new  commercial  technology  licenses  after
rigorous user tests by government customers.

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Research and Development

Most of Teknowledges R&D (except in the Financial Systems business unit and specific Security Systems
and Knowledge Systems contracts) were funded R&D contracts sponsored by the government. Much of this development work is focused on
fundamental software systems functionality, equally useful for military or commercial applications. The Department of Defense generally funds these
capabilities if it cannot find what it needs in the commercial software market. The requirement for innovation is fundamental.
Generally, the Company retains the exclusive commercial development rights to its government sponsored software development.
Teknowledge also sponsors its own software development, mostly in the form of capitalized TekPortal product development.

In 2001, Teknowledge continued to grow its TekPortal product and services business, and increased its investment in
TekPortal considerably. The Company capitalized $2,602,442 and $2,213,665 of computer software development costs in the years ended
December 31, 2001 and 2000, respectively. In addition, the Companys R&D expense was $490,101 and $557,850.

Government Contract Administration

In 2001, approximately 58% of Teknowledges revenues were from cost-type government-sponsored contract research and
development. Since these R&D contracts are typically made on a multi-year basis, 95% of Teknowledges December 31, 2001 backlog was
for contract R&D sponsored by the government. Teknowledge may enter into cooperative matching agreements with NIST or other
government agencies in which some R&D costs are reimbursed. The Companys success in winning contract R&D business depends on
effective competitive bidding for contracts. The Company applies for contract R&D in the form of a proposal by responding to Requests
for Proposals and Broad Agency Announcements issued by the United States Federal Government, by prime contractors under contract to
the U.S. Government, or in some cases by commercial companies. Proposals include discussion of the technical approach to be taken to
satisfy the sponsors or the prime contractors requirements and a detailed presentation of costs expected to be incurred. The
proposal is reviewed and evaluated by technical and administrative personnel employed by the government or the prime contractor.
Typically, these contracts are bid competitively, and the contract is awarded to the company which would best satisfy the
governments or the prime contractors requirements. If the procurement method is negotiated award, the government or the prime
contractor enters into negotiations to determine a price for the contract; upon successful conclusion of negotiations, a contract is
awarded. Government contracts are subject to agency funding limitations, congressional appropriation, and the priorities of the
current administration in Washington, D.C.

Most cost-type government contracts performed by the Company have a regulated fixed-fee limit, which limits the Company from
improving profit margins on these type of contracts beyond what is permitted in the government regulations. In addition, Federal
Acquisition Regulations exclude from reimbursement some unallowable expenses that the Company considers a regular part of the
business. Almost all of the Companys contracts contain termination clauses that permit contract termination upon the Companys
default or at the contracting partys discretion. During 1998, DARPA terminated several of its own projects due to a change in its
program priorities. Such cancellations may occur again in the future; however, Teknowledge conducts contract R&D in several
technically relevant areas, and this diversity helps protect against some of the effects of changes in sponsor priorities. The
Company intends to build its substantial multi-year backlog further with additional proposals for new contract R&D projects, since
this work provides a strong pipeline of software and technical innovation that can be applied commercially.

The majority of Teknowledges service revenue is derived from government-sponsored contract research and development
projects, and the Company has historically been profitable in that business. However, dependence on R&D contracts can be risky
because the contracts are subject to administrative, legislative, and political interruptions, which may jeopardize the flow of
funds. There can be no assurance that the government will continue to seek services at the current level in the future. Another
uncertainty is that the Companys revenues, costs, and earnings on government contracts are determined based on estimated overhead
rates derived from forecasted annual costs. The Companys actual experience in headcount growth, billable efficiency, and costs
inevitably vary somewhat from original estimates and necessitate periodic adjustments to overhead rates and revenues. Such
adjustments of a few percentages points may translate to several hundred thousand dollars in rate adjustments or reserves. Rate
adjustments are made on a cumulative basis at least annually, but the resulting revenue and income effects are recognized in the
period of the adjustments. The Company is also subject to periodic reviews of prior year costs and expenses by audit agencies of the
Federal Government. As a result of these audits, the Company may be exposed to cost adjustments, which are applied on a retroactive
basis to the government contracts completed in those years. These adjustments can have a positive or negative effect on the business.
In order to address the

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possible exposure from prior year rate adjustments, the Company has established a rate adjustment reserve for such
contingencies, and the amount of the rate adjustment reserve is reviewed and adjusted at least annually.

The indirect costs and expenses  accumulated in the  performance of government  contracts are allocated to the customer in the
form of overhead  (indirect)  rates.  These rates,  which are  periodically  reviewed by government  auditors,  fluctuate  based on the
relationship  between  overhead costs and direct costs  incurred in the  performance  of the contracts  during the year.  Excluded from
these rates,  and not subject to  reimbursement,  are small amounts of unallowable  costs,  such as entertainment  and advertising.  In
addition,  the government has established  compensation  reimbursement limits for executives,  which reduces the amount of compensation
and  related  expenses  (such as bonuses  and stock  options)  that can be passed on to the  government  through  the  overhead  rates.
Teknowledge  typically  receives  about  7%8%  fees on new  government  contracts.  New contracts  that have been  transferred to
Teknowledge from another  institution,  such as those that were transferred from USC in 2000, may provide for technology rights, but no
fees. The overall  limitation on potential  government  contract fees,  coupled with a potential  increase in the expenses not eligible
for  reimbursement,  restrict  the  Companys  ability to improve  profit  margins on  government  contracts  in the  future.  The
Companys  governmentsponsored  R&D is most valuable as a technology incubator,  development  laboratory,  and test bed.
The best software from this work becomes a candidate for software  product  commercialization.  This helps the government  amortize the
considerable cost of maintenance, and it improves Teknowledges ability to compete in the commercial marketplace.

Competition

A number of companies provide consulting services and software that compete with aspects of Teknowledges business. Many of
these companies are substantially larger and have greater financial resources than Teknowledge. Teknowledges primary competitive
advantages are its experienced management team, its specialized financial systems consulting and engineering teams, its deeply
technical R&D talent base, its expertise in key application areas, its patent portfolio and other software-based intellectual
property, and its unusually strong and externally funded R&D program in several key areas relevant to TekPortal and the financial
services industry.

Teknowledges TekPortal is positioned as the leading on-premise aggregation software worldwide. Its main competition is from
Yodlee, which has historically focused on providing off-premise, centralized data center solutions. Yodlee is the largest provider of
application service provider or ASP-based account aggregation. In contrast, TekPortal provides an on-premise software license
solution that allows the financial institution, as the trusted provider, to warehouse and manage access to the customers financial
portfolio information. The financial institution is well positioned to use the aggregated balance and transaction information, with
the customers permission, to more effectively sell relevant products and services directly to its customers. In addition, the
TekPortal on-premise solution allows the financial institution to set and enforce procedures to protect the privacy of the customers
financial information. As the demand for account aggregation applications grows, the key differentiators will be new modules that help
financial institutions realize the value in their account aggregation database. Other factors will include the cost to operate the
service, and the ability to provide additional on-site consulting and application services. Other on-premise suppliers include
uMonitor and Adhesion Technologies, which have historically attempted to gain market share by providing their software at prices
that may not be sustainable in the long run. Teknowledge intends to continue to charge reasonable prices for TekPortal, and capture
that portion of the market that appreciates high quality software and services, as well as longevity in software suppliers. We also
compete with businesses delivering software platforms designed to enable financial institutions to offer internet-based financial
services, including Corrillian, S1, Digital Insight, and Online Resources and Communications.

Knowledge processing systems are provided by Logica Carnegie Group, Inference Corp., Mindbox, Inc. CycCorp, Intellicorp,
Inc., and others. Trilogy Development Group, Calico, Selectica, Brightware, Baan, SAP, Oracle, PCorder.com, and others provide sales
and configuration systems. Distributed systems and security services are provided by Trusted Information Systems, SRI, Secure
Computing, Lockheed-Martin, Boeing, Genuity, ISX, and SAIC, among others. Internet-based distance education and training technologies
include Click2Learn, IBM, and KnowledgeNet, with new competitors still emerging in the commercial marketplace. Potential competitors
could also be collaborators, such as Macromedia (learning components sold to IBM) and Click2Learn (formerly Asymetrix Learning
Systems).

Proprietary Rights

Teknowledge maintains an active intellectual property program and currently holds nine key U.S. software patents. The
application software developed by Teknowledge includes TekPortal for financial information consolidation, Sales Associate for
conducting automated sales on the Internet, knowledge-based expert systems, pattern detection and

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data fusion tools, and systems to
manage and protect webs of networked information. One software patent, the Automatic Retrieval of Changed Files by a Network Software
Agent, allows users to register interest in a particular data item on a specific web page and get notification when that item
changes. As use of any product name becomes consistent and established, the Company intends to apply for formal registration of the
product name as a trademark in the United States and relevant foreign jurisdictions.

Teknowledge has relied on a combination of patent, copyright, trade secret and trademark laws, as well as contractual
provisions, to protect its proprietary technology. The Company requires all employees, customers, vendors, and others who have access
to proprietary technology to sign nondisclosure agreements. The Company retains a proprietary right to market commercially most of
the development sponsored by government agencies. The government may not distribute proprietary information that was developed by the
Company to any third-party for commercial purposes without first receiving permission from the Company.

Teknowledge provides its software products to end users under non-exclusive, non-transferable licenses that typically have a
perpetual term unless terminated for breach. The Company protects the source code of its software products as trade secrets and
unpublished copyrighted works. Additionally, Teknowledge holds patents for the knowledge
processing and systems engineering technologies that form the basis for many of the products and configuration services that the Company markets.

There can be no assurance that Teknowledges protective measures will be adequate to protect its proprietary rights, that
others have not or will not independently develop or acquire equivalent or superior technology, or that the Company will not be
required to obtain royalty-bearing licenses to use other intellectual property in order to utilize the inventions embodied in its
patents. There also can be no assurance that any patents will be issued pursuant to the Companys current or future patent
applications or that patents issued pursuant to such applications or any patents the Company currently owns will not be invalidated,
circumvented or challenged. Thus far, Teknowledge has not been notified that it may be infringing any patents or proprietary rights
owned by third parties. There can be no assurance that the Company would be able to enter into an acceptable license under such
third-party patents, or that it could redesign or modify its products and processes to avoid infringement of such patents or
proprietary rights, or that the Company could otherwise avoid infringement of such patent or proprietary rights. In the event the
Company is unable to take such action, its business, financial condition and results of operations could be materially and adversely
affected. In some cases, litigation may be necessary to protect the Companys proprietary rights (see Part 1, Item 3: Legal
Proceedings).

It  is  Teknowledges  intention  to  increase  its  technology  and  intellectual  property  licensing  investments  and
operations.  The Company is aware of third parties it believes infringe on its intellectual  property rights.  Teknowledge is currently
trying to  negotiate  licensing  arrangements  with these third  parties.  However,  if the Company is unable to  negotiate a licensing
arrangement, the Company may consider legal action.

Employees

Teknowledge had a total of 67 full-time employees at December 31, 2001, of which 50 were technical, 13 were accounting and
administrative, and 4 were sales and marketing. All the employees were employed in the continental
United States. The majority of employees are technical. They perform direct billable work on contracts, or develop, support, and sell
software products. In addition to full-time employees, Teknowledge employs an increasing number of independent contractors to work on
specific projects. A large percentage of Teknowledge employees have deep expertise in technical disciplines. The future success of
the Company will depend, in part, on the Companys ability to retain, attract, and motivate highly qualified technical, sales, and
management personnel. This has become a particular challenge as demand for top quality software professionals continues to exceed
supply, even in a bear market. Teknowledge provides competitive salaries and bonuses, an active Incentive Stock Option program, a
superior benefits program, and a stimulating work environment. The Company has never had a work stoppage, and it is not a party to
any collective bargaining agreement with any of its employees.

Executive Officers

Neil A.  Jacobstein,  47, is Chairman of the Board,  Chief Executive  Officer,  and President of  Teknowledge.  He has over 20 years of
software  development  experience,  and has served as President and Chief Operating Officer and a director of the Company since January
1993.  He was elected to the position of Chairman and CEO on November 22, 1999.  After  joining  Teknowledge  in 1984,  Mr.  Jacobstein
served in various  positions,  including:  Senior Knowledge  Engineer,  Manager

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of the Research and Advanced  Development  Group,  Vice
President and General  Manager of Research and Advanced  Systems  Development,  and Vice President and General Manager of the Knowledge
Systems  Division.  Mr.  Jacobstein  initiated  Teknowledges  eCommerce  unit (now  Financial  Systems) in 1996.  In 1998, he was
appointed to the Technology Advisory Board of the U.S. Armys Simulation,  Training, and Instrumentation Command (STRICOM).  Prior
to joining  Teknowledge,  Mr. Jacobstein was a Graduate Research Intern and consultant at Xerox PARC, and a Research Associate at CBNS.
Since 1992,  he has served as the  Chairman  of the Board of  Directors  of the  Institute  for  Molecular  Manufacturing,  a nonprofit
organization.  He serves as a Director of  GlobalStake.com.  In 1999, Mr.  Jacobstein was selected as a Henry Crown Fellow in the Aspen
Institutes executive leadership program.

Dennis A. Bugbee, 55, is Vice President of Finance, Chief Financial Officer, and Secretary of the Company. Mr. Bugbee joined
the Company in 1990 as the Division Controller for the Knowledge Systems Division in Palo Alto, California. He was promoted to
Director of Finance March 1, 1993 and shortly thereafter to the positions of Treasurer and Corporate Secretary. Prior to joining the
Company, Mr. Bugbee held the position of Accounting Manager with TRWs Space and Defense Sector. He has over 25 years experience in
finance and accounting.

Benedict OMahoney, 42, is Vice President, Administration and Legal Affairs of the Company. Mr. OMahoney was elected a
Director of Teknowledge in December 1999. Mr. OMahoney joined the Company in 1996 as Corporate Counsel. Prior to joining
Teknowledge, Mr. OMahoney practiced intellectual property law from 1991 to 1996, and served as General Counsel for Slatt Mortgage
Company from 1988 to 1991. He served with the Federal Reserve Bank of San Francisco from 1985 to 1988. Mr. OMahoney also serves on
the Board of Directors of the Virtual Reality Education Foundation, a nonprofit organization.

Item 2.  Description of Property

The  Companys  executive  offices are located at 1810 Embarcadero  Road, Palo Alto,  California,  under a lease expiring in April
2002. The Company will extend its current lease on a  shortterm  basis,  while it considers other options, including an option to
extend its current lease for an additional  three years at a significantly  reduced rate. The Company has also signed  renewable leases
for office space in Fairfax, Virginia; Marina Del Rey, California;  Cleveland,  Ohio; and San Diego, California.  These properties vary
in size from 960 to 13,000 square feet, are in good condition and are generally described as research and development facilities.

Item 3.  Legal Proceedings

On March 30, 2001, Teknowledge Corporation,  SAP America, Inc., and SAP Aktiengesellschaft  agreed to a full settlement of all
outstanding lawsuits. The subjects of the lawsuit were Teknowledges U.S. Patent 4,591,983,  entitled  "Hierarchical  Knowledge System"
issued May 27, 1986, and U.S. Patent 4,783,752,  entitled  Knowledge Based Processor for Application  Programs Using Conventional Data
Processing  Capabilities  issued November 8, 1988. As part of the settlement  agreement,  SAP paid Teknowledge $750,000
for use of the Companys intellectual property referenced above.
Teknowledge agreed not to commence any patent infringement suits against SAP relating to any of Teknowledges  patents, and both
parties agreed to dismiss their current claims against each other.

