UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB

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

                   For the fiscal year ended December 31, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 [No Fee Required]

                  For the transition period from_____ to______

                        Commission File Number: 0-14793

                            TEKNOWLEDGE CORPORATION
           (Name of small business issuer as specified in its charter)

                               Delaware 94-2760916
                (State or other jurisdiction of (I.R.S. Employer
               incorporation or organization) 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, $.01 par value per share
                    Series 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 [ ] No [X]

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the  best  of  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. $14,376,024

The aggregate  market value of Common Stock,  $.01 par value per share,  held by
non-affiliates  of the registrant was $9,371,769 on March 26, 2001 (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 26, 2001, there were 5,690,835  shares of Common Stock,  $.01 par value
per share, of the registrant outstanding.

Documents Incorporated by Reference
Proxy Statement for the 2000 Annual Meeting of Stockholders            Part III

Teknowledge(R),   TekPortal(TM)  and  Sales   Associate(TM)  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  (the  "Company")  sells software  product and
service  solutions,  and  is  increasingly  focused  on the  financial  services
industry. It also provides contract research and development services, primarily
to the Defense Advanced Research Projects Agency ("DARPA").  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.

         The Company operates five business operating units within one reporting
segment.  The operating  units are  interdependent  in terms of  infrastructure,
talent,  technology,  and management incentives,  and therefore are treated as a
single  reporting  segment.  The  fastest  growing  part of  Teknowledge  is the
Financial Systems (eCommerce)  operating unit. This unit is increasingly 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(TM)  security
product, and Financial Fusion solutions.  In addition,  Teknowledge is qualified
as a Microsoft Certified Partner.

         Teknowledge has four other operating units in  complementary  technical
application  areas, in addition to its Financial Systems unit.  Security Systems
(Information  Assurance)  provides 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 develops software to distribute the resulting  courseware
solutions  on the  Internet.  Distributed  Systems is focused on  improving  the
quality, control, and timeliness of services on the Internet.  Knowledge Systems
is developing  solutions for processing  knowledge and making  inferences  about
customer-supplied data.

         Many  of  Teknowledge's   customers  need  to  provide  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"),  the National  Institute of
Standards and Technology ("NIST"), and Small Business Innovation Research (SBIR)
Programs sponsored by other agencies. This provides Teknowledge with a very rich
source of  technology  for its own focused  product  development,  patents,  and
licensing.  Teknowledge has an unusually large intellectual property program for
a small company,  with nine  fundamental  U.S.  software  patents  available for
license.

         Teknowledge's  direct  revenue mix from  continuing  operations for the
year ending December 31, 2000, was  approximately 36% financial systems products
and services and 64%  government-sponsored  contract R&D. In 1999, the ratio was
15% to 85%.  The  proportion  of  revenue  attributed  to  Financial  Systems is
expected to continue to increase as  investment  and  capabilities  in this unit
grow over the coming years.  Teknowledge is increasing its investments and focus
on commercial software products and services,  particularly in financial account
aggregation and related markets.

         Teknowledge  was  incorporated  on July 8,  1981  under the laws of the
State of Delaware.  The Company's principal  executive and technical  operations
offices are located at 1810 Embarcadero  Road, Palo Alto,  California  94303. In
addition, Teknowledge has technical operations offices located in Marina Del Rey

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and San Diego,  California;  Fairfax,  Virginia;  Cleveland,  Ohio; and Orlando,
Florida.  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  there is  increasing
international demand for TekPortal account aggregation solutions.

Overview

         Teknowledge started almost 20 years ago as a technology  company,  with
the  vision of  codifying  and  distributing  knowledge  via  computers.  Today,
Teknowledge is becoming a financial products and services supplier with a large,
contract R&D funded research and development capability. Teknowledge is shifting
its  focus  from  contract  research  and  development  to  deliver  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  effectively.  This is  particularly  true for  banks  and
financial  services  companies.  Account  aggregation  products  like  TekPortal
provide unprecedented information about the financial transactions of customers.
Teknowledge has the technical  foundation for strong  competitive  advantages in
helping  both  financial   institutions  and  their  customers  understand  this
information and make profitable use of it.

         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 value chain is specialized  for
financial applications and combined with specific customer information,  it will
drive the growth of Teknowledge's  business in financial  systems,  supported by
network security, training, and distributed application solutions.

         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(TM), 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  to  generate  additional  sales
revenue.

Operating Units

         Teknowledge has distributed operations, with its headquarters located
in Palo Alto, California and offices in Marina Del Rey  and  San  Diego,

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California;  Fairfax,  Virginia;  Cleveland,  Ohio;  and Orlando,  Florida.  The
Company  operates  five  interdependent  operating  units  within one  reporting
operation:  Four are  currently  focused  primarily  on  contract  research  and
development,  while one, Financial Systems, is focused on financial services and
products.  The operating units are  interdependent  in terms of  infrastructure,
talent,  technology,  and management incentives,  and therefore are treated as a
single reporting segment.