The Company was a party to a collection action against fashionmall.com (NASDAQ: FASH) arising from fashionmall.coms failure to
pay fees due pursuant to a software services agreement between the parties unrelated to account aggregation. Teknowledge instituted
an arbitration proceeding against fashionmall.com on March 28, 2000 for breach of contract. In response, fashionmall.com
crossclaimed for breach of contract, fraudulent misrepresentation, negligent misrepresentation, negligent performance of
services and breach of good faith and fair dealing. The Company considered this response a series of baseless crossclaims on a
collection matter. On November 5, 2001, the Company and fashionmall.com agreed to a full settlement of all outstanding claims. As
part of the settlement, fashionmall.com transferred to the Company $165,000 in cash and both parties agreed to dismiss their claims
against each other.

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

No matters were submitted to a vote of security holders during the fourth quarter of 2001.

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PART II

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Item 5.  Market for Common Equity and Related Stockholder Matters

The Common Stock of  Teknowledge  has been trading  under the symbol TEKC on the Nasdaq  SmallCap  Market since March 5, 1999.
Before this date it was traded under the same symbol on the Bulletin Board, an  over-the-counter  (OTC) listing service provided by
the National Quotation Bureau. On March 22, 2002 the closing price of the stock was $2.66 a share.

The following  table sets forth the range of high and low closing price information for the Common Stock on the Nasdaq SmallCap Market for the quarterly  periods  indicated.
The three-year average closing stock price was $4.57. The Company historically has not paid cash dividends and does not anticipate paying cash dividends in the near future.

|2001                                    |  | High   |  | Low  
|--------------------------------------- |  | ------ |  | -----
|First quarter, ended March 31, 2001     |  | $2.88  |  | $1.63
|Second quarter, ended June 30, 2001     |  | 5.48   |  | 1.82 
|Third quarter, ended September 30, 2001 |  | 6.72   |  | 3.23 
|Fourth quarter, ended December 31, 2001 |  | 4.30   |  | 3.33 
|                                        |  |        |  |      
|2000                                    |  | High   |  | Low  
|First quarter, ended March 31, 2000     |  | $13.50 |  | $3.50
|Second quarter, ended June 30, 2000     |  | 11.13  |  | 5.25 
|Third quarter, ended September 30, 2000 |  | 5.75   |  | 3.63 
|Fourth quarter, ended December 31, 2000 |  | 3.94   |  | 1.69 

As of December 31, 2001 there were 1,547  holders of record of Common Stock of the Company.

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Item 6.  Managements Discussion and Analysis of Financial Condition and Results of Operations

Overview of Significant Matters

The Company operates as an interdependent matrix of technical personnel, management, engineering services, technology, and other
resources that are shared in the course of business across five operating units in two reporting segments, commercial and government.
The commercial segment includes the Financial Systems operating unit as well as other commercial operations, including patent and
technology licensing, and the commercial business applications of Security Systems. The government segment includes the
governmentsponsored operations of the following business units: Security Systems, Training Systems, Distributed Systems and
Knowledge Systems. The revenue mix is approximately 42% from the commercial segment and 58% from the government segment. In 2000, 36%
was from commercial and 64% from government. Revenue for the year ended December 31, 2001 was $17,263,958 and net income was $703,720
or 4.1% of revenues. During 2001, the Company experienced a 20% growth in revenue compared to 2000.

The Company believes that substantial investment in the development of the TekPortal product in 2001 and 2000 have
increased the marketability and appeal of its account aggregation solution with larger financial institutions. These institutions
appear committed to offering account aggregation to their customers. Teknowledge continues to develop additional software to enhance
the features and performance of TekPortal, which should appeal to institutions who desire a larger suite of services for their
financial customers. Revenue from the Financial Systems operating unit is likely to exceed contract R&D revenues at some point in coming years.
Revenue from license fees for TekPortal software grew 64% from nearly $1,050,000 in 2000 to approximately $1,720,000 in 2001.

The  proportion  of revenues  attributed  to Financial  Systems is expected to continue to grow as a  percentage  of revenues;
however,  Teknowledge  expects to be an active competitor for contract R&D.  The  Companys  current backlog of $11,800,000 is
primarily for  governmentsponsored  contract R&D. This is to be expected, since most of the TekPortal license related work is
performed on  shortterm  service  contracts,  often with recurring revenue from maintenance,  and in some cases branding and user
fees.  The contract  R&D  related  backlog is associated  with  services  provided over several  years.  As long as the  government
continues to offer R&D  contracts in areas that favor  Teknowledges  expertise and strategic  technical  directions  (such as
security,  distributed systems,  webbased training, and knowledge systems), the Company will actively pursue these opportunities.
This contract R&D work may lead to new patents,  software solutions,  services expertise,  or a foundation for innovative financial
products.

During 2001, a substantial  amount of working  capital from  operations was used to support the  development of the TekPortal  product.
Approximately  $2,600,000 of working capital was utilized for TekPortal  development  purposes.  To fund this  investment,  the Company
used cash from operations and utilized its line of credit for  approximately  $190,000.  To support future growth and increase  working
capital,  the Company may seek additional  equity and debt financing.  However,  management  believes that it has sufficient
cash available to support  operations,  at least through  December 31, 2002,  based on its current cash position,  available credit and financing
sources,  and cash flows from  operations.  The Company  believes  it is  impossible  to predict  significant  future  events that will
materially  affect the cash position of the Company,  and a negative or positive  event could happen at any time.  Examples of negative
events are: an unusual or rapid decline in business prospects and operations,  a large legal award,  assessment,  or penalty payable by
the Company,  or the  withdrawal of a credit  facility or financing  arrangement. The realization  of any of these risks could have a
material adverse effect on the Companys liquidity and cash reserves.

Teknowledge  had been  involved  in an  arbitration  matter  with a customer  since late 1999.  This  matter was  successfully
resolved  through  negotiation in November 2001. The Company was also involved in litigation with SAP America,  Inc.,  regarding two of
the Companys  patents. In March 2001,  Teknowledge and SAP finalized a settlement  agreement and termination of the lawsuit.  As
part of the settlement agreement, SAP paid Teknowledge $750,000 for use of the Companys intellectual property referenced above.

Forward Looking Statements

Forwardlooking statements made in this report relate to the demand for aggregation software, technical employees and
counterterrorism applications, as well as expected revenue growth, ability to realize backlog, competition for new R&D
contracts, development of financial products and services, realization of deferred income tax assets, collections on customer
receivables, and realization of the Companys investment in GlobalStake.com. All forwardlooking statements involve risks
and uncertainties, and actual results could differ materially from those set forth in the

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forwardlooking statements contained herein as a result of competition, general market conditions, agency funding limitations, other factors relating to government
contracting, ability to attract and retain technical and management personnel, commercial opportunities, financing, and other factors
described in Certain Factors That May Affect Future Results of Operations and/or Stock Price.

Certain Factors That May Affect Future Results of Operations and/or Stock Price

Management  believes that the market for TekPortal  software  continues to be a significant  opportunity  for  Teknowledge and that its
Financial Systems business will expand over time. The market for account  aggregation  software,  however,  continues to evolve rapidly
and is populated by substantial  competitors who are continuously  developing  competing software products and services.  As is typical
for a new and rapidly evolving industry,  demand and market acceptance for account  aggregation  products and services are subject to a
high level of uncertainty.  As a result,  many competitors have merged or dropped out of the market.  Further,  aspects of the business
(including  security,  privacy,  reliability,  cost, ease of use, and quality of services) are undergoing rapid changes and review that
may affect the use of information  aggregation  software in  particular.  The Company is exposed to a higher risk of default and slower
collections from small Financial  Systems clients,  compared to relatively  reliable  government  customers.  Teknowledge is addressing
this difference by broadening its aggregation customer base and targeting larger financial institutions.

The demand for account aggregation software will depend upon broad acceptance of new methods of conducting business and
exchanging information over the Internet. It appears that banks in particular are moving quickly to install account aggregation
software. TekPortal is already in use at a number of bank sites. However, the continuing demand for specific products developed by
the Company cannot be determined, nor can the viability of these products be determined at this time. As the market continues to
change, there can be no assurance that the Company will be able to recruit or retain the technical staff to develop and bring to
market products that will gain market acceptance or generate significant revenue or profits. If TekPortal or Teknowledges other
products and services markets actually develop more slowly than expected, become saturated with competitors, or if the Companys
products do not achieve market acceptance, the Companys business, financial condition, and results of operations may be materially
and adversely affected.

Teknowledge plans to grow its business by investing in TekPortal and by expanding into additional product or service
offerings. This may require significant additional investment and could strain technical, financial, and operational resources. New
competitors can enter the market for TekPortal and other financial solutions. The Companys gross margins in new business areas may
be lower than in existing business activities, and it may not be able to expand or maintain operations in a cost-effective or timely
manner. If a number of customers do not receive new products or services favorably, it could hurt the Companys reputation and delay
future expansion.

Within the financial services industry, Teknowledge believes many companies are consolidating, creating larger competitors with greater
resources and a broader range of products. The Company also competes with businesses delivering financial services through Internet
portals, banks marketing their own Internet-based financial services, and non-bank financial service providers, such as brokerages
and insurance companies, seeking to expand the breadth of their Internet product and services offerings. In addition, the Companys
customers may develop competing products. For example, a bank or brokerage may choose to develop its own software platform for
Internet-based financial services. Several of the vendors offering data processing services to financial institutions also offer
Internet banking solutions that may compete with the Companys solutions. Many of the Companys competitors and potential competitors
may have significant advantages over the Company, including more extensive name recognition and marketing power, preferred vendor
status with the Companys existing and potential customers and significantly greater financial, technical, marketing and other
resources, giving them the ability to offer free products or services to gain market share or to respond more quickly to new or
changing opportunities, technologies and customer requirements. The Companys competitors may also bundle their products in a manner
that may discourage users from purchasing the Companys products. Existing and potential competitors may establish cooperative relationships
with each other or with third parties, or adopt unsustainable or aggressive pricing policies to gain market share.

Teknowledge has a quality  assurance  program to test its complex software  products,  but its software could still contain  undetected
errors  or  defects  that may be  discovered  at any point in the life of the  product.  The  Company  has in the past  discovered  and
corrected  software errors in its products.  After  implementation,  errors may be found from time to time in the Companys new or
enhanced  products or  services,  or products or services it resells for  strategic  partners.  These errors could cause the Company to
lose  revenues  or cause a delay in market  acceptance  of its  solutions  or could  result in  liability  for damages or injury to its
reputation.  The Companys  products are often used in transaction  processing systems

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that include other vendors  products, and, as a result,  its products  must  integrate  successfully  with these  existing  systems.System  errors,  whether  caused by the
Companys  products or those of another vendor,  could adversely affect the market  acceptance of its products,  and any necessary
modifications  could cause the Company to incur significant  expenses.  Since the Companys  products are used to deliver services
that are integral to its customers  businesses,  errors, defects or other performance problems could result in financial or other
damages to its customers.  Product liability litigation arising from these errors,  defects or problems,  even if it were unsuccessful,
would be time consuming and costly to defend.  Existing or future laws or unfavorable  judicial  decisions  could negate any limitation
of liability provisions that are included in the Companys license agreements.

Numerous federal agencies have recently adopted rules and regulations protecting consumer privacy and establishing guidelines for
financial institutions to follow in selecting technology vendors for solutions such as TekPortal. The Company believes its business
does not currently subject it to any of these rules or regulations that would adversely affect its business. However, these rules and
regulations are new and may be interpreted to apply to the Companys business in a manner that could make the its business more
onerous or costly. As the Internet continues to evolve, the Company expects federal, state and foreign governments to adopt more laws
and regulations covering issues such as 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 Internetbased financial
services.

Teknowledges customers in the Financial Systems unit are in the rapidly consolidating financial services industry, which is
subject to economic changes that could reduce demand for the Companys products and service. Changes in economic conditions and
unforeseen events, like recession, inflation or acts of terrorism could occur and reduce consumers use of bank services. Any event of
this kind, or implementation for any reason by banks of cost reduction measures, could result in significant decreases in demand for
our products and services. Mergers and acquisitions are pervasive in todays banking industry. Teknowledges existing
customers may be acquired by or merged into other financial institutions, which already have their own financial Internet software
solution or which decide to terminate their relationships with the Company for other reasons. As a result, the Companys revenue
from licensing of aggregation software could decline if an existing customer is merged into or acquired by another company.

Teknowledges solutions must integrate with complex data processing systems at the Companys customers facilities.
The Company generally recognizes revenue on a percentage completion basis, so its revenue is often dependent on its ability to
complete implementations within the time periods that it establish for its projects. Teknowledge relies on a combination of internal
implementation teams and outsourced implementation teams for its implementations. If these teams encounter significant delays in
implementing the Companys solutions for a customer or fail to implement the solutions effectively or at all at a
customers facility, the Company may not be able to recognize any revenue from the contract or be required to recognize a loss
from the contract, if revised project cost estimates exceed revenue from the contract. In addition, Teknowledge may incur monetary
damages or penalties if we are not successful in completing projects on schedule.

Despite the Companys security measures, the core of its network infrastructure could be vulnerable to unforeseen computer
problems. Network or Internet security problems could harm the Companys reputation and business. Although the Company believes
it has taken steps to mitigate much of the risk, it may in the future experience interruptions in service as a result of the
accidental or intentional actions of Internet users, current and former employees or others. Unknown security risks may result in
liability to the Company and also may deter financial organizations from licensing its software and services. Although the Company
intends to continue to implement and establish security measures, there can be no assurance that measures it has implemented will not
be circumvented in the future, which could have a material adverse effect on its business, financial condition or results of
operations. The occurrence of any of these problems could reduce product demand from potential customers and cause existing customers
to terminate their license or data center contracts with the Company. These problems could also require the Company to spend
significant capital to remedy any failure and could subject it to costly litigation with clients or their end users.

The  Companys  success depends upon its proprietary  technology and  information.  The Company relies on a combination of patent,
copyright,  trademark and trade secret laws and confidentiality  procedures to protect its proprietary  technology and information.  It
is  difficult  to police  unauthorized  use of  software.  The steps the Company has taken to protect its services and products may not
prevent  misappropriation of its technology.  Any  misappropriation of the Companys  proprietary  technology or information could
reduce any  competitive  advantages it may have or result in costly  litigation.  The Company now also has a significant  international
presence.  The laws of some foreign  countries  may not

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protect the  Companys  proprietary  technology as well as the laws of the
United States. The Companys ability to protect its proprietary technology abroad may not be adequate.

In November 1999,  Teknowledge agreed to provide  $1,200,000 in  spinoff  seed money (valued  consistently with other
investors) for a webbased real estate company, GlobalStake.com  (GS).  During 2001, GS modified its strategy to focus
on a  businesstobusiness  model for conducting  commercial real estate mortgage  transactions.  GS closed several deals and
reported  positive  net income in the third and fourth  quarters of 2001.  However,  as GS is a business  with limited cash and all the
associated  risks of a  startup  business,  its success is dependent  on many  factors;  such as, the market  demand for mortgage
loans,  the  availability of multiple  mortgage  financing  sources,  periodic  fluctuations in interest rates, the ability to hire and
train qualified brokers,  intervening political and sociological events, and the capability to negotiate competitive  arrangements with
its customers.  The Company reviews the status of its investment in GS annually,  in the absence of adverse conditions,  from documents
supplied by GS and  discussions  with GS  management.  In  evaluating  its  investment,  Teknowledge  reviews  historical  and forecast
information regarding cash flows,  operating expenses,  the pipeline of new business, and available credit facilities before making its
final determination  whether the Companys  investment in GS is impaired. As of December 31, 2001, the Company determined that its
investment in GS is not impaired.

The majority of Teknowledges service revenue is derived from government-sponsored contract research and development
projects, and the Company has historically been profitable in that business. However, dependence on R&D contracts can be risky
because the contracts are subject to administrative, legislative, and political interruptions, which may jeopardize the flow of
funds. There can be no assurance that the government will continue to seek services at the current level in the future. Another
uncertainty is that the Companys revenues, costs, and earnings on government contracts are determined based on estimated overhead
rates derived from forecasted annual costs. The Companys actual experience in headcount growth, billable efficiency, and costs may
vary from original estimates and necessitate periodic adjustments to overhead rates and revenues. Such adjustments are made on a
cumulative basis whereby the resulting revenue and income effects are recognized in the period of the adjustments. The Company is
also subject to periodic reviews of prior year costs and expenses by audit agencies of the Federal Government. As a result of these
audits the Company may be exposed to cost adjustments, which are applied on a retroactive basis to the government contracts completed
in those years. These adjustments can have a negative or positive effect on the business. In order to address the possible exposure
from prior years, the Company has established a rate adjustment reserve for such contingencies, and the amount of the rate adjustment
reserve is reviewed and adjusted at least annually.

The typical cost-type government contract performed by the Company has a regulated fixed-fee, which limits the Company from
improving profit margins on these contracts. In addition, Federal Acquisition Regulations exclude from reimbursement some
unallowable expenses, which the Company considers a regular part of the business, such as advertising expense.
In addition, almost all the Companys contracts contain termination clauses, which permit contract termination if the
Company defaults or at the contracting partys discretion.

Another uncertainty in providing services is the Companys ability to attract and retain sufficient technical staff to meet
the demands of new orders. The Company recognizes that the loss of one or more key management and technical personnel could adversely
affect aspects of the Companys business. The Company relies on its executives and business unit managers for the acquisition and
negotiation of new business, the management of services contracts and product development, and the management of ongoing operations.
The Company is currently seeking new employees to fill technical openings in its operations. A large proportion of the technical
support base for operations is provided by outside consultants, and it is anticipated that this trend will continue in the future.
The Company spent approximately $4,900,000 on mostly billable subcontractors in 2001. The use of outside consultants allows the
Company to expand or constrict its operations quickly both inside and outside the U.S. The Company believes that its future success
depends on attracting and retaining highly skilled technical personnel and other employees.

The Companys operating results and stock price are affected by a wide variety of factors, including successful
commercialization of the Companys products, government intervention, competition, ability to staff, retain, and recruit key
employees, financing and collections, investments, and general economic and market conditions.

Critical Accounting Policies and Estimates

Teknowledges significant accounting policies are also described in Note 2 to the consolidated financial statements.
However, certain accounting policies are particularly important to the portrayal of the financial position

15

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and results of operations and require the application of significant judgment by its management team; as a result, they are subject to an inherent degree of
uncertainty. In applying those policies, management uses its judgment to determine the appropriate assumptions to be used in the
determination of estimates. Those estimates are based on the Companys historical experience, terms of existing contracts,
observance of trends in the industry, information provided by its customers, and information available from other outside sources,
as appropriate. Teknowledges significant accounting policies include:

| |  | Revenue recognition and allowance for doubtful accounts;
|- |  | --------------------------------------------------------
| |  | Investments in GlobalStake.com;                         
| |  | Accounting for income taxes; and                        
| |  | Software development costs                              

Revenue Recognition and Allowance for Doubtful Accounts

Revenue on software  license and services is recognized  when  persuasive  evidence of an  arrangement  exists,  the price is
fixed and determinable,  delivery has occurred,  there is a reasonable  assurance of collection on the resulting  receivable and vendor
specific  objective  evidence  exists to allocate  the total fee among all  delivered  and  undelivered  elements  in the  arrangement.
Teknowledge  obtains written purchase  authorizations  from customers for a specific product at a fixed price and considers delivery to
have occurred at the time of shipment.  The software is delivered to the customer  electronically or on a CD-Rom.  Revenue is typically
recognized on shipment for product software;  however,  if the software is subject to customer acceptance or contract terms that do not
satisfy all of the above mentioned criteria,  revenue is recognized upon customer  acceptance or when all revenue recognition  criteria
have been met.  Revenue from software consulting services is generally  recognized on a time and materials basis;  however,  depending on the terms of
the  contract,  the  service  element may be  recognized  on a  milestone  achievement  or a  percentage-of-completion  basis.  Revenue
recognized  under the  percentage-of-completion  basis requires the use of project cost  estimates.  Project cost estimates are revised
periodically  and changes  affecting the amount of revenue  recognized  are recorded when they become known.  Revenue from research and
development  contracts is generally  recognized over applicable  contractual periods as specified by each contract and as costs related
to the  contracts  are incurred.  Teknowledge  provides an allowance for doubtful  accounts  based on historical  payment
experience  for its  nongovernment  customers,  age of unpaid  amounts,  review of significant  past due accounts and current  economic
trends. Estimates of uncollectible amounts are revised each period and changes are recorded when they become known. The Company generally
does not provide an allowance for government customers.

Investment in GlobalStake.com

In November 1999,  Teknowledge  agreed to provide  $1,200,000 in seed money (valued  consistently  with other investors) for a
new  web-based  company,  GlobalStake.com,  which was spun off from  Teknowledge  Corporation.  GlobalStake.com  began by offering full
service,  discounted  consumer real estate  transactions  on the Internet,  but in December 2000 modified its strategy to focus on a
business-to-business  model for  conducting  commercial  real estate  mortgages.  Teknowledge  has reviewed the cash flow  projections,
existing customer  pipeline,  outside investment  opportunities,  and available credit sources of  GlobalStake.com,  and has determined
that its investment is not impaired.  However,  as  GlobalStake.com  is a business with limited cash and all the associated  risks of a
start-up  business,  its success is dependent on market demand for mortgage loans,  fluctuations in interest rates, the ability to hire
qualified  brokers,  and the ability to secure  mortgage  financing  sources and to negotiate a  competitive  arrangement.  The Company
intends to periodically review its investment in GlobalStake.com  for impairment.  Should the Company determine that all or part of its
investment  in  Globalstake.com  is  impaired,  an  adjustment  to its  investment  would be  charged  to  income  in the  period  such
determination is made.

Accounting for Income Taxes

Teknowledge records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely
than not to be realized. Teknowledge considers expected future taxable income and reversing taxable temporary differences in
assessing the need for the valuation allowance. In the event Teknowledge were to determine that it would not be able to realize all
or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the
period such determination was made. Likewise, should Teknowledge determine that it would be able to realize additional deferred tax
assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the
period such determination was made.

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Software Development Costs

The Company  evaluates the expected  future  revenues from software  products  before  capitalizing software  development
costs.  Only those projects that are considered  potentially  profitable  after including the costs to develop the software are pursued
beyond the planning stage. The Company capitalizes  software  development costs only from the point of technological  feasibility.  All
costs incurred prior to  determination of technological  feasibility  are expensed.  Teknowledge  solicits  feedback from its customers to help identify
potential  enhancements  that add value to key products such as TekPortal.  The Company in turn evaluates these potential  enhancements
to determine  which, if any, will be  incorporated  into the next version.  The software  development  process  proceeds from module to
module until the product manager  determines  that an adequate number of  functionalities  have  accumulated to earn release status.  A
typical version may encompass up to a dozen functional  modules,  most of which could be used  separately,  but which are not practical
to market  individually  because of cost and market  constraints.  The  Company may add  high-value,  low-risk  development  modules to
address  particular  customer needs,  but only after assessing  technical risk and program design issues.  These optional  features are
considered  low-risk  development  enhancements  to the original  functionality.

During 2001,  Teknowledge  completed  work on V2.0 of
TekPortal.  Many of the  functionalities  added to V2.0 were extensions of work performed in earlier  versions 1.0 and 1.1 in 2000. The
earlier  versions have been fully  operational  at a number of Internet bank sites since 2000.  The software  developed in V2.0
extended the  capabilities  of TekPortal to include large bank service  bureaus and the smaller  banks that they  service.  Capitalized
costs include direct and indirect labor costs and applicable  overhead,  but exclude general and  administrative  costs. As of December
31, 2001, the amount of capitalized software development costs was approximately  $4,000,000.  The Companys policy is to amortize
capitalized  software  development  costs by the  greater  of (a) the ratio of  current  gross  revenues  for a product to the total of
current and anticipated  future gross revenues for that product,  or (b) the straight-line  method over the estimated  economic life of
the  product,  which is estimated  at three  years.  Capitalized  costs are  reviewed  and  evaluated  periodically  to  determine  the
recoverability of capitalized  software  development costs.  Should the Company determine that all or part of its capitalized  software
development  costs are not recoverable,  an adjustment to the capitalized  software costs would be charged to income in the period such
determination is made.

Results of Operations

Revenues in 2001 were $17,263,958 as compared to $14,376,024 in 2000. Revenues in 2001 increased 20% over the previous year as a
result of increased demand for both its government and commercial products and services. Commercial operations contributed 42% of
total revenues in 2001, 37% from Financial Systems and 5% from intellectual property rights and commercial security contracts.
In 2000, substantially all of the commercial revenue was from Financial Systems, which was 36% of total revenue. Revenues from
government-sponsored contract R&D accounted for 58% of total revenues in 2001 as compared to 64% in 2000.

Financial Systems revenues include license sales for the TekPortal software, consulting services, and post-contract customer
support services. Financial Systems revenue totaled $6,319,477 and $5,160,874 for 2001 and 2000, respectively. Revenue from license
fees for TekPortal software was $1,714,325; a 64% increase from 2000. TekPortal software and the Financial Systems solutions
continued to gain market acceptance during 2001. The Company released version 2.0 of TekPortal in late December 2001. Revenues from
resellers accounted for 34% of Financial Systems revenues. The Company believes that the demand for account aggregation software will
continue to grow in 2002.

Revenues   from   governmentsponsored   contract   R&D  were   $10,081,291   in  2001,   compared  to   $9,209,831  in  2000.
Governmentsponsored  contract R&D  revenues  include mainly  costtype  contract  research and  development.  The future
demand for  governmentsponsored  contract R&D services will depend on competitive contract awards and sponsor priorities. The
Company anticipates the  governments  demand for  counterterrorism  applications will increase in the wake of the events on
September  11th,  although in the nearterm there may be a short fall in the solicitation of domestic R&D proposals
as funds may be diverted to hostile  overseas  operations.  In 2001,  53% of total  revenues were from two contract  R&D  customers
sponsored by the Department of the Air Force and the Department of the Navy, compared to 57% in 2000.

The  Company  typically  recognizes  revenue  from its  contracts  as  services  are  provided  as  determined  on a contract-by-contract  basis.  This accounting  method may result in timing  differences  between the amount of revenue  recognized on an accrual
basis and the amount billed, which is subject to separate  determination based on an analysis of contract  deliverables and milestones.
The difference  between the revenue  recognized on this basis and the amount billed to the customer is recorded in accounts  receivable
as unbilled receivables or as deferred revenue.  At December 31, 2001,

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approximately 58% of unbilled receivables were for commercial contracts,  and 42% were for government-sponsored R&D contracts.

Cost of revenue was  $12,307,559  in 2001 compared to $9,788,202 in 2000.  Cost of revenues as a percentage of total  revenues
for 2001 was 72%,  compared to 68% in 2000. The increase in costs between  periods was  attributable  to an increase in labor and labor
related  costs for  revenue-producing  services in both the  commercial  and  government  operating  lines.  The Company  invested over
$2,200,000 in the development of computer  software in 2000. As a result,  amortization  charges in 2001 increased by $604,000 over the
comparable  period in 2000.  The  Company  expects  amortization  expenses  to  continue  to grow in 2002 as a result of the release of
version 2.0 of TekPortal  software.  The Company uses  billable  consultants  and  contractors  to supplement  its  full-time  employee
workforce.  During 2001, the Company spent  approximately  $4,900,000 on these services  compared to $4,800,000 in 2000.  Subcontractor
growth rates are dependent on future contracts and may not grow at the same rate in future periods.

General and administrative costs were $2,970,549 and $3,039,488 in 2001 and 2000, respectively. Administrative costs for 2001 were
17% of total revenues, versus 21% in 2000. Government contracts provide recovery of much of the Companys general and
administrative costs through approved indirect overhead rates billed to the government on a monthly basis. During 2001, the Company
experienced an increase in expenditures for outside professional fees for accounting and legal services. Due to improved customer
collections, the reserve for uncollectable accounts was reduced by approximately $402,000.

Sales and marketing costs were $767,226 in 2001 as compared to $474,780 in 2000. The Companys sales and marketing efforts
include applications engineering and technical support, direct sales efforts, as well as trade shows, demonstrations, and other
traditional marketing activities. In 2000, the Company relied primarily on direct sales and Value Added Resellers to lay the
foundation for expanding the Financial Systems business. During 2001 the Company increased its staff to sell financial products to
the banking industry, expanding the Companys sales efforts both domestically and internationally.

Company sponsored R&D costs in 2001 decreased to $490,101 from $557,850 in the comparable
period in 2000 primarily as a result of the diversion of some employees who normally work on in-house R&D to other billable
projects. These figures do not include the majority of the R&D conducted by Teknowledge under contract to government customers,
nor do they include software development costs that were capitalized during the period. Excluding overhead and other direct costs,
R&D conducted by the Company under contract to government customers was $4,681,530.

The Company  spent  $2,602,442  for the  development  of its  TekPortal  product  during 2001 and this amount was  capitalized
(version  2.0 was  released  for sale in  December  2001).  The  Company  expects to continue  to  capitalize  additional  costs in the
development  of the TekPortal  product in 2002;  however,  probably at a lower level than in 2001.  The majority of the  Companys
long-term  R&D  expenditures  are funded  externally  through  government  projects (and  recorded as cost of revenues),  which are
expected to provide new  technology  and  intellectual  property.  Teknowledge  retains  intellectual  property  rights on its contract
R&D work.

Interest  income was $34,302 in 2001 versus $64,770 in 2000.  Due to its  considerable  investment in software  development in
2001,  the Company  experienced  lower average cash balances  throughout  2001. In addition,  interest  expense,  related to additional
borrowings increased from $56,501 in 2000 to $109,176 in 2001.

The effective  tax rate was 0% and 25% in 2001 and 2000,  respectively.  The principal  reason for the 0% tax rate in 2001 was
due to the benefit  associated  with  additional  research  and  development  tax credits as a result of the  increased  investment  in
TekPortal and a reduction in the valuation allowance (see Notes 2 and 6 of Notes to Consolidated Financial Statements).

The Company considered a $900,000 reclassification within the equity section of the balance sheet from retained earnings to
paidin capital related to tax benefits recognized in 1997.  After further consultation with its prior and current accountants, the
Company concluded that the original transaction was appropriately recorded and no reclassification is necessary.