Financial  Systems.  The Financial Systems unit has ongoing contracts with banks
and financial  institutions to provide both financial services and Teknowledge's
multi-institution  account aggregation solution,  called TekPortal.  Teknowledge
has  sold  over  20  TekPortal  software  licenses  to  financial  institutions.
TekPortal  enables   institutions  to  provide  a  consolidated  view  of  their
customers'  financial portfolio  seamlessly  integrated into their own web site.
TekPortal  will  act 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
transfers  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  TekPortal
solution has not gone  unnoticed by the financial  industry,  which 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.  TekPortal is uniquely
positioned to provide financial  institutions  with an on-premise  capability to
retain  customers at their web site,  and then use that  opportunity to sell new
products and services.

         TekPortal is an on-premise 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 more 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 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
- Transfer funds between local and external accounts
- 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 less mature  software  system that  provides
unassisted  sales  over the  Internet.  It  incorporates  rules of  selling  and
utilizes  specific  product  knowledge to emulate the best practices of the most
productive  sales person in a firm. The product 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.  The Sales
Associate  delivers   up-to-the-minute   information  on  product  features  and
availability,  as well as news of special  discounts and other  promotions.  The

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software is designed for delivery with other  commercial  components such as web
servers,  databases,  firewalls,  and  other  web  site  components.  The  Sales
Associate is a powerful technology,  and the Company has continued to evolve its
capabilities.  However,  potential  customers  have been  daunted by the need to
specialize its domain knowledge. In response,  Teknowledge plans to specialize a
new  version  of the Sales  Associate's  software  as a  value-added  module for
TekPortal and the financial services industry.  However, there are uncertainties
and risks associated with the introduction of any software product (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  firewalls,  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 web site  intrusion  detection and
response.  There are many  third-party  party  commercial  opportunities in this
arena.  Some commercial  products,  such as  CheckPoint's  firewall for web site
security,  have emerged as commercial  market  leaders.  Teknowledge  has become
certified  as a  VAR  to  deliver  CheckPoint's  Firewall-1(TM)  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.  The
Parent's Associate enabled parents to get advice on parenting and provide access
to  Internet-based  educational  resources.  The  Center  Associate  provided  a
computer-based  coach to help  guide  users in getting  the most from  education
resources  available to them.  Teknowledge  is playing 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.  In  1998,  Teknowledge  was one of three  prime
contractors  selected  out of 51  teams in the NIST  Adaptive  Learning  Systems
competition.  Teknowledge  was  awarded $2  million  in cost  sharing on a $4.3M
project  to  develop  a  Courseware  Factory(TM)  for  converting   podium-based
traditional  courses for delivery over the World Wide Web. This work 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.

Distributed  Systems.  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   and  updated
dynamically.  This requires the ability to provide  reliable  quality of service
performance,  security  of  operations,  and  maintainability.  Distribution  of
knowledge  by  intelligent  "push" and "pull"  techniques  has already  become a
critical  technology.   In  addition,   the  types  and  quantity  of  knowledge
distributed  will require new designs and new software  specialized for specific
knowledge  processing  tasks.  Teknowledge's  Distributed  Systems business unit
focuses on providing new Internet systems infrastructure to address these needs.
It is a  prime  contractor  on the  DARPA-sponsored  QUITE  project,  where  the

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objective is to provide  innovative  solutions to the problem of optimizing  the
quality of service of distributed resources on a network.

         In 2000, Teknowledge recruited 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.  USC agreed to
transfer $6.6M of Dr. Balzer's  contract  backlog to  Teknowledge.  This team is
doing a variety of mostly DARPA-sponsored  contract R&D projects. 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.

Knowledge Systems.  Computer knowledge bases 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. Techniques for creating large knowledge bases have advanced significantly.
Many  fundamental  problems  of how to  perform  efficient  inference  on  large
knowledge bases are being solved incrementally.  Many specialized techniques for
creating  and  applying  knowledge  have  matured.  The  potential  payoff  from
combining   elements  from  this  research   progress  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 situation. This infrastructure can also serve as a basis
for  pragmatic  problem  solving and web  interface  capabilities  for financial
services  or  other  applications.   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 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  can be  specialized  for  TekPortal  and  financial
instruments.

Sales and Marketing

         Teknowledge's   employees,   including  the  operating  unit  managers,
dedicated sales staff, 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.  Consulting assignments are funded
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 2000,  Teknowledge  increased  its  commercial  sales and  marketing
efforts to lay the foundation for increased Financial Systems business. 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. In addition,
Teknowledge is actively seeking additional VAR companies to sell TekPortal,  and
pull through the Company's other application solutions.