In 2001,  Teknowledges  net income was $703,720,  or $0.12  diluted  earnings per share.  This compares to $392,017,  or
$0.07 diluted  earnings per share for 2000. Net income  represented  4% of revenues for 2001 and 3% for the comparable  period in 2000.
Government contracts continue to produce steady income, but at a rate typically below a

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successful commercial  enterprise.  This is due to contracts  negotiated  with the  government  are restricted  from  exceeding the fee limits  established in the Federal  Acquisition
Regulations.  The  Company  expects to achieve  higher net  margins on its  commercial  contracts  as volume  increases  and  operating
efficiencies improve.

Liquidity and Capital Resources

As of December 31, 2001, the Company had $1,570,783 in cash and cash equivalents, an increase of $521,731 over the previous
year. The Company generated net cash of $3,121,450 from its operating activities compared to $1,089,962 in 2000. The Company also
generated net cash of $202,828 from financing activities compared to $1,511,616 in 2000. Financing activities include $190,137 and
$1,350,000 of net borrowings during 2001 and 2000, respectively. The Company invested $2,602,442 for developing the TekPortal
software and $128,119 for purchases of computer equipment and other improvements. The Company invested $71,986 in GlobalStake.com
during the year and has met 100% of its $1.2M investment agreement since GlobalStake.com was established in November of 1999.

To support the future growth,  the Company may seek additional  equity or debt  financing.  However,  management  believes that it has
sufficient  funds to support  operations at least through  December 31, 2002 based on its current cash position,  available  credit and
equity  sources,  and cash flows from  operations.  The Company has borrowed a total of $1,540,000  against a $3,000,000 bank line. The
Company used the money to supplement its existing  reserves and to fund the growth of its commercial  operations.  The Company believes
it is impossible to predict  significant future events that will materially affect the cash position of the Company,  and a negative or
positive  event could  happen at any time.  Examples of negative  events  are: an unusual or rapid  decline in business  prospects  and
operations;  a large legal award,  assessment,  or penalty payable by the Company,  or the withdrawal of a credit facility or financing
arrangement.  The  realization  of any of these risks could have a material  adverse  effect on the  Companys  liquidity and cash
reserves.

In June 2001, the Company  transferred  its credit line to a financial  institution  that offered lower interest rates, a larger credit
line, and a broader choice of financial  instruments.  The assets of the Company  collateralize  borrowings under the arrangement.  The
outstanding  balance  bears a variable  per annum rate of interest  equal to the sum of 2.4% and the  One-Month  LIBOR rate.  Under the
terms of the  arrangement,  the Company may borrow up to 80% of the eligible  receivable  base,  to a maximum of  $3,000,000.  Eligible
receivable  base is  defined  as 80% of  commercial  receivables  outstanding  for 90 days or less plus the lower of 50% of  government
receivables  outstanding  for 90 days or less or  $750,000.  The Company  typically  uses the money to  supplement  its  existing  cash
reserves and to fund the growth of its commercial operations.

At December 31, 2001, the Company had borrowed  $1,540,137  against a borrowing  base of  $1,874,279.  During January 2002, the Company
paid down the line by $650,000. The Company requested a waiver of two financial covenants from the financial  institution at December
31, 2001. These covenants were  tangible  net worth  and total  debt to tangible net  worth,  which were out of
compliance. The financial institution granted the waiver through December 2002.

Related Party Transactions

In November  1999,  Teknowledge  agreed to provide  $1,200,000  in seed money  (valued  consistently  with other  investors)  for a new
web-based  company,   GlobalStake.com,   which  was  spun  off  from  Teknowledge   Corporation.   The  Companys   investment  in
GlobalStake.coms  Series A preferred  stock  represents  a 19.9%  ownership  interest.  GlobalStake.com  began by  offering  full
service,  discounted  consumer real estate  transactions  on the Internet,  but in December 2000 it modified its strategy to focus on a
business-to-business  model for  conducting  commercial  real estate  mortgages.  Teknowledge  has reviewed the cash flow  projections,
existing customer  pipeline,  outside investment  opportunities,  and available credit sources of  GlobalStake.com,  and has determined
that its investment is not impaired.  However,  as  GlobalStake.com  is a business with limited cash and all the associated  risks of a
start-up  business,  its success is dependent on market demand for mortgage loans,  fluctuations in interest rates, the ability to hire
qualified  brokers,  and the ability to secure  mortgage  financing  sources and to negotiate a  competitive  arrangement.  The Company
intends to periodically review of its investment in GlobalStake.com for impairment.

To date Teknowledge has provided: (1) approximately $1,206,000 in cumulative seed cash and services; (2) the proprietary
information and technology developed in support of the GlobalStake.com business plan; and (3) licenses to practice Teknowledges
patent portfolio. As of December 31, 2001 the Company has fulfilled its investment obligation with GlobalStake.com and has no future
obligation or intent to fund GlobalStake.com's future financial needs.

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The  Companys  CEO  represents  Teknowledge  in one out of six  seats  on the  Board of  Directors  of  GlobalStake.com.  He owns
approximately 7% of the common shares on a diluted basis at December 31, 2001. These are nonvoting shares.

Recently Issued Accounting Pronouncements

In July  2001,  the FASB  issued  SFAS No.  141,  Business  Combinations,  and SFAS No.  142,  Goodwill  and
Intangible  Assets.  SFAS No. 141 is  effective  for all business  combinations  completed  after June 30, 2001.  SFAS No. 142 is
effective for fiscal years  beginning  after December 15, 2001;  however,  certain  provisions of this Statement  apply to goodwill and
other  intangible  assets acquired  between July 1, 2001 and the effective date of SFAS No. 142. Major  provisions of these  Statements
and their effective dates for the Company are as follows:

| |  | All business combinations initiated after June 30, 2001 must use the purchase method of accounting. The pooling of interest
              method of accounting is prohibited except for           
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  | transactions initiated before July 1, 2001.                                                                                                                                                       
| |  | Intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from
              contractual or other legal rights or are separable from the       
|  |  | acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability.                                            
| |  | Goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective
              January 1, 2002, all previously recognized goodwill and
|  |  | intangible assets with indefinite lives will no longer be
              subject to amortization.                                                                                                  
| |  | Effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and
              whenever there is an impairment indicator.               
| |  | All acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting.                                                                               

Management has reviewed the provisions of these  Statements  and has assessed that these  Statements  will not have a material
impact on the Companys financial position or results of operations.

In August 2001, the FASB issued Statement of Financial  Accounting  Standards No. 143,  Accounting  for Asset Retirement
Obligations,  (SFAS No.  143).  SFAS No. 143 addresses  accounting and reporting for obligations  associated with the
retirement of tangible  long-lived assets and the associated asset retirement  costs. This Statement  requires that the fair value of a
liability for an asset  retirement  obligation  be  recognized  in the period in which it is incurred if a reasonable  estimate of fair
value can be made. The associated asset  retirement  costs are capitalized as part of the carrying amount of the long-lived  asset. The
liability is accreted to its present value each period while the cost is  depreciated  over its useful life.  SFAS No. 143 is effective
for financial  statements  issued for fiscal years beginning after June 15, 2002. The Company  believes the adoption of SFAS No. 143 in
2002 will not have a significant adverse effect on its financial condition or results of operation.

In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal
of LongLived Assets,  (SFAS No. 144). SFAS No. 144, which replaces SFAS No. 121, Accounting for the
Impairment of LongLived Assets and for LongLived Assets to be Disposed Of, requires longlived assets to be
measured at the lower of carrying amount or fair value less the cost to sell. SFAS No. 144 also broadens disposal transaction
reporting related to discontinued operations. SFAS No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001. The Company believes the adoption of SFAS No. 144 in 2002 will not have a significant adverse effect on its
financial condition or results of operation.

Item 7.  Financial Statements

The  response to this item is  incorporated  by  reference in a separate  section of this  report.  See Exhibits and Reports
on Form 8-K, Item 13(a)(1) and (2).

Item 8.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On July 26, 2001, the Audit Committee of the Companys Board of Directors approved a change in the Companys independent accountants
for the fiscal year ended 2001, from Arthur Andersen LLP to Grant Thornton LLP. The report of Arthur Andersen
for the fiscal years ended December 31, 2000 and 1999 contained no adverse opinions,

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disclaimer of opinion or qualification or
modification as to uncertainty, audit scope or accounting principles. During the fiscal years ended December 31, 2000 and 1999 and
the interim period from January 1, 2001 through July 26, 2001, there were no disagreements between the Company and Arthur Andersen
LLP on any accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved
to the satisfaction of Arthur Andersen LLP would have caused them to make reference to the subject matter of the disagreement in
connection with their report. No event described in paragraph (a) (1) (v) of Item 304 of Regulation S-K has occurred within the
Companys fiscal years ending December 31, 2000 and 1999, or the period from January 1, 2001 through July 26, 2001.

PART III

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Item 9.  Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 15(a) of the Exchange Act

The Board of Directors  currently  consists of six members:  Neil A. Jacobstein,  Dr. Larry E. Druffel,  Ivan Lustig,  General
Robert T. Marsh (Ret.), Benedict OMahoney, and James C. Workman.

Neil A.  Jacobstein.  Mr.  Jacobstein,  47, has served as Chairman of the Board,  Chief  Executive  Officer and  President  of
Teknowledge  since  November 22,  1999. He served as President and Chief  Operating  Officer and a Director of the Company from January
1993 to November 22,  1999.  After  joining  Teknowledge  in 1984,  Mr.  Jacobstein  was  promoted  over a nineyear period to:  Senior
Knowledge  Engineer,  Manager of the  Research and Advanced  Development  Group,  Vice  President  and General  Manager of Research and
Advanced Systems  Development,  and Vice President and General Manager of the Knowledge  Systems  Division.  Mr.  Jacobstein  initiated
Teknowledges  eCommerce  business  unit in 1996.  In 1998,  he was  appointed  to the  Technology  Advisory  Board of the U.S.  Armys
Simulation,  Training,  and Instrumentation  Command (STRICOM).  Prior to joining  Teknowledge,  Mr. Jacobstein was a Graduate Research
Intern and  consultant  at Xerox PARC,  and a Research  Associate  at CBNS.  Since 1992,  he has served as the Chairman of the Board of
Directors of the Institute for Molecular Manufacturing,  a nonprofit organization.  Since November 1999, he has served as a Director of
GlobalStake.com. In 1999, Mr. Jacobstein was elected a Henry Crown Fellow in the Aspen Institutes executive leadership program.

Benedict  OMahoney. Mr.  OMahoney,  42, is Vice President,  Administration and Legal Affairs of the Company.  Mr.
OMahoney  was elected to the Board in November 1999. Mr.  OMahoney  joined the Company in 1996 as Corporate  Counsel.  From
1991 to 1996, Mr. OMahoney  practiced  intellectual property law and he served as General Counsel for Slatt Mortgage Company from
1988 to 1995.  Mr.  OMahoney  serves  on the  Board of  Directors  of the  Virtual  Reality  Education  Foundation,  a  nonprofit
organization.

General Robert T. Marsh. General Marsh (retired four star Air Force general),  77, was elected a director of American Cimflex  Corporation (a predecessor
to the Company) in 1987.  He served as Chairman of the Board of Thiokol  Corporation  until his  retirement in 1991. On April 20, 2001,
General Marsh retired as Executive Director of the Air Force Aid Society,  a nonprofit  charitable  organization  serving the Air
Force  community,  a  position  he had held since  1995.  In 1997 he served as  Chairman  of the  Presidents  Commission  on  Critical
Infrastructure  Protection.  General Marsh joined the Board of SI  International  in December 1998 and continues to serve on the Board.
He serves as Chairman of the Board of Verint  Technology  Inc.  and he is a trustee  emeritus of MITRE  Corporation.  General  Marsh is
Chairman of the Companys Finance and Audit Committee.

Ivan Lustig. Mr. Lustig,  43, was elected to the Board in March 2001. Mr. Lustig has served as Managing  Director and Head of
Media  Investment  Banking of ABN AMRO Inc. since 1999. Prior to that he spent eleven years at Schroder & Co., the last four years
as Managing  Director and Head of US Media and  Communications  Investment  Banking.  Before joining  Schroder  &  Co., he was Vice
President  at L.F.  Rothschild  & Co.,  Inc.  Mr.  Lustig is a Trustee of the  American  Museum of the Moving Image and a member of the
Socrates Society of the Aspen Institute. Mr. Lustig holds a Bachelor of Science, Master of Engineering, and Master of Business Administration
degrees from Cornell University.

Dr. Larry E. Druffel. Dr.  Druffel,  61, was appointed to the Board of Directors in April 1997.  Since 1996, he has served as
President and a Director of the South Carolina Research Authority (SCRA), a public nonprofit  organization.  He holds a Doctorate
Degree in Computer  Science from  Vanderbilt  University and a Masters Degree in Computer  Science from the University of London,  and
was a Director of the  Software  Engineering  Institute at  CarnegieMellon  University  from 1986 to 1996.  He also served on the
Board of Rational Software Corp. from 1986 to 1993. He is Chairman of the

21

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Board of the Advanced Technology  Institute,  and a member of
the Board of the South Carolina Technology Alliance, both private nonprofit  corporations.  He is a Director of Knowledge Sentry, a
Greenville  South Carolina  company, since 2000. He has served as a member of the Board of Directors,  Environmental  Enterprise  Group,
since 2001.

James C. Workman. Mr. Workman,  59, has served on the Board since October 20,  1992. He was appointed  Chairman of the Board,
Chief Executive Officer and President of the Company on an interim basis effective October 20, 1992.  With the appointment of
Dr.  HayesRoth  and Mr.  Jacobstein to executive  positions in 1993,  Mr.  Workman  resigned from his interim  executive  officer
position but retained a seat on the Board. Mr. Workman is active in several  community  organizations  in Wisconsin.  He is a member of
the  Executive  Council  and Board of  Trustees  of the  Diocese of Fond Du Lac.  His  primary  employment  is as a  selfemployed
attorney/consultant. Mr. Workman is Chairman of the Companys Human Resources Committee.

Item 10.  Executive Compensation

The following table sets forth the cash compensation  paid to the Chief Executive Officer and the two most highly  compensated
executive  officers of the Company whose annual salary and bonus  exceeded  $100,000 for all services to the Company in the years ended
December 31, 2001, 2000, and 1999.

SUMMARY COMPENSATION TABLE

Annual Compensation

|Name and Principal Position                                                                                                                                                                                                                                                                    | Year                                         | Salary$(1)                                                              | Bonus$(2)                                                                     
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------------------------------------------
|Neil Jacobstein, Chair, Pres, CEO
Neil Jacobstein, Chair, Pres, CEO
Neil Jacobstein, Pres, COO
Benedict OMahoney, VP Adm & Legal
Benedict OMahoney, VP Adm & Legal
Benedict OMahoney, VP Adm & Legal
Dennis Bugbee, VP and CFO
Dennis Bugbee, VP and CFO
Dennis Bugbee, Director of Finance | 2001
2000
1999
2001
2000
1999
2001
2000
1999 | 202,999
205,040
162,770
131,971
126,800
107,086
141,894
134,162
116,383 | 151,605
114,000
  64,891
  30,750
  25,087
  36,710
  10,125
  16,061
  12,843

|(1) | Includes 401(k) deferred compensation and 5% Company matching provision.                                                                                                                                                                                                                                           
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The bonuses set forth in this column are  generally  paid after the  conclusion  of the annual audit  following  the year to which they
         relate.  Mr.  Jacobstein  earned a bonus of $120,892 for 2000 that was paid in 2001 by action of the Board of  Directors, the remainder is accrued bonus for 2001.