Backlog

         At December 31,  2000,  the expected  order  backlog was  approximately
$20.2  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.  91% of
the December 31, 2000 backlog is from government customers. Approximately 40% of
the backlog consists of  government-sponsored  programs that are awarded but not
yet  authorized  for  funding.  The  government  normally  funds a  contract  in

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incremental amounts for the tasks that are currently in production. In 2000, the
Information Sciences Institute  transferred to Teknowledge $6.6M in contract R&D
backlog.  Backlog is an  estimate  and is subject to a number of risks (see Part
II, Item 6:  Management's  Discussion  & Analysis or Plan of Operation - Certain
Factors That May Affect Future  Results of Operations  and/or Stock Price).  The
portion of the overall  backlog  that is expected to be fulfilled in the current
fiscal year is approximately 38%.


Research and Development

         Most of Teknowledge's research and development (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 DoD 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 product development.

         In  2000  Teknowledge  continued  to grow  its  TekPortal  product  and
services business, and increased its investment in TekPortal  considerably.  The
Company  capitalized  $2,213,665 and $185,460 of computer  software  development
costs in the years ended December 31, 2000 and 1999, respectively.  In addition,
the  Company  expensed  $557,850  and  $599,231  of its own  matching  funds  on
Courseware  Factory  R&D for  the  years  ended  December  31,  2000  and  1999,
respectively.

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.

         TekPortal   is  uniquely   positioned   with  respect  to  the  account
aggregation market. Its main competition from Yodlee, VerticalOne, and EasyLogin
have  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  uniquely  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 account aggregation market heats up,
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.

         Trilogy Development Group, Calico,  Concentra,  Selectica,  Brightware,
Baan,  SAP,  Oracle,  PCorder.com,  and others  provide sales and  configuration
systems.  Knowledge  processing  systems are provided by Logica  Carnegie Group,
Inference  Corp.,  Mindbox,  Inc.  CycCorp,   Intellicorp,   Inc.,  and  others.
Distributed  systems and security  services are provided by Trusted  Information
Systems, SRI, Secure Computing, Lockheed-Martin, Boeing, Genuity, ISX, and SAIC,

<PAGE>
                                       8


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),  which are both technology
suppliers on the Courseware Factory project.

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 data fusion tools,  and
systems  to manage and  protect  webs of  networked  information.  One  patented
software,  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).

Contract R&D

         In  2000,   approximately  64%  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,  91% of  Teknowledge's
December  31, 2000 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

<PAGE>
                                       9


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.  Since  the  terminations
involve some of Teknowledge's  multi-year projects, the effect on revenue may be
spread over several  years.  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
may vary  from  original  estimates  and  necessitate  periodic  adjustments  to
overhead  rates and  revenues.  Such  adjustments  are made 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 positive or negative  effect on the business.  In
order to  diminish  the  possible  exposure  in prior  years,  the  Company  has
established a reserve for such contingencies.

         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 contract R&D
employees,  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.
<PAGE>
                                       10


Employees

         Teknowledge had a total of 71 full-time employees at December 31, 2000.
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  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 exceeded
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,  46, is  Chairman  of the Board,  Chief  Executive
Officer,  and  President  of  Teknowledge.  He  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  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 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 nonprofit organization.  He serves as a Director of GlobalStake.com.  In 1999,
Mr.  Jacobstein  was  elected a Henry  Crown  Fellow  in the  Aspen  Institute's
executive leadership program.

         Dennis A. Bugbee,  54, 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,  41, 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, and served as General  Counsel for Slatt Mortgage  Company from 1988.
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 for a period of three  years  commencing
April 5, 1999, with an option to extend the lease for an additional three years.
The Company has also signed  renewable  leases for office space in Arlington and
Fairfax,  Virginia; Marina Del Rey, California;  Cleveland, Ohio; and San Diego,
California.

Item 3.  Legal Proceedings

         In 1999 Teknowledge offered to sell SAP a license to use the technology
related  to  Teknowledge's   Intelligent   Configuration  Patent  Portfolio,   a

<PAGE>
                                       11


collection of five patents relating to configuration technologies, including the
`983 patent.  In response to this offer,  on October 8, 1999, SAP America,  Inc.
and SAP  Aktiengesellschaft  (collectively,  "SAP") filed a lawsuit  against the
Company in the United States  District  Court for the District of Delaware.  The
subject matter of the case involves Teknowledge's  configuration systems patent,
Bennett et al. U.S.  Patent  4,591,983 (the '983 patent") and the  configuration
technology  associated with the SAP R/3 System ("R/3 System").  SAP is seeking a
judgment  against  Teknowledge  that  the  `983  patent  is  invalid  and is not
infringed by the R/3 System; an award of attorney fees, costs of suit, and other
relief the court may deem just and proper.