22

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AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUE

The following table provides the specified  information  concerning  exercises of options to purchase the Companys Common Stock in the
fiscal year ended  December 31, 2001,  and  unexercised  options  held as of December  31,  2001,  by the persons  named in the summary
compensation table above.

|Name                               | SharesAcquiredonExercise(#) | ValueRealized(1) | Number of SecuritiesUnderlyingUnexercised Optionsat FYE(Exercisable/Unexercisable)(#) | Value ofUnexercisedIntheMoneyOptionsat FYE(Exercisable/Unexercisable)($)(2)
|---------------------------------- | --------------------------- | ---------------- | ------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------
|Neil Jacobstein, Chair, Pres, CEO  |                            |                 | /                                                                                   | /                                                                          
|Benedict OMahoney, VP Adm & Legal |                            |                 | 36,833/35,167                                                                         | 38,066/36,125                                                                
|Dennis Bugbee, VP and CFO          |                            |                 | 33,333/31,667                                                                         | 38,066/36,125                                                                

|(1) | The value realized upon exercise is the difference between the exercise price and the closing bid price at the close of business on
the date the stock is exercised.                                                     
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The value of unexercised  inthemoney  options is determined by  multiplying  the number of shares under the option
         by the difference between the December 31, 2001 closing price of $3.75 and the grant price.

Directors Compensation

Each  nonemployee  member of the Board of  Directors  receives  cash  compensation  totaling  $10,000,  which is paid in
quarterly  increments  of $2,500.  In addition to their  regular  compensation,  directors  are entitled to be  reimbursed  for related
travel, lodging, and other expenses in attending board and committee meetings.

Employment Contracts and Termination of Employment and Change of Control Arrangements

Neil Jacobstein, Chairman of the Board, Chief Executive Officer, and President, has an employment agreement with the Company that
provides for a 2002 base salary of $234,000. Mr. Jacobstein voluntarily froze his base salary increase in 2001 and has not received
stock options since 1994. Mr. Jacobsteins employment agreement includes an incentive compensation plan that provides for additional
compensation when certain target objectives are achieved in six strategic categories that have been determined and assessed by the
Board of Directors to a maximum of 120% of his annual base salary. Mr. Jacobstein has a severance package that entitles him to
severance benefits equal to his most recent twelvemonth salary and bonus. In the event of a change of control, defined as any
consolidation or merger of the Company in which the Company is not the continuing or surviving corporation, Mr. Jacobstein will be
entitled to severance benefits to include: (i) full accrued salary and vacation pay, (ii) accrued incentive compensation awarded or
determined to be awarded by the Board of Directors, (iii) insurance coverage, (iv) retirement benefits and (v) a lump sum severance
payment equal to two times the total cash compensation.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain  information  concerning the beneficial  ownership of Common Stock as of April 15, 2002
by persons  known to the Company to own  beneficially  more than 5% of the Common Stock,  by each of the  directors of the Company,  by
each of the executive officers named in the Summary  Compensation  Table, and by all directors and executive officers of the Company as
a group.

23

---

|Name and Address of Beneficial Owner(1)                                                                                                                                                                                                                                                                                                   | Common Stock Owned Beneficially(2)                                                                          | Percentage of Class(3)              
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------------------
|Mark J. Hanna
3800 S. Ocean Dr.
Hollywood, FL 33019
Dennis A. Bugbee(4)
Larry E. Druffel(4)
Fredrick HayesRoth
1810 Embarcadero Road
Palo Alto, CA 94303
Neil A. Jacobstein(4)
Ivan L. Lustig(4)
Robert T. Marsh(4)
Benedict OMahoney(4)
James C. Workman(4)
All Directors and Executive Officers of the
Company as a Group (7 Persons) | 385,000(5)
86,181(6)
20,000(7)
542,552(8)
700,857(8)
3,000(10)
22,000(11)
43,499(12)
22,000(13)
897,537(14) | 6.7%
1.5%
*
9.5%
12.3%
*
*
*
*
15.3%

|*   | Less than 1%                                                                                                                                                                                                                                                                                                                             
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Except as  otherwise  indicated,  the persons  named in this table have sole voting and  investment  power with respect to all
shares of Common Stock shown as beneficially  owned by them,  subject to community  property laws where  applicable and to the
information contained in the footnotes to this table.                      
|(2) | All share  numbers have been  adjusted to give effect to a  oneforfive  reverse  stock split on December 22, 1998.
Under the rules of the Securities and Exchange  Commission,  a person is deemed to be the beneficial  owner of shares that can
be acquired by such person within 60 days upon the exercise of options.              
|(3) | Calculated on the basis of 5,717,751 shares  outstanding as of April 30, 2002,  provided that any additional  shares of Common
Stock  that a  stockholder  has the right to acquire  within 60 days after  April 30,  2002 are deemed to be  outstanding  for
purposes of calculating that stockholders percentage beneficial ownership.
|(4) | The address of all  directors and executive  officers is the  Companys  Executive  Offices  located at 1810  Embarcadero
Road, Palo Alto, California 94303.                                                                                                                                                                             
|(5) | Based solely on a Schedule 13G filed by Mark Hanna with the Securities and Exchange Commission on June 14, 2001.                                                                                                                                                                                                                         
|(6) | Includes  41,249 shares that may be purchased  upon the exercise of employee  stock options that are currently  exercisable or
will become exercisable within 60 days of April 30, 2002.                                                                                                                                                 
|(7) | Includes  12,000 shares that may be purchased  upon the exercise of director  stock options that are currently  exercisable or
will become exercisable within 60 days of April 30, 2002.                                                                                                                                                 
|(8) | Dr.  HayesRoth  resigned from his positions as Chairman and CEO of  Teknowledge  on November 22, 1999.  The  information
concerning the Common Stock owned  beneficially  by Dr.  HayesRoth  was obtained from a Form 4 filed with the Securities
and Exchange Commission on March 28, 2000.                                           
|(9) | Mr. Jacobstein has exercised all of his stock options.  Includes 20,000 shares owned by Mr. Jacobsteins spouse;  however, Mr.
Jacobstein disclaims beneficial ownership.                                                                                                                                                                

24

---

|(10) | Includes  3,000 shares that may be purchased  upon the exercise of director  stock options that are currently  exercisable  or
will become exercisable within 60 days of April 30, 2002. Ivan Lustig was elected to the Board on March 12, 2001.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(11) | Includes  22,000 shares that may be purchased  upon the exercise of director  stock options that are currently  exercisable or
will become exercisable within 60 days of April 30, 2002.                                                        
|(12) | Includes 44,749 shares,  which may be purchased upon the exercise of employee stock options that are currently  exercisable or
will become exercisable within 60 days of April 30, 2002.                                                        
|(13) | Includes  18,000 shares that may be purchased  upon the exercise of director  stock options that are currently  exercisable or
will become exercisable within 60 days of April 30, 2002. Mr. Workmans spouse owns 4,000 shares beneficially.   
|(14) | Includes  options for 138,498  shares that are currently  exercisable or will become  exercisable  within 60 days of April 30, 2002.                                                                                                            

Item 12.  Certain Relationships and Related Transactions

In November 1999,  Teknowledge  agreed to provide  $1,200,000 in seed money (valued  consistently  with other investors) for a
new webbased company,  GlobalStake.com,  which was spun off from Teknowledge Corporation.  GlobalStake.com began by offering full
service,  discounted  consumer real estate  transactions  on the Internet,  but in December 2000 it modified its strategy to focus on a
businesstobusiness  model  for  conducting  commercial  real  estate  mortgages.  Teknowledge  has  reviewed  the cash flow
projections,  existing customer pipeline,  outside investment opportunities,  and available credit sources of GlobalStake.com,  and has
determined  that its investment is not impaired.  However,  as  GlobalStake.com  is a business with limited cash and all the associated
risks of a startup  business,  its success is dependent on market demand for mortgage loans,  fluctuations in interest rates, the
ability to hire qualified  brokers,  and the ability to secure mortgage  financing sources and to negotiate a competitive  arrangement.
The Company intends to periodically review its investment in GlobalStake.com for impairment.

To date Teknowledge has provided:  (1)  approximately  $1,206,000  (including  approximately  $72,000 during 2001 as described
below and $923,000 in 2000) in cumulative seed cash and services;  (2) the proprietary  information and technology developed in support
of the  GlobalStake.com  business  plan;  and (4)  licenses to practice  Teknowledges  patent  portfolio.  As of December 31, 2001 the
Company has fulfilled its investment  obligation  with  GlobalStake.com  and has no future  obligation.  The  Companys  CEO, Neil
Jacobstein,  represents  Teknowledge in one out of six seats on the Board of Directors of GlobalStake.com.  He owns approximately 7% of
the GlobalStake.com common shares on a diluted basis at December 31, 2001. These are nonvoting shares.

The  Companys  investment  in  GlobalStake.com  during  2001  of  approximately  $72,000  was in  the  form  of  funding
GlobalStake.coms  payroll and operating  expenses.  The  Companys  investment in  GlobalStake.com  during 2000 of  approximately
$923,000  was in the form of funding  GlobalStake.coms  payroll and  operating  expenses  ($572,000)  as well as  consulting  services
rendered by the Company at normal billing rates ($351,000).

Item 13.  Exhibits and Reports on Form 8-K

(a)(1) and (2):  Financial Statements

Reference  is made to the  Index  to  Financial  Statements  preceding  the  consolidated  financial  statements
included in response to Part II, Item 7 of this annual report for a list of all financial statements filed.

(a)(3):   Exhibits

Set forth below is a list of all exhibits filed herewith or incorporated by reference as part of this Annual Report on Form 10-KSB.

25

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|Exhibit No. |  | Description                                                                                                                                                                      | 
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|            |  |                                                                                                                                                                                  | 
|3.1         |  | Amended and Restated Certificate of Incorporation of Teknowledge Corporation (4);                                                                                                | 
|            |  |                                                                                                                                                                                  | 
|3.2         |  | Amended and Restated Bylaws of Teknowledge Corporation (4)                                                                                                                       | 
|            |  |                                                                                                                                                                                  | 
|3.3         |  | Certificate of Designation, Preferences and Rights of the Terms of the Series A Preferred Stock (2)                                                                              | 
|            |  |                                                                                                                                                                                  | 
|4.1         |  | Rights Agreement dated January 29, 1996 between the Company and Registrar and Transfer Company as Rights Agent (2)                                                               | 
|            |  |                                                                                                                                                                                  | 
|10.1        |  | Stock Option Agreement between the Company and Neil Jacobstein, dated November 29, 1993 (5)                                                                                      | 
|            |  |                                                                                                                                                                                  | 
|10.2        |  | Stock Option Agreement between the Company and Neil Jacobstein, dated April 1, 1994 (5)                                                                                          | 
|            |  |                                                                                                                                                                                  | 
|10.3        |  | Change of Control Agreement, dated November 21, 1994, between Teknowledge Corporation and Frederick Hayes-Roth and Neil Jacobstein (1)                                           | 
|            |  |                                                                                                                                                                                  | 
|10.4        |  | Stock Option Agreement between the Company and Neil Jacobstein, dated March 30, 1995 (5)                                                                                         | 
|            |  |                                                                                                                                                                                  | 
|10.5        |  | Teknowledge Corporation 1998 Stock Option Plan (3)                                                                                                                               | 
|            |  |                                                                                                                                                                                  | 
|10.6        |  | Contract Agreement with GlobalStake.com, dated November 22, 1999 (6)                                                                                                             | 
|            |  |                                                                                                                                                                                  | 
|23.1        |  | Consent of Arthur Andersen LLP, independent public accountants                                                                                                                   | 
|            |  |                                                                                                                                                                                  | 
|23.2        |  | Consent of Grant Thornton LLP, independent public accountants                                                                                                                    | 
|            |  |                                                                                                                                                                                  | 
|            |  | References                                                                                                                                                                       | 
|            |  |                                                                                                                                                                                  | 
|(1)         |  | Filed as an Exhibit to the Companys Annual Report on Form 10-KSB, for the fiscal year ended December 31, 1994.                                                                  | 
|            |  |                                                                                                                                                                                  | 
|(2)         |  | Filed as an Exhibit to the Companys Current Report on Form 8-K dated February 12, 1996, related to the adoption of
a 12(g) Shareholder Rights Agreement dated January 29, 1996. | 
|            |  |                                                                                                                                                                                  | 
|(3)         |  | Filed as an Exhibit to the Companys Quarterly Report on Form 10-QSB, for the quarter ended September 30, 1998.                                                                  | 
|            |  |                                                                                                                                                                                  | 
|(4)         |  | Filed as an Exhibit to the Companys Annual Report on Form 10-KSB, for the fiscal year ended December 31, 1998.                                                                  | 
|            |  |                                                                                                                                                                                  | 
|(5)         |  | Filed as an Exhibit to the Companys Quarterly Report on Form 10-QSB, for the quarter ended June 30, 1999.                                                                       | 
|            |  |                                                                                                                                                                                  | 
|(6)         |  | Filed as an Exhibit to the Companys Annual Report on Form 10-KSB, for the fiscal year ended December 31, 1999.                                                                  | 

26

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(b)         Reports on Form 8-K

None

(c)         Exhibits

Reference  is  made  to the  response  to  Item  13(a)(3)  above  for a list of all  exhibits  filed  herewith  or
incorporated  by  reference  as part of this Annual  Report on Form  10-KSB.  Reference  is also made to the Exhibit  Index
forming part of this Annual Report on Form 10-KSB.

Reference is made to the response to Item 13(a)(1) and (2) above with regard to the financial  statement schedules
filed as part of this Annual Report on Form 10-KSB.

For the purposes of complying with the amendments to the rules  governing Form S-8 (effective July 13, 1990) under
the  Securities  Act of 1933,  the  undersigned  registrant  hereby  undertakes  as  follows,  which  undertaking  shall be
incorporated  by reference  into  registrants  Registration  Statements  on Form S-8 Nos.  33-27291,  33-77874,  33-78984,
33-82720, 333-00261, 333-67623 and 333-44334.

Insofar  as  indemnification  for  liabilities  arising  under  the  Securities  Act of 1933 may be  permitted  to
directors,  officers and controlling  persons of the registrant  pursuant to the foregoing  provisions,  or otherwise,  the
registrant has been advised that in the opinion of the Securities and Exchange  Commission such  indemnification is against
public policy as expressed in the Securities Act of 1933 and is,  therefore,  unenforceable.  In the event that a claim for
indemnification  against  such  liabilities  (other than the payment by the  registrant  of expenses  incurred or paid by a
director,  officer or controlling person of the registrant in the successful defense of any action,  suit or proceeding) is
asserted  by such  director,  officer or  controlling  person in  connection  with the  securities  being  registered,  the
registrant  will,  unless in the opinion of its counsel the matter has been settled by controlling  precedent,  submit to a
court of appropriate  jurisdiction  the question whether such  indemnification  by it is against public policy as expressed
in the Act and will be governed by the final adjudication of such issue.