                  On October 21, 1999 Teknowledge  filed a counterclaim  against
SAP for patent  infringement  of two of its patents.  The subject of the counter
suit is the `983 patent entitled "Hierarchical Knowledge System" and U.S. Patent
4,783,752  entitled  "Knowledge Based Processing for Application  Programs Using
Conventional  Data Processing  Capabilities."  On May 24, 2000 and September 30,
2000,  SAP filed  motions for  Summary  Judgment on the `983 patent and the `752
patent, respectively. Teknowledge responded to these motions on June 9, 2000 and
July 17, 2000,  respectively.  Teknowledge  and SAP are  finalizing a settlement
agreement and  termination  of the lawsuit.  The Company  anticipates no adverse
effect as a result of this settlement.

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 2000.

                                     PART II

--------------------------------------------------------------------------------

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 12,
2001 the closing price of the stock was $1.875 a share.

          The Company  executed a  one-for-five  reverse stock split on December
22,  1998.  The  following  table  sets  forth  the  range  of high  and low bid
information  for the Common  Stock on the OTC Bulletin  Board for the  quarterly
periods indicated, adjusted for the effect of the reverse stock split. All share
and per share data has been retroactively  restated to reflect the effect of the
reverse stock split. The bid information reflects  inter-dealer prices,  without
retail   mark-up,   markdown  or  commission   and  may  not  represent   actual
transactions.  The Company has never paid  dividends on its capital  stock.  The
three-year average stock price was $4.54.
<TABLE>
<CAPTION>

                         2000                                               High                  Low

<S>  <C>                                                                 <C>                   <C>
     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

                         1999                                               High                  Low

     First quarter, ended March 31, 1999                                  $ 6.88               $ 4.50
     Second quarter, ended June 30, 1999                                    5.94                 3.88
     Third quarter, ended September 30, 1999                                5.66                 4.00
     Fourth quarter, ended December 31, 2000                                5.13                 3.47
</TABLE>




         As of December  31,  2000 there were 1,582  holders of record of Common
Stock of the Company.
<PAGE>
                                       12


Item 6.       Management's Discussion and Analysis or Plan of Operation


Overview of Significant Matters

         Forward-looking statements made in this report relate to the demand for
technical  employees,  expected  revenue  growth,  ability to  realize  backlog,
competition  for new contract R&D contracts,  development of financial  products
and  services,   deferred  tax  assets,   collections,   and  investments.   All
forward-looking  statements involve risks and uncertainties,  and actual results
could differ  materially from those set forth in the 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,  financial  systems
opportunities,  financing,  and other factors described in "Certain Factors That
May Affect Future Results of Operations and/or Stock Price."
<TABLE>
<CAPTION>

                                               Year Ended December 31, 2000
                                                 Quarterly Results Summary
                                         (In thousands, except for per share data)

                                             First        Second       Third        Fourth          Total
<S>                                         <C>           <C>         <C>           <C>           <C>
         Revenues                           $2,754        $4,020      $4,195        $3,407        $14,376
         Costs and Expenses                  2,697         3,924       3,987         3,252         13,860
         Other and Tax Provision                12            33          84           (4)            125
         Net Income                             45            63         125           159            392
         Diluted Net Income per share          .01           .01         .02           .03            .07
</TABLE>


         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.  The revenue mix is approximately 36%
from Financial Systems and 64% from government-sponsored contract R&D ("contract
R&D").  This compares to 15% and 85%,  respectively,  in 1999.  Revenues for the
year ended  December  31, 2000 were  $14,376,024  and net income was $392,017 or
2.7% of revenues.  The increase in revenues is mainly  attributable to growth in
the Financial  Systems  operating unit, the fastest growing part of the Company.
Despite  a  cutback  in some  Federal  contracts  in 1998,  at the  government's
convenience,  revenues  from  contract  R&D  in  both  2000  and  1999  exceeded
$9,000,000.  Revenue  from R&D  contracts  is expected to remain  steady in 2001
based on the current backlog of new business.

         Revenues from the Financial  Systems operating unit is likely to exceed
contract R&D revenues in coming years.  Revenue  growth from  Financial  Systems
accelerated after the introduction of the TekPortal(TM) product in mid-2000. The
Company  believes that its  substantial  expenditures  in the development of the
TekPortal  product in 2000 has  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.  In 2000, over
$1,000,000  of license fees for  TekPortal  software were recorded for financial
products.

         The  early  2000  version  of  the  TekPortal  product  was  relatively
immature,  so net margins  suffered as the Company's  technical  staff  extended

<PAGE>
                                       13


every  effort to deliver  the new product to the strict  requirements  of mostly
financial  institution  customers.  As a result of this experience and continued
development expenditures,  the current product is more robust and mature, and as
a result,  consulting  services contracts  conducted with TekPortal require less
direct input from the product  engineering  staff. The Company expects TekPortal
license fees and revenues from consulting services to increase in the future.

         The proportion of revenues  attributed to Financial Systems is expected
to exceed contract R&D in coming years;  however,  Teknowledge  fully expects to
continue  to be an active  competitor  for  contract  R&D.  Most of the  current
backlog of  $20,200,000 is for  government-sponsored  contract R&D. 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 R&D work may lead to new patents,
software solutions, services expertise, or a foundation for innovative financial
products.

         During 2000, a substantial  amount of working  capital from  operations
was used to support the development of the TekPortal  product and the investment
in  GlobalStake.com.   (See  Note  12  to  the  Financial  Statements).  Roughly
$2,200,000 of working  capital was utilized for TekPortal  development  purposes
and $900,000 was invested in  GlobalStake.com.  To fund these  investments,  the
Company  used  cash  from  operations  and  utilized  its  line  of  credit  for
$1,350,000.  To support future growth and increase working capital,  the Company
may seek additional equity and debt financing. However, management believes that
it has sufficient  funds to support  operations,  at least through  December 31,
2001,  based on its current cash position,  available credit and equity sources,
and cash flow from operations.

         Teknowledge has been involved in an arbitration  matter with a customer
since late 1999.  This matter is likely to be resolved  through  arbitration  or
other means in the first half of 2001. The Company  expects a favorable  outcome
from this matter.  The Company is also involved in litigation  with SAP America,
Inc., regarding two of the Company's patents. Teknowledge and SAP are finalizing
a settlement  agreement and termination of the lawsuit.  The Company anticipates
no adverse effect as a result of this settlement.


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

         Management  believes  that  the  market  for  TekPortal  software  is a
significant  new  opportunity  for  Teknowledge  and that its Financial  Systems
business  will expand over time.  The market for account  aggregation  software,
however, is rapidly evolving,  and 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. In spite of forecasted robust growth, many companies have merged or
dropped out of the race. Further,  aspects of the business (including  security,
privacy, reliability, cost, ease of use, and quality of services) are undergoing
rapid  evolution and review that may affect the use of  information  aggregation
software in particular.  In general,  the Company is exposed to a higher risk of
default and slower  collections from new 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

<PAGE>
                                       14


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.

          During  2000,  GlobalStake.com  modified  its  strategy  to focus on a
business-to-business  model for conducting commercial real estate mortgages. The
Company has  reviewed the revised  business  plan and cash flow  projections  of
GlobalStake.com,  and has determined  that its investment has not been 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,  the  ability to secure  mortgage  financing  sources and to
negotiate a competitive arrangement.  The Company intends to periodically review
the  performance  of  GlobalStake.com  in accordance  with the business plan and
SFAS121.

         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 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  diminish  the  possible  exposure  in prior  years,  the  Company  has
established a reserve for such contingencies.

         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.  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 on-going 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

<PAGE>
                                       15


consultants,  and it is anticipated that this trend will continue in the future.
The Company spent nearly  $5,000,000 on mostly billable  subcontractors in 2000.
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.

         In  summary,  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,  and general
economic and market conditions.


Results of Operations

         2000 compared to 1999

          Revenues in 2000 were  $14,376,024 as compared to $11,094,672 in 1999.
Revenues in 2000  increased 30% over the previous  year.  Revenues from contract
R&D  accounted  for 64% of total  revenues  in 2000 as  compared to 85% in 1999.
Revenues from Financial Systems grew in 2000, rising to 36% of total revenues as
compared to 15% in 1999.

         Financial  Systems  revenues  include  license  sales for the TekPortal
software,  consulting services, and post contract customer support services. The
increase is due to increased market acceptance of the TekPortal software and the
Financial  Systems  solutions.  Revenues  from  resellers  account  for  43%  of
Financial  Systems  revenues.  The Company  experienced  some slow payments from
customers  and has reserved for potential  doubtful  accounts.  (See  discussion
below).  The Company believes that the demand for account  aggregation will grow
in 2001,  and the demand for contract R&D  services  will depend on  competitive
contract awards and sponsor priorities.

          Revenues  from  contract  R&D  were  $9,209,831  in 2000  compared  to
$9,471,449 in 1999.  Contract R&D revenues include mainly  cost-type  government
sponsored contract research and development. DARPA sponsored the Company's three
largest government contracts accounting for 57% of contract R&D revenues in 2000
and 58% in 1999.

         Revenues  from  the  sale of  software  licenses  are  recognized  upon
contract  execution,  provided all shipment  obligations have been met, fees are
fixed and determinable,  and collection is probable. Revenue from maintenance is
recognized  over  the  term  of  the  agreement,  and  consulting  services  are
recognized as services are performed.