27

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SIGNATURES

In accordance with the requirements of Section 13 or 15(d) 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.

|                      | Teknowledge Corporation   
|--------------------- | --------------------------
|                      |                           
|Date:  April 30, 2002 | By: /s/ Neil A. Jacobstein
|                      | Neil A. Jacobstein        
|                      | Chairman of the           
|                      | Board of Directors        

Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,  this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.

|Name                           |  | Capacity                                     |  | Date           | 
|------------------------------ |  | -------------------------------------------- |  | -------------- | 
|                               |  |                                              |  |                | 
|/s/ Neil A. Jacobstein         |  | Chairman of the Board of Directors           |  | April 30, 2002 | 
|Neil A. Jacobstein             |  | and Chief Executive Officer                  |  |                | 
|                               |  | (Principal Executive Officer)                |  |                | 
|                               |  |                                              |  |                | 
|/s/ Dennis A. Bugbee           |  | Vice President Finance,                      |  | April 30, 2002 | 
|Dennis A. Bugbee               |  | Chief Financial Officer                      |  |                | 
|                               |  | (Principal Financial and Accounting Officer) |  |                | 
|                               |  |                                              |  |                | 
|/s/ Benedict OMahoney         |  | Director, Vice President,                    |  | April 30, 2002 | 
|Benedict OMahoney             |  | Administration and Legal Affairs             |  |                | 
|                               |  |                                              |  |                | 
|/s/ Lawrence Druffel           |  | Director                                     |  | April 30, 2002 | 
|Lawrence Druffel               |  |                                              |  |                | 
|                               |  |                                              |  |                | 
|/s/ Ivan Lustig                |  | Director                                     |  | April 30, 2002 | 
|Ivan Lustig                    |  |                                              |  |                | 
|                               |  |                                              |  |                | 
|/s/ General Robert T. Marsh    |  | Director                                     |  | April 30, 2002 | 
|General Robert T. Marsh (Ret.) |  |                                              |  |                | 
|                               |  |                                              |  |                | 
|/s/ James C. Workman           |  | Director                                     |  | April 30, 2002 | 
|James C. Workman               |  |                                              |  |                | 

28

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ANNUAL REPORT ON FORM 10-KSB

                                        ITEM 7, ITEM 13(a)(1) and (2), and (c)

                                               LIST OF FINANCIAL STATEMENTS

                                                     CERTAIN EXHIBITS

                                       FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001
                                       AND FOR EACH OF THE TWO YEARS ENDED DECEMBER 31, 2001

                                                  TEKNOWLEDGE CORPORATION

                                                   PALO ALTO, CALIFORNIA

29

---

TEKNOWLEDGE CORPORATION

                                            FORM 10-KSB - ITEM 13(a)(1) and (2)

                                         LIST OF CONSOLIDATED FINANCIAL STATEMENTS

The following consolidated financial statements of Teknowledge Corporation are included in Item 7:

|                                                                                    | Page   
|----------------------------------------------------------------------------------- | -------
|                                                                                    |        
|Reports of Independent Public Accountants                                           | 3132  
|                                                                                    |        
|Consolidated Balance Sheet - December 31, 2001                                      | 33     
|                                                                                    |        
|Consolidated Statements of Operations and Comprehensive Income                     |        
|Years ended December 31, 2001 and 2000                                              | 34     
|                                                                                    |        
|Consolidated Statements of Stockholders Equity  Two years ended December 31, 2001 | 35     
|                                                                                    |        
|Consolidated Statements of Cash Flows  Years ended December 31, 2001 and 2000      | 36     
|                                                                                    |        
|Notes to Consolidated Financial Statements                                          | 37  48

30

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Report of Independent Certified Public Accountants

To the Board of Directors and Shareholders of Teknowledge Corporation:

We have audited the accompanying consolidated balance sheet of Teknowledge Corporation (a Delaware Corporation) and subsidiary as of
December 31, 2001, and the related consolidated statements of operations and comprehensive income, stockholders equity and cash
flows for the year then ended. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Teknowledge Corporation and its subsidiary as of December 31, 2001, and the consolidated results of their operations and
their consolidated cash flows for the year then ended in conformity with accounting principles generally accepted
in the United States of America.

/s/Grant Thornton LLP
Grant Thornton LLP

San Jose, California
March 19, 2002

31

---

Report of Independent Public Accountants

To Teknowledge Corporation:

We have audited the accompanying consolidated statement of operations and comprehensive income, stockholders equity and cash flows
of Teknowledge Corporation (A Delaware corporation) and subsidiary for the year then ended December 31, 2000. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of
operations and cash flows of Teknowledge Corporation and subsidiary for the year ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.

/s/Arthur Andersen LLP
Arthur Andersen LLP

San Jose, California
March 29, 2001

32

---

TEKNOWLEDGE CORPORATION
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2001

|ASSETS                                                                                |                      |  
|------------------------------------------------------------------------------------- | -------------------- | -
|                                                                                      |                      |  
|Current assets:                                                                       |                      |  
|Cash and cash equivalents                                                             | $         
1,570,783 |  
|Receivables:                                                                          |                      |  
|Billed, net of allowance of $113,215                                                  | 3,029,170            |  
|Unbilled                                                                              | 576,709              |  
|                                                                                      |                      |  
|Total receivables                                                                     | 3,605,879            |  
|Deferred income taxes                                                                 | 396,365              |  
|Deposits and prepaid expenses                                                         | 247,809              |  
|Total current assets                                                                  | 5,820,836            |  
|                                                                                      |                      |  
|Capitalized software development costs, net of accumulated amortization of $1,271,662 | 4,008,673            |  
|                                                                                      |                      |  
|Fixed assets, at cost                                                                 |                      |  
|Computer and other equipment                                                          | 3,500,926            |  
|Furniture and fixtures                                                                | 122,834              |  
|Leasehold improvements                                                                | 819,904              |  
|                                                                                      |                      |  
|                                                                                      | 4,443,664            |  
|Less: Accumulated depreciation and amortization                                       | (4,055,859           | )
|                                                                                      |                      |  
|                                                                                      | 387,805              |  
|Investment in Globalstake                                                             | 1,206,293            |  
|Deferred income taxes                                                                 | 371,635              |  
|                                                                                      |                      |  
|                                                                                      |                      |  
|Total assets                                                                          | $        11,795,242  |  
|                                                                                      |                      |  
|                                                                                      |                      |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                  |                      |  
|                                                                                      |                      |  
|Current liabilities:                                                                  |                      |  
|Accounts payable                                                                      | $         2,171,312  |  
|Line of Credit                                                                        | 1,540,137            |  
|Payroll and related liabilities                                                       | 730,472              |  
|Other accrued liabilities                                                             | 543,643              |  
|                                                                                      |                      |  
|Total current liabilities                                                             | 4,985,536            |  
|                                                                                      |                      |  
|Commitments and contingencies                                                         |                     |  
|                                                                                      |                      |  
|Stockholders equity                                                                  |                      |  
|Preferred stock, $.01 par value, authorized 2,500,000 shares                          |                      |  
|Series A Convertible Preferred Stock, none issued                                     |                     |  
|Common stock, $.01 par value, authorized 25,000,000 shares,                           |                      |  
|5,697,168 shares issued and outstanding                                               | 56,972               |  
|Additional paid-in capital                                                            | 1,784,675            |  
|Retained earnings since January 1, 1993                                               |                      |  
|(following quasi-reorganization)                                                      | 4,968,059            |  
|                                                                                      |                      |  
|Total stockholders equity                                                            | 6,809,706            |  
|                                                                                      |                      |  
|Total liabilities and stockholders equity                                            | $        11,795,242  |  
|                                                                                      |                      |  

The accompanying notes are an integral part of this consolidated financial statement.

33

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TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME

|Years Ended December 31,                       | 2001                     |   | 2000                     | 
|---------------------------------------------- | ------------------------ | - | ------------------------ | 
|                                               |                          |   |                          | 
|Revenues                                       | $        17,263,958      |   | $        14,376,024      | 
|Cost of revenue                                | 12,307,559               |   | 9,788,202                | 
|                                               |                          |   |                          | 
|Gross profit                                   | 4,956,399                |   | 4,587,822                | 
|Operating expenses:                            |                          |   |                          | 
|General and administrative                     | 2,970,549                |   | 3,039,488                | 
|Sales and marketing                            | 767,226                  |   | 474,780                  | 
|Research and development                       | 490,101                  |   | 557,850                  | 
|                                               |                          |   |                          | 
|Total operating expenses                       | 4,227,876                |   | 4,072,118                | 
|                                               |                          |   |                          | 
|Operating income                               | 728,523                  |   | 515,704                  | 
|Other income (expense), net                    | (24,803                  | ) | 8,313                    | 
|                                               |                          |   |                          | 
|Income before provision for income taxes       | 703,720                  |   | 524,017                  | 
|Provision for income taxes                     |                         |   | 132,000                  | 
|                                               |                          |   |                          | 
|Net income and comprehensive income            | $            
703,720    |   | $            
392,017    | 
|                                               |                          |   |                          | 
|                                               |                          |   |                          | 
|Net income per share:                          |                          |   |                          | 
|Basic                                          | $                  
0.12 |   | $                  
0.07 | 
|                                               |                          |   |                          | 
|Diluted                                        | $                  
0.12 |   | $                  
0.07 | 
|                                               |                          |   |                          | 
|                                               |                          |   |                          | 
|Shares used in computing net income per share: |                          |   |                          | 
|Basic                                          | 5,693,256                |   | 5,477,651                | 
|                                               |                          |   |                          | 
|Diluted                                        | 5,931,716                |   | 5,958,303                | 
|                                               |                          |   |                          | 

The accompanying notes are an integral part of this consolidated financial statement.

34

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TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
TWO YEARS ENDED DECEMBER 31, 2001

|                           |  | Common Stock |  | Additional   |  |            |   |            |  |                   |  
|-------------------------- |  | ------------ |  | ------------ |  | ---------- | - | ---------- |  | ----------------- | -
|                           |  | Shares       |  | Par          |  | Paid-in    |   | Retained   |  | Treasury          |  
|                           |  | Issued       |  | Value        |  | Capital    |   | Earnings   |  | Stock             |  
|                           |  |              |  |              |  |            |   |            |  |                   |  
|Balance, January 1, 2000   |  | 5,302,540    |  | $     53,025 |  | $1,795,402 |   | $3,872,322 |  | $   (181,097      | )
|                           |  |              |  |              |  |            |   |            |  |                   |  
|Exercise of stock options  |  | 388,295      |  | 3,883        |  | (23,354    | ) |           |  | 181,097           |  
|                           |  |              |  |              |  |            |   |            |  |                   |  
|Net income                 |  |             |  |             |  |           |   | 392,017    |  |                  |  
|                           |  |              |  |              |  |            |   |            |  |                   |  
|                           |  |              |  |              |  |            |   |            |  |                   |  
|Balance, December 31, 2000 |  | 5,690,835    |  | 56,908       |  | 1,772,048  |   | 4,264,339  |  |                  |  
|                           |  |              |  |              |  |            |   |            |  |                   |  
|Exercise of stock options  |  | 6,333        |  | 64           |  | 12,627     |   |           |  |                  |  
|                           |  |              |  |              |  |            |   |            |  |                   |  
|Net income                 |  |             |  |             |  |           |   | 703,720    |  |                  |  
|                           |  |              |  |              |  |            |   |            |  |                   |  
|                           |  |              |  |              |  |            |   |            |  |                   |  
|Balance, December 31, 2001 |  | 5,697,168    |  | $     56,972 |  | $1,784,675 |   | $4,968,059 |  | $              
 |  
|                           |  |              |  |              |  |            |   |            |  |                   |  

The accompanying notes are an integral part of this consolidated financial statement.

35

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TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

|Years Ended December 31,                             | 2001                |   | 2000             |  
|---------------------------------------------------- | ------------------- | - | ---------------- | -
|                                                     |                     |   |                  |  
|Cash flows from operating activities:                |                     |   |                  |  
|Net income                                           | $      703,720      |   | $      392,017   |  
|Adjustments to reconcile net income to net cash      |                     |   |                  |  
|provided by operating activities:                    |                     |   |                  |  
|Depreciation and Amortization                        | 1,111,904           |   | 540,145          |  
|Provision (benefit) for doubtful accounts            | (401,785            | ) | 505,000          |  
|Changes in assets and liabilities:                   |                     |   |                  |  
|Receivables                                          | 1,556,624           |   | (2,002,576       | )
|Deposits and prepaid expenses                        | (209,436            | ) | 37,319           |  
|Other assets                                         | 24,541              |   | 4,855            |  
|Deferred income taxes                                |                    |   | 132,000          |  
|Accounts payable                                     | 73,217              |   | 1,350,691        |  
|Accrued liabilities                                  | 262,665             |   | 130,511          |  
|                                                     |                     |   |                  |  
|Net cash provided by operating activities            | 3,121,450           |   | 1,089,962        |  
|                                                     |                     |   |                  |  
|Cash flow from investing activities                  |                     |   |                  |  
|Investment in GlobalStake                            | (71,986             | ) | (922,541         | )
|Capitalization of software development costs         | (2,602,442          | ) | (2,213,665       | )
|Purchase of fixed assets                             | (128,119            | ) | (367,723         | )
|                                                     |                     |   |                  |  
|Net cash used by investing activities                | (2,802,547          | ) | (3,503,929       | )
|                                                     |                     |   |                  |  
|Cash flow from financing activities                  |                     |   |                  |  
|Proceeds from the issuance of common stock           | 12,691              |   | 161,626          |  
|Net borrowings from line of credit                   | 190,137             |   | 1,350,000        |  
|                                                     |                     |   |                  |  
|Net cash provided by financing activities            | 202,828             |   | 1,511,626        |  
|                                                     |                     |   |                  |  
|Net increase (decrease) in cash and cash equivalents | 521,731             |   | (902,341         | )
|Cash and cash equivalents at the beginning of period | 1,049,052           |   | 1,951,393        |  
|                                                     |                     |   |                  |  
|Cash and cash equivalents at the end of period       | $    1,570,783      |   | $    1,049,052   |  
|                                                     |                     |   |                  |  
|                                                     |                     |   |                  |  
|Supplemental disclosure of cash flow information:    |                     |   |                  |  
|Cash paid for income taxes                           | $                
 |   | $         38,786 |  
|                                                     |                     |   |                  |  
|Cash for interest expense                            | $       108,053     |   | $         56,501 |  
|                                                     |                     |   |                  |  

The accompanying notes are an integral part of this consolidated financial statement.

36

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TEKNOWLEDGE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001

1.           History and Business

Teknowledge Corporation (the Company) was incorporated on July 8, 1981 under the laws of the State of
         Delaware and is the surviving corporation of the merger of American Cimflex Corporation and Teknowledge Inc.,
         which was consummated in 1989. In December 1992, the Board of Directors approved a quasi-reorganization, which
         had the effect of eliminating the accumulated deficit at December 31, 1992 of approximately $58 million by
         reducing paid-in-capital.

The Company sells software product and service solutions, and is increasingly focused on the financial
         service industry. It also provides contract research and development services, primarily to the U.S. Government.
         Teknowledge designs intelligent transactions that deliver flexible, secure, and knowledge-based interactions with
         customers. These transactions enable organizations to codify their knowledge, use it to interpret data, and
         provide value-added services to end-users.

As the Company migrates its business from primarily government sponsored contracts to a commercial
         customer base,  the Company is subject to risks inherent to companies at a similar stage of development. These
         include successful introduction and market acceptance of the software products and related services; sufficient
         resources to develop enhancements to the existing products and introduction of follow-on products; competition
         from larger companies; the ability to retain and attract employees, and sufficient working capital and cash flows
         to support the growth of the business. The Companys software products and solutions are targeted to the account
         aggregation market where customers are mainly financial institutions.