         The  Company  typically  recognizes  revenue  from its  contracts  on a
percentage-of-completion  basis. This 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 certain
deliverables and milestones.  The difference between the revenue recognized on a
percentage-of-completion basis and the amount billed to the customer is recorded
in  accounts  receivable  as  unbilled   receivables.   At  December  31,  2000,
approximately 75% of unbilled  receivables were for financial systems contracts,
and 25%  were for R&D  contracts.  Subsequent  to  year-end  close,  most of the
unbilled receivables were billed to customers.

         Cost of revenue was  $9,788,202 in 2000 compared to $7,049,550 in 1999.
All eligible general and administrative costs on government-sponsored contracts,
although  reimbursable  by the  government,  have been  included  in general and
administrative expense. Between periods, the workforce grew 39%, largely to meet
the growing demands of the Financial Systems projects. In 2000, the Company also

<PAGE>
                                       16


recognized  $281,747 of  amortization  expense  related to capitalized  software
development costs for TekPortal product. The cost of revenues in 2000 was 68% of
revenues as compared to 64% in 1999. This reflects investments in making
TekPortal a hardened commercial product.

         Due to the relative infancy of the Financial  Systems  products,  gross
margins in 2000 were affected as additional effort was required by the technical
staff  to  ensure   appropriate   product  support  and  services  for  customer
satisfaction.  As a result, the Company incurred certain  unrecoverable costs in
the earlier  part of 2000.  Newer  projects  are  expected  to benefit  from the
experience gained from this earlier work and the maturation of the product.

         General and administrative costs were $3,039,488 and $2,410,001 in 2000
and 1999,  respectively.  The Company  has  increased  its  general  reserve for
potential  doubtful  accounts to $515,000  in 2000 from  $10,000 in 1999.  Total
reserves for doubtful accounts  represent 11% of the trade receivable balance at
year-end.  The  Company  has  experienced  slower  collections,  higher  average
receivable  balances,  and  a  slower  turnover  of  cash  from  its  commercial
customers.   Teknowledge  has  tightened  its  credit/collection  process  going
forward. The cost of labor and labor related expenses,  temporary services,  and
legal and defense  costs all  increased  in absolute  dollars  over the previous
year.

         Sales and marketing costs were $474,780 in 2000 as compared to $512,040
in  1999.  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.  Cost between 1999
and 2000 changed little as the Company  focused on direct contract  efforts.  In
2000, the Company relied  primarily on direct sales and Value Added Resellers to
lay the foundation for expanding the Financial Systems business. At December 31,
2000, the Company had three major  resellers that sold TekPortal with supporting
application  services.  In 2001,  Teknowledge  plans to  increase  its sales and
marketing  efforts  substantially in both the domestic market and  international
community.

         Total  expenditures on research and development were $2,771,515 in 2000
and  $784,691  in 1999.  The  Company  capitalized  $2,213,665  and  $185,460 of
computer software development costs in 2000 and 1999.  Teknowledge  concentrated
on the development of technologies that potentially added value to TekPortal, as
well as other financial products it hopes to introduce in the future. In special
circumstances  with strategic  value,  the Company may accept partial funding on
R&D efforts from other government agencies,  e.g., NIST, to fund some of its R&D
efforts.  The Company has one more year of commitment to provide cost sharing on
the NIST Courseware Factory project at approximately the same level as 2000. The
NIST contract started in late 1998. The Company expended  $557,850 on internally
funded  research  and  development  in 2000 and  $599,231 in 1999 related to the
Courseware  Factory project.  The majority of the Company's 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.

         Interest  income net of expenses was $8,313 in 2000 versus  $115,381 in
1999.  Due to its  considerable  commercial  investments  in 2000,  the  Company
experienced  lower average cash balances and higher interest expenses related to
its borrowing activities during 2000.

         The effective tax rate was 25% and 40% in 2000 and 1999,  respectively.
The principal reason for the lower tax rates in 2000 is additional  research and
development  tax  credits  that were  recognized  as a result  of the  increased
investment in TekPortal (see Notes 2 and 6 of "Notes to  Consolidated  Financial
Statements").  During the first  three  quarters of 2000,  the  Company  used an
effective  tax rate of 40%.  The benefit of the  research  and  development  tax
credits was  quantified  in the fourth  quarter.  Had the  company  used the 25%

<PAGE>
                                       17


effective rate during the first three quarters of 2000, the effect on net income
and earnings per share would have been:



                                 (In thousands)

                              Q1 2000      Q2 2000      Q3 2000       Q4 2000
Net Income
  As Reported (40% tax)           $45          $63          $125         $159
  With R&D credit (25% tax)       $56          $79          $156         $101
EPS
  As reported (40%)               .01          .01          .02           .03
  With R&D credit (25% tax)       .01          .01          .03           .02


         In  2000,  Teknowledge's  net  income  was  $392,017,  or $.07  diluted
earnings per share.  This compares to $383,539,  or $0.07  diluted  earnings per
share for 1999. As mentioned  previously,  fiscal 2000 earnings were impacted by
lower than expected margins on the delivery of its Financial  Systems  solutions
as a result of the infancy of the  business,  increased  provision  for doubtful
accounts, offset by a lower effective tax rate.


Liquidity and Capital Resources

         As of December 31, 2000,  the Company had  $1,049,052  in cash and cash
equivalents,  a  decrease  of  $902,341  over the  previous  year.  The  Company
generated net cash of $1,089,962  from its operating  activities  and $1,511,626
from  financing  activities,  including  $1,350,000 of  borrowings.  It invested
$2,213,665  for  developing  capitalized  TekPortal  software  and  $367,723 for
purchases of computer  equipment and other  improvements.  The Company  invested
$922,541  in  GlobalStake.com  during  the  year  and has  met 95% of its  $1.2M
investment agreement since GlobalStake.com was spun out in November of 1999.

         To support the future growth,  the Company may seek  additional  equity
and debt financing. However, management believes that it has sufficient funds to
support  operations at least through December 31, 2001 based on its current cash
position,  available  credit and equity sources,  and cash flow from operations.
The Company has borrowed a total of $1,350,000  against a $2,000,000  bank line.
The Company used the money to supplement  its existing  reserves and to fund the
growth of its commercial operations.

         During the year ended  December 31, 2000,  the Company had a $2,000,000
unsecured  line of credit  agreement with a bank. The Company could borrow up to
60% of the eligible  receivables  base, or $2,000,000,  whichever is lower.  The
maximum  rate that could be charged was one percent  over the bank's  prime rate
(9.5% at December 31, 2000). The agreement includes certain financial  covenants
and disclosure  requirements  that were met during the year. The line expired in
February  2001. The  outstanding  balance as of December 31, 2000 was $1,350,000
and was refinanced in January 2001 as described below.

         In January 2001, the Company entered into a credit  arrangement  with a
finance company.  The assets of the Company  collateralize  borrowings under the
arrangement.  The  outstanding  balance  bears a monthly  finance fee of 1%. The
Company also pays a monthly administrative fee of 0.5% of the amount financed at
the end of the  settlement  period.  Under  the  terms of the  arrangement,  the
Company can borrow up to 80% of the eligible receivable base, up to a maximum of

<PAGE>
                                       18


$2,000,000.  The new agreement  contains no financial  covenants and has minimal
disclosure requirements

Recent Accounting Pronouncements

         In June 1998, the Financial  Accounting Standards Board issued SFAS No.
133,  "Accounting  for Derivative  Instruments  and Hedging  Activities",  which
requires companies to value derivative  financial  instruments,  including those
used for hedging foreign  currency  exposures,  at current market value with the
impact of any change in market  value  being  charged  against  earnings in each
period. In June 1999, the Financial  Accounting  Standards Board issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective  Date of SFAS No. 133" to defer the effective date of SFAS No. 133
until fiscal years  beginning  after June 15, 2000. To date, the Company has not
entered into any derivative  financial  instrument  contracts.  Thus the Company
anticipates  that  SFAS  No.  133  will  not  have  a  material  impact  on  its
consolidated financial statements.


Item 7.  Financial Statements

         The  response to this item is  incorporated  by reference in a separate
section of this report. See Exhibits,  Financial Statement Schedules 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

         Not applicable.
<PAGE>
                                       19


                                    PART III
--------------------------------------------------------------------------------
Item 9: Directors, Executive Officers, Promoters and Control Persons; compliance
        with Section 15(a) of the Exchange Act

General

     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.  Ivan Lustig was elected to the Board
in March 2001,  which  increased the size of the Board from five to six members.
The  Board of  Directors  comprises  three  classes  of  directors,  each  class
consisting  as nearly as possible of one-third  of the Board,  with one class of
the Board being elected each year. At each annual meeting  thereafter,  nominees
for  directors  in the class  whose term is expiring  are voted  upon,  and upon
election,  such  director  would  serve a  three-year  term.  At the 2000 Annual
Meeting,  Gen.  Robert T. Marsh was  elected as a Class III  director to serve a
three-year  term. At the 1999 Annual Meeting,  Neil A. Jacobstein and William G.
Roth were elected as Class II directors to serve a three-year  term.  Subsequent
to the 1999 election, William G. Roth resigned his position on the Board and was
replaced by Benedict O'Mahoney. At the 2001 Annual Meeting, Dr. Larry E. Druffel
and James C. Workman, are the nominee's for Class I director,  to be elected for
a three-year term and until their successors are duly elected and qualified.