2.           Summary of Significant Accounting Policies

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
         requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
         and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
         amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of Teknowledge Corporation and its wholly
         owned subsidiary, Teknowledge Federal Systems, Inc. All significant intercompany transactions and balances have
         been eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid investments, with original maturity dates of less than 90 days,
         as cash equivalents. As of December 31, 2001, the Companys funds were invested almost entirely in money market
         instruments at various institutions.

37

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Accounts Receivable and Unbilled Receivables

Accounts receivable and unbilled receivables as of December 31, 2001 consists of the following:

|Commercial customers:           |              |  
|------------------------------- | ------------ | -
|Billed receivables              | $  2,060,338 |  
|Unbilled receivables            | 273,603      |  
|                                |              |  
|                                | 2,333,941    |  
|                                |              |  
|U.S. Government:                |              |  
|Billed receivables              | 1,082,047    |  
|Unbilled receivables            | 303,116      |  
|                                |              |  
|                                | 1,385,153    |  
|                                |              |  
|                                | 3,719,094    |  
|Allowance for doubtful accounts | (113,215     | )
|                                |              |  
|Total receivables, net          | $  3,605,879 |  
|                                |              |  

Concentration of Credit and Customer Risk

In 2001 and 2000,  approximately 58% and 64% of the Companys total revenues,  respectively,  were recorded in connection with
         U.S.  Government  contracts,  principally  of the  cost-plus-fixed-fee  type.  In 2001,  54% of total  revenues  were from two
         government  departments:  27% from the  Department of the Air Force and 27% from the  Department of the Navy. In 2000, 25% and
         33% of total revenues were from the Department of the Air Force and the Department of the Navy, respectively.

The Company  performs  periodic  credit  evaluations  of its  commercial  customers  and  generally  does not require
         collateral.  The Company has not  experienced  a credit loss from a government  customer nor does it  anticipate  such losses.
         During 2001 one reseller,  Financial  Fusion,  accounted for 31% of Financial  Systems  revenues.  In 2000,  Financial  Fusion
         accounted for 29%, while NCR accounted for 11%.

Capitalized Software Development Costs

Teknowledge  capitalizes  software  development  costs  starting  from the point  that  technological  feasibility  is
         determined and continuing  until general  availability of the product.  During 2001 and 2000,  software  development  costs of
         $2,602,442 and $2,213,665 were capitalized respectively. Amortization costs were $885,430 in 2001 and $281,747 in 2000. The Companys policy is to amortize
         capitalized software development costs by the greater of (a) the ratio of current gross revenues for a product to
         the total of current and anticipated future gross revenues for that product, or (b) the straight-line method over
         the estimated economic life of the product, which is estimated at three years.

Fixed Assets

Equipment is depreciated using the straight-line method over their estimated useful lives ranging from
         three to five years. Maintenance and repairs are charged to expense as incurred. Leasehold improvements are
         amortized over the shorter of the useful life or the remaining lease term. Depreciation costs were $226,474 in
         2001 and $258,398 in 2000.

Investment in GlobalStake.com

At December 31, 2001 the Company owned 19.9% of GlobalStake.com and accounts for the investment under
         the cost method (see Note 12).

38

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Long-lived Assets

The company reviews, on a periodic basis, the carrying amount of long-lived assets for impairment
         whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
         For all fiscal years presented, the Company determined that no material impairment loss had occurred.

Treasury Stock

The Company uses the cost method of accounting for treasury stock. Under the cost method the Company
         records the total cost of the treasury stock as a reduction to its shareholders equity. Additionally, stock held
         in treasury is not considered outstanding for the purposes of computing earnings per share.

On December 16, 1998, the Company adopted a program to repurchase up to 300,000 shares of the Companys
         common stock in the open or private markets during the twelve-month period ending December 15, 1999 at prevailing
         prices. Repurchases were made periodically at managements discretion using the Companys own cash reserves.
         Shares repurchased may be reissued to employees pursuant to the Companys stock option plans, or for other
         corporate purposes. During the year ended December 31, 1999, the company repurchased 70,270 shares for $291,494,
         out of which 25,200 shares were reissued in 1999 and 45,070 shares in 2000 for $110,396 and $39,275,
         respectively. All reissuances were pursuant to the Companys Stock Option Plan. There were no shares held in
         treasury as of December 31, 2001 and 2000.

Revenue Recognition

The Company derives revenue from research and development contracts (Contract R&D) with the U.S.
         Government and from sales of software products and services for financial systems, patent and technology
         licensing and commercial business applications of government Security Systems to commercial customers.

(a)  Contract Revenue

The Company  principally  uses the  percentage-of-completion  method of  accounting  for  contract  revenues for both
         government  and commercial  projects.  The  percentage-of-completion  method is based on total costs incurred to date compared
         with  estimated  total costs upon  completion of contracts.  The Company  charges all losses on contracts to operations in the
         period when the loss is known.  For  contracts  that do not meet the criteria  for the  percentage-of-completion  method,  the
         Company  recognizes  contract revenue on a milestone  achievement basis. 15% of the fee, which is approximately one percent of
         the total contract award,  is retained and may be billed after the final indirect rates are submitted to the  government.  The
         final  indirect  rates are not submitted to the  government  until they have been  reviewed and approved by the Defense Contract
         Audit Agency.  Revenue on the retained fee is not  recognized  until billed to the  government.  As of December 31, 2001,  the
         Company calculated that it had approximately  $293,000 of retained fees on its completed  contracts to be recognized in future
         periods.  The Company has not received  final  overhead rate  approval from government agencies for costs  incurred the fiscal years 1998 through 2001.
         Accordingly,  the Company has recorded a rate adjustment  reserve related to potential audit agency adjustments to the Companys
         indirect overhead rates.

(b)  Software License and Services

Revenue is recognized  in accordance  with SOP 97-2 and  accordingly  the Company  recognizes  software  license  revenue when
         persuasive  evidence of an arrangement exists, the product has been delivered,  the fee is fixed and determinable,  collection
         of the resulting  receivable is probable and vender  specific  objective  evidence  (VSOE)  exists to allocate the
         total fee among all delivered and  undelivered  elements in the  arrangement.  The Company  delivers the software to customers
         electronically  or on a CD-Rom and assesses  whether the fee is fixed and  determinable  based on the payment terms associated
         with the  transaction.  The Company also assesses  collectibility  based on the  customers  past payment history and its
         current  credit-worthiness.  The Company defines VSOE fair value as the price charged when the same element is sold separately
         and if not sold  separately  the price to be charged  upon  introduction  as  established  by  Management  having the relevant
         authority.  Revenue earned under software  license  agreements for 2001 and 2000 was $1,714,325 and $1,046,145,  respectively.
         Revenue from  post-contract  customer  support and  maintenance  contracts is recognized  ratably over the period the customer
         support services are provided, and software consulting services revenue is recognized as services are performed on a time and
         material basis.

38

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Earnings Per Share

Basic  earnings  per share is  calculated  by dividing  net income by the  weighted  average  shares of common stock
         outstanding  during the period.  Diluted  earnings per share is  calculated  by dividing  net income by the  weighted  average
         shares of outstanding common stock and potentially  dilutive  securities outstanding during the period.  Potentially  dilutive  securities
         included in the diluted calculation consist of shares issuable upon the exercise of outstanding common stock options.

A summary of the earnings per share calculation for the years ended December 31, 2001 and
         2000 is as follows (in thousands, except per share amounts):

|                            |                                        | 2001          |  | 2000          | 
|--------------------------- | -------------------------------------- | ------------- |  | ------------- | 
|Basic earnings per share:   |                                        |               |  |              
|                            | Net income                             | $         704 |  | $         392 | 
|                            |                                        |               |  |               | 
|                            | Weighted average common shares         | 5,693         |  | 5,478         | 
|                            |                                        |               |  |               | 
|                            | Basic earnings per share               | $        0.12 |  | $        0.07 | 
|                            |                                        |               |  |               | 
|                            |                                        |               |  |               | 
|Diluted earnings per share: |                                        |               |  |              
|                            | Net income                             | $         704 |  | $         392 | 
|                            |                                        |               |  |               | 
|                            | Weighted average common shares         | 5,693         |  | 5,478         | 
|                            | Options                                | 239           |  | 480           | 
|                            |                                        |               |  |               | 
|                            | Diluted weighted average common shares | 5,932         |  | 5,958         | 
|                            |                                        |               |  |               | 
|                            | Diluted earnings per share             | $        0.12 |  | $        0.07 | 
|                            |                                        |               |  |               | 

A total of 644,037 options in 2001 and 336,500 options in 2000 were excluded from the computation of diluted
         earnings per share because the options exercise price was greater than the average market price of the common shares.

Accounting for Stock-Based Compensation

The Company has adopted the  disclosure  provisions of Statement of Financial  Accounting  Standards  (SFAS) No. 123,
         Accounting  for  Stock-Based  Compensation.  The Company  continues  to apply  Accounting  Principles  Board (APB)
         Opinion  No.  25 and  related  interpretations  in  accounting  for the  options  granted  to  employees  and  directors.  The
         Companys  option  grants  provide  that option exercise prices will not be less than fair market value per share on the date the
         option is granted.

Financial Instuments

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of trade receivables. The amounts
reported for cash, receivables, accounts payable, line of credit and accrued liabilities approximate the fair value due to their short maturities.
The fair value of the Companys investment in GlobalStake.com cannot be readily determined, because of a lack of a ready market.

Recently Issued Accounting Pronouncements

In July 2001, the FASB issued SFAS No.141,  Business  Combinations,  and SFAS No.142,  Goodwill and
         Intangible  Assets.  SFAS No.141 is effective for all business combinations  completed after June 30, 2001. SFAS No. 142
         is effective for fiscal years  beginning  after December 15, 2001;  however,  certain  provisions of this  Statement  apply to
         goodwill and other  intangible  assets acquired  between July 1, 2001 and the effective date of SFAS No. 142. Major

40

---

provisions of these Statements and their effective dates for the Company are as follows:

| |  | All business combinations initiated after June 30, 2001 must use the purchase method of accounting. The pooling of interest
              method of accounting is prohibited except for           
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  | transactions initiated before July 1, 2001.                                                                                                                                                       
| |  | Intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from
              contractual or other legal rights or are separable from the       
|  |  | acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability.                                            
| |  | Goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective
              January 1, 2002, all previously recognized goodwill and
|  |  | intangible assets with indefinite lives will no longer be
              subject to amortization.                                                                                                  
| |  | Effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and
              whenever there is an impairment indicator.               
| |  | All acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting.                                                                               

Management has reviewed the provisions of these  Statements  and has assessed that these  Statements  will not have a
         material impact on the Companys financial position or results of operations.

In August 2001,  the FASB issued  Statement of Financial  Accounting  Standards No. 143,  Accounting  for Asset
         Retirement  Obligations,  (SFAS No.  143).  SFAS No. 143 addresses  accounting and reporting for obligations
         associated  with the  retirement of tangible  long-lived  assets and the associated  asset  retirement  costs.  This Statement
         requires  that the fair value of a liability  for an asset  retirement  obligation  be recognized in the period in which it is
         incurred if a reasonable  estimate of fair value can be made. The associated  asset  retirement  costs are capitalized as part
         of the carrying amount of the long-lived  asset.  The liability is accreted to its present value each period while the cost is
         depreciated over its useful life. SFAS No. 143 is effective for financial  statements  issued for fiscal years beginning after
         June 15, 2002.  The Company  believes the adoption of SFAS No. 143 in 2002 will not have a significant  adverse  effect on its
         financial condition or results of operation.

In October  2001,  the FASB issued  Statement of Financial  Accounting  Standards No. 144,  Accounting  for the
         Impairment or Disposal of Long-Lived  Assets,    (SFAS  No.144).  SFAS No.144,  which replaces SFAS No, 121,
         Accounting  for the  Impairment  of  Long-Lived  Assets and for  Long-Lived  Assets to be  Disposed  Of,  requires
         long-lived  assets to be  measured  at the lower of  carrying  amount or fair value  less the cost to sell.  SFAS No. 144 also
         broadens  disposal  transaction  reporting  related to  discontinued  operations.  SFAS No.  144 is  effective  for  financial
         statements  issued for fiscal years  beginning  after December 15, 2001. The Company  believes the adoption of SFAS No. 144 in
         2002 will not have a significant adverse effect on its financial condition or results of operation.

3.           Other Accrued Liabilities

Other accrued liabilities as of December 31, 2001 consist of the following:

|Provision for indirect rate adjustments and unallowable costs | $   350,000 | 
|------------------------------------------------------------- | ----------- | 
|Deferred Revenue                                              | 81,197      | 
|Accrued professional fees                                     | 73,429      | 
|Other                                                         | 38,989      | 
|                                                              |             | 
|                                                              | $   543,615 | 
|                                                              |             | 

4.           Lease Commitments

The Company leases facilities and equipment under operating leases. As of December 31, 2001, the Company had facility leases in the following
         locations:

41

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|Location                   |  | Expires          
|-------------------------- |  | -----------------
|                           |  |                  
|Marina Del Rey, California |  | December 31, 2002
|Palo Alto, California      |  | April 4, 2002    
|Cleveland, Ohio            |  | October 31, 2005 
|Fairfax, Virginia          |  | June 30, 2002    

The remaining obligations under these leases, net of expected sub-lease income, are as follows:

|Year Ending  |               | 
|------------ | ------------- | 
|December 31, |               | 
|             |               | 
|2002         | $     200,000 | 
|2003         | 38,000        | 
|2004         | 39,000        | 
|2005         | 33,000        | 
|             |               | 
|             | $     311,000 | 
|             |               | 

Rent expense for the years ended December 31, 2001 and 2000 totaled approximately, $834,000 and
 $699,000, respectively, net of sublease income.

5.           Line of Credit

All of the assets of the Company  collateralize  borrowings under the line of credit.  The outstanding balance bears a variable per annum rate of interest
         equal to the sum of the One-Month LIBOR rate (1.87% at December 31, 2001) plus 2.4%. Under the terms of the  arrangement,  the
         Company  may borrow up to 80% of the  eligible  receivable  base,  to a maximum of  $3,000,000.  Eligible  receivable  base is
         defined as 80% of  commercial  receivables  outstanding  for 90 days or less plus the lower of 50% of  government  receivables
         outstanding for 90 days or less or $750,000. The line of credit expires on June 30, 2002. As of December 31, 2001, the available
         commitment was $1,874,279 and the outstanding balance was $1,540,137. The line of credit agreement contains certain financial covenants
         determined on a quarterly basis.

6.           Income Taxes

The Company  accounts for income taxes using an asset and  liability  approach for  computing  deferred  income taxes
         based on enacted tax laws and rates  applicable  to the period in which the  differences  between the tax basis and  financial
         reporting basis of assets and liabilities reverse.

42

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The provision for income taxes differs from the statutory U.S. Federal income tax rate due to the
         following:

|                                                    | 2001  |   | 2001  |  
|--------------------------------------------------- | ----- | - | ----- | -
|                                                    |       |   |       |  
|Provision at U.S. statutory rate                    | 34.0  | % | 34.0  | %
|State income tax, net of federal tax effect         | 5.2   |   | 5.2   |  
|Net operating losses not allowed at the state level | 6.9   |   | 1.6   |  
|Other                                               | 0.8   |   | (0.6  | )
|Change in valuation allowance                       | (20.9 | ) | 7.0   |  
|Benefit of tax credit carryforwards                 | (26.0 | ) | (22.1 | )
|                                                    |       |   |       |  
|Effective tax rate                                  | 0.0   | % | 25.1  | %
|                                                    |       |   |       |  

The components of the net deferred income tax asset as of December 31, 2001 are as follows:

|Net operating loss carryforwards | $20,206,738   |  
|-------------------------------- | ------------- | -
|Tax credit carryforwards         | 1,353,841     |  
|Cumulative temporary differences | (1,035,601    | )
|                                 |               |  
|                                 | 20,524,978    |  
|Valuation allowance              | (19,756,978   | )
|                                 |               |  
|Net deferred tax asset           | $     768,000 |  
|                                 |               |  

The valuation allowance increased from $23,627,517 as of December 31, 1999 to $23,859,912 as of December 31, 2000
and decreased to $19,756,978 as of December 31, 2001. The Company believes sufficient uncertainty exists regarding the realizability of its net deferred income tax assets because the net
operating loss and tax credit carryforwards may expire before they can be utilized and accordingly, a valuation allowance has been
established. The realization of the net deferred income tax asset is also dependent on generating sufficient taxable income in future
years. Although realization is not assured, management believes it is more likely than not that the recorded net deferred income tax
asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income are reduced.

At December 31, 2001, the Company had net operating loss  carryforwards  of  approximately  $57 million  available to
         offset future Federal taxable income. These loss carryforwards expire through the year 2021 as follows:

|2002      | $   5,000,000 | 
|--------- | ------------- | 
|2003      | 10,000,000    | 
|2004      | 9,000,000     | 
|2005      | 11,000,000    | 
|2006      | 7,000,000     | 
|Remainder | 15,000,000    | 
|          |               | 
|          | $ 57,000,000  | 
|          |               | 

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In 2001, $6 million of net operating  losses expired.  The availability and timing of the amount
         of prior losses to be used to offset  taxable income in future years may be limited due to various tax law provisions,  including any
         change in ownership interest of the Company resulting from significant stock transactions.

7.           401(k) Plan

The Company has a 401(k) plan and participants  in the plan may make a  contribution  as a percentage of their gross
         wages subject to the applicable  government  limits.  The Company matches 5% of  contributions  on eligible wages.

The Company
         matching  contribution  vests at 20% per year over a five-year  period.  The Company  contributed  approximately  $261,000 and
         $210,000 to the plan during 2001 and 2000, respectively.

8.           Stockholders' Equity

Preferred Stock

On January 29, 1996, the Companys Board of Directors approved a Rights Agreement. The
         adoption of the Rights Agreement is intended as a means to guard against takeover tactics designed to gain control of the
         Company without paying all stockholders full and fair value.

Under the Rights Agreement, stockholders will receive five Rights to purchase one one-hundredth of a share of
         Series A Preferred Stock for each outstanding share of the Companys Common Stock of record held at the close
         of business on February 12, 1996.

The Rights, which will initially trade with the Common Stock, become exercisable to purchase one
         one-hundredth of a share of Series A Preferred Stock, at $2.00 per Right, when a third party acquires 15 percent
         or more of Common Stock or announces a tender offer which could result in such person owning 15 percent or more
         of Common Stock. Each one one-hundredth of a share of Series A Preferred Stock has terms designed to make it
         substantially the economic equivalent of one share of Common Stock. Prior to a third party acquiring 15 percent,
         the Rights can be redeemed for $.001 each by action of the Board. Under certain circumstances, if a third party
         acquires 15 percent or more of Common Stock, the Rights permit the holders to purchase Teknowledge Common Stock
         having a market value of twice the exercise price of the Rights, in lieu of the Preferred Stock. In addition, in
         the event of certain business combinations, the Rights permit purchase of the Common Stock of an acquirer at a
         50 percent discount. In either case, Rights held by the acquirer will become null and void.

Stock-Based Compensation Plans

The Company has two stock option plans accounted for under APB Opinion 25. The stock option plan for employees is called the Teknowledge
         Corporation 1998 Stock Option Plan (the 1998 Plan) and the stock option plan for Directors called the
         Teknowledge Plan for Non-Employee Directors (the Directors Plan).

The aggregate number of shares issued under the 1998 Plan may not exceed 2,345,101 shares of Common Stock and 250,833 shares were
available for future grant as of December 31, 2001. The Board of Directors has granted options to employees that are either incentive
stock options (ISO) or non-statutory stock options (NSO). For ISO, the exercise price of the common stock
options may not be less than the fair market value on the date of grant. For NSO, the exercise price of the common stock may not be
less than 85% of the fair market value of the common stock on the date of grant. Options that have been granted normally vest in
quarterly increments starting the second year of a four-year term and expire ten years after the grant date.

The aggregate number of shares issued under the Directors Plan may not exceed 100,000 shares of Common Stock and 20,000 shares
were available for future grant as of December 31, 2001. Under this plan, non-employee directors are entitled to receive annual
option grants to purchase 3,000 shares of Common Stock on their initial election to the Board and thereafter on the anniversary date
of their election to the Board. Options, which are granted at fair market value, are exercisable one year after the grant date and
expire ten years from the grant date.

As of December 31, 2001, the following number of shares of Common Stock have been reserved for future
         issuance under both Plans:

44

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|Teknowledge Corporation 1998 Stock Option Plan | 1,445,728 | 
|---------------------------------------------- | --------- | 
|Stock Option Plan for Non-Employee Directors   | 87,000    | 
|                                               |           | 
|                                               | 1,532,728 | 
|                                               |           | 

A summary of the status of the Companys stock option plans as of December 31, 2001 and 2000 is
         presented below:

|                            | 2001            |   | 2000            | 
|--------------------------- | --------------- | - | --------------- | 
|                            |                 |   | Weighted        | 
|                            |                 |   | Average         | 
|                            | Options         |   | Ex Price        | 
|                            |                 |   |                 | 
|Oustanding at beg. of year  | 1,223,291       |   | $          3.53 | 
|Granted                     | 97,000          |   | 2.56            | 
|Exercised                   | (6,333          | ) | 2.00            | 
|Forfeited                   | (52,063         | ) | 4.35            | 
|                            |                 |   |                 | 
|Outstanding at end of year  | 1,261,895       |   | $          3.44 | 
|                            |                 |   |                 | 
|Exercisable at end of year  | 592,672         |   | $          3.36 | 
|Weighted average fair value |                 |   |                 | 
|per option granted          | $          2.12 |   |                 | 

The following table summarizes information about stock options outstanding at December 31, 2001:

|              |  | Options Outstanding |  | Options Exercisable | 
|------------- |  | ------------------- |  | ------------------- | 
|              |  |                     |  | Wtd Avg             | 
|Range of      |  |                     |  | Contractual         | 
|Ex Prices     |  |                     |  | Life                | 
|($s)         |  | Options             |  | (Years)             | 
|              |  |                     |  |                     | 
|0.05    1.00 |  | 7,003               |  | 2.6                 | 
|1.01    2.00 |  | 92,000              |  | 7.2                 | 
|2.01    3.00 |  | 460,855             |  | 7.9                 | 
|3.01    4.00 |  | 252,100             |  | 7.8                 | 
|4.01    5.00 |  | 408,500             |  | 8.3                 | 
|5.01  11.25  |  | 41,437              |  | 7.9                 | 
|              |  |                     |  |                     | 
|0.05  11.25  |  | 1,261,895           |  | 7.9                 | 
|              |  |                     |  |                     | 

Had compensation cost for these plans been determined consistent with SFAS No. 123, the Companys net
         income and earnings per share would have been reduced to the following pro forma amounts.

45

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|            |             |   | 2001    |   | 2000     |  
|----------- | ----------- | - | ------- | - | -------- | -
|            |             |   |         |   |          |  
|Net income  | As reported | $ | 703,720 | $ | 392,017  |  
|            | Pro forma   | $ | 165,356 | $ | (149,695 | )
|            |             |   |         |   |          |  
|Diluted EPS | As reported | $ | 0.12    | $ | 0.07     |  
|            | Pro forma   | $ | 0.02    | $ | (0.03    | )

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option
         pricing model with the following weighted-average assumptions used for grants in 2001 and 2000, respectively:
         risk-free interest rates of 4.7% and 6.2%; expected lives of 5.5 years for both periods; expected volatility of
         75% for both periods; and expected dividend yield of 0% for both periods.

9.           Other Income (Expense)

The composition of other income and expense is as follows:

|                 | 2001       |   | 2001        |  
|---------------- | ---------- | - | ----------- | -
|                 |            |   |             |  
|Interest income  | $   34,302 |   | $   64,770  |  
|Interest expense | (109,176   | ) | (56,501     | )
|Other            | 50,071     |   | 44          |  
|                 |            |   |             |  
|                 | $  (24,803 | ) | $     8,313 |  
|                 |            |   |             |  

10.           Commitments and Contingencies

Customer Dispute

Teknowledge is currently  involved in a dispute with a customer over a  manufacturing-related  license fee paid prior to 1996.
         The customer has sent the matter to collection.  Teknowledge  disputes the customers  interpretation,  and believes it is not
         consistent  with its contract.  Litigation is possible,  but not  anticipated at this time. The Company has accrued $50,000 as
         of December 31, 2001  related to this  customer  dispute.  The amount  represents  a settlement  offered by the Company to the
         customer, which has yet to be accepted by the customer.

Legal Proceedings

On March 30, 2001, Teknowledge Corporation, SAP America, Inc., and SAP Aktiengesellschaft agreed to a
         full settlement of all outstanding lawsuits. The subjects of the lawsuit were Teknowledges U.S. Patent
         4,591,983, entitled Hierarchical Knowledge System issued May 27, 1986, and U.S. Patent 4,783,752, entitled
         Knowledge Based Processor for Application Programs Using Conventional Data Processing Capabilities issued
         November 8, 1988. As part of the settlement agreement, SAP paid Teknowledge $750,000 for use of the Companys intellectual property
         referenced above. Teknowledge agreed not to commence any patent infringement suits against SAP relating to any of Teknowledges
         patents, and both parties agreed to dismiss their current claims against each other.

46

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The Company was a party to a collection action against fashionmall.com (NASDAQ: FASH) arising from
         fashionmalls failure to pay fees due pursuant to a software services agreement between the parties. The Company
         instituted an arbitration proceeding on March 28, 2000 for breach of contract. In response, fashionmall.com
         cross-claimed for breach of contract, fraudulent misrepresentation, negligent misrepresentation, negligent
         performance of services and breach of good faith and fair dealing. On November 5, 2001, the Company and
         fashionmall.com agreed to a full settlement of all outstanding claims. As part of the settlement, fashionmall.com
         transferred to the Company $165,000 in cash and both parties agreed to dismiss their claims against each other.

11.           Related Party Transactions

In November 1999, Teknowledge agreed to provide $1,200,000 in seed money (valued consistently with other
         investors) for a new web-based company, GlobalStake.com, which was spun off from Teknowledge Corporation.
         GlobalStake.com began by offering full service, discounted consumer real estate transactions on the Internet, but
         in December 2000 it modified its strategy to focus on a business-to-business model for conducting commercial real
         estate mortgages. Teknowledge has reviewed the cash flow projections, existing customer pipeline, outside
         investment opportunities, and available credit sources of GlobalStake.com, and has determined that its investment
         is not impaired. However, as GlobalStake.com is a business with limited cash and all the associated risks of a
         start-up business, its success is dependent on market demand for mortgage loans, fluctuations in interest rates,
         the ability to hire qualified brokers, and the ability to secure mortgage financing sources and to negotiate a
         competitive arrangement. The Company intends to periodically review its investment in GlobalStake.com for impairment.

To date Teknowledge has provided: (1) approximately $1,206,000 (including approximately $72,000 during
         2001- see details below and $923,000 in 2000) in cumulative seed cash and services; (2) the proprietary
         information and technology developed in support of the GlobalStake.com business plan; and (3) licenses to
         practice Teknowledges patent portfolio. As of December 31, 2001 the Company has fulfilled its investment
         obligation with GlobalStake.com and has no future obligation.

The Companys CEO represents Teknowledge in one out of six seats on the Board of Directors of  GlobalStake.com.
He owns approximately 7% of the common shares on a diluted basis at December 31, 2001. These are nonvoting shares.

The Companys investment in GlobalStake.com during 2001 of approximately $72,000 was in the form of
         funding GlobalStake.com's payroll and operating expenses. The Companys investment in GlobalStake.com during 2000
         of approximately $923,000 was in the form of funding GlobalStake.coms payroll and operating expenses ($572,000)
         as well as consulting services rendered by the Company at normal billing rates ($351,000).

12.           Segment Reporting

During 1998, the Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related
         Information. SFAS No. 131 requires a new basis of determining reportable business segments, i.e., the
         management approach. This approach requires that information used by management to assess performance and manage
         a companys resources be the source for segment information disclosure. SFAS 131 also establishes standards for
         related disclosures about products and services, geographic areas and major customers.

The Company provides software products and consulting services for government and commercial applications through five interdependent
operating units. The chief decision maker, the Companys CEO, views the operating units as an interdependent matrix of technical
personnel, management and engineering services, technology and other resources that are shared in the course of business. Discrete
financial information is not available for each operating unit, other than revenue and cost of revenue information. Moreover, the
Company does not account for or report to the CEO its assets or capital expenditures by operating unit. Operating costs and expenses
are managed by functional areas. Decisions about resource allocation are based on utilization rates of the employees. Performance
assessment for managers in any operating unit is based primarily on technical performance and overall profitability of the Company.
Prior to 2001, the CEO viewed the five operating units as operating within one reportable segment based on the information used to
assess performance and allocate resources. During 2001, due to the expansion of the Companys commercial operations as well as
other information used in assessing performance and allocating resources, the five operating units were viewed as operating within
two reportable segments, government and commercial. The commercial segment includes Financial Systems, patent and technology
licensing, and the commercial business applications of Security Systems. The government segment includes the governmentsponsored
operations of the following business units: Security Systems, Training Systems, Distributed Systems and Knowledge Systems.

47

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Financial information about segments (in thousands):

|                              | Commercial           |  | Government           |  | Total                | 
|----------------------------- | -------------------- |  | -------------------- |  | -------------------- | 
|Year ended December 31, 2001: |                      |  |                      |  |                      | 
|                              |                      |  |                      |  |                      | 
|Revenues                      | $              7,183 |  | $           10,081   |  | $           17,264   | 
|Cost of revenue               | 5,368                |  | 6,939                |  | 12,307               | 
|                              |                      |  |                      |  |                      | 
|Gross profit                  | $              1,815 |  | $              3,142 |  | $              4,957 | 
|                              |                      |  |                      |  |                      | 
|Year ended December 31, 2000: |                      |  |                      |  |                      | 
|                              |                      |  |                      |  |                      | 
|Revenues                      | $              5,166 |  | $           9,210    |  | $           14,376   | 
|Cost of revenue               | 3,648                |  | 6,140                |  | 9,788                | 
|                              |                      |  |                      |  |                      | 
|Gross profit                  | $              1,518 |  | $              3,070 |  | $              4,588 | 
|                              |                      |  |                      |  |                      | 

Revenue for customers in the United States of America represented approximately 97% and 100% in 2001 and 2000,
         respectively.

13.           Unaudited Quarterly Financial Data

|Quarterly Results Summary            
|-------------------------------------
|(In thousands, except per share date)
|                                     
|Year ended December 31, 2001:        
|                                     
|Revenues                             
|Gross profit                         
|Net income                           
|Diluted net income per share         
|                                     
|Year ended December 31, 2000:        
|                                     
|Revenues                             
|Gross profit                         
|Net income                           
|Diluted net income per share         

48

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