<PAGE>


--------------------------------------------------------------------------------
                                             Positions                 Director
     Name                          Age       With the Company          Since
     ----                          ---       ----------------          --------

Class I Directors nominated for election at the 2001 Annual Meeting

     Dr. Larry E. Druffel          60        Director                  1997
     James C. Workman              58        Director                  1993

Class II Directors whose term expires at the 2002 Annual Meeting

     Neil A. Jacobstein            46        Chairman of the Board,    1993
                                             President  and CEO

     Benedict O'Mahoney            41        V.P. Adm., Corp Counsel   1999

Class III Directors whose term expires at the 2003 Annual Meeting

     Gen. Robert T. Marsh          76        Director                  1987

     Ivan L. Lustig                42        Director                  2001
--------------------------------------------------------------------------------

     Class I Nominees for a Term Expiring in 2001

     The nominees for election have indicated a willingness to serve, but if the
nominees  should decline or be unable to serve as a Class I director,  the proxy
holders will vote for the election of another substitute nominee as the Board of
Directors recommends.

     Dr.  Larry E.  Druffel.  Dr.  Druffel,  60, 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 Board of the
Advanced Technology  Institute,  and a member of the Board of the South Carolina
Technology  Alliance,  both private non-profit  corporations;  and a director of
Knowledge  Sentry,  a Greenville South Carolina Company since 2000. He served as
Director of Computer  Software and Systems,  Office of Deputy  Undersecretary of
Defense for Research and Advanced Technology, Washington, DC.

     James C. Workman.  Mr.  Workman,  58, 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



<PAGE>


organizations in Wisconsin. He is a member of the Executive Council and Board of
Trustees  of the Diocese of Fond Du Lac. He is also a Director of the United Way
of   Door   County.    His   primary    employment   is   as   a   self-employed
attorney/consultant. Mr. Workman is Chairman of the Human Resources Committee.

     Continuing Class II Directors for a Term Expiring in 2002

     Neil A. Jacobstein.  Mr.  Jacobstein,  46, is Chairman of the Board,  Chief
Executive  Officer,  and  President of  Teknowledge.  He served as President and
Chief  Operating  Officer  and a Director of the Company  from  January  1993 to
November  22,  1999,  when he was elected to the  position of Chairman  and CEO.
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 nonprofit organization. He co-founded and serves 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,  41, is Vice President,  Administration
and Legal  Affairs of the  Company.  Mr.  O'Mahoney  was  elected a Director  of
Teknowledge  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 also 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 nonprofit organization.

Continuing Class III Directors for a Term Expiring in 2003

     Ivan Lustig.  Mr. Lustig joined the Board in March 2001. Mr. Lustig, 42, is
Managing Director and Head of Media Investment Banking since joining ING Barings
in 1999.  Prior to that time he spent 11 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
B.S., Master of Engineering, and M.B.A degrees from Cornell University.

     General  Robert T.  Marsh.  General  Marsh  (Retired),  76,  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. He served as Chairman of the
President's  Commission  on Critical


<PAGE>


Infrastructure Protection. General Marsh joined the Board of SI International in
December 1998 and continues to serve on the Board.  General Marsh also serves on
the Board of Comverse Infosys Technologies, Inc. and he is a trustee emeritus of
MITRE Corporation.  General Marsh is Chairman of the Company's Finance and Audit
Committee.

Executive Officers

     The  following  is  certain  information   regarding  the  Company's  other
executive officer who is not a member of the Board of Directors.

     Dennis A. Bugbee, 54, is Vice President of Finance,  CFO, and Secretary for
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 in March 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.

Item 10: Executive Compensation

The following table sets forth the cash compensation paid to the Chief Executive
Officer and the four most highly  compensated  executive officers of the Company
whose salary and bonus exceeded  $100,000 for all services to the Company in the
years ended December 31, 2000, 1999, and 1998.

                           SUMMARY COMPENSATION TABLE

                                                Annual Compensation
--------------------------------------------------------------------------------

Name and Principal Position                  Year     Salary    Bonus
                                                       $(1)      $(2)
--------------------------------------------------------------------------------
Neil Jacobstein, Chair, Pres, CEO(4)         2000    205,040    14,000
Neil Jacobstein, Chair, Pres, CEO(4)         1999    162,770    64,891
Neil Jacobstein, Pres, COO                   1998    152,784    97,585

Benedict O'Mahoney, VP Adm&Legal             2000    126,800    25,087
Benedict O'Mahoney, VP Adm&Legal             1999    107,086    36,710
Benedict O'Mahoney, VP Adm&Legal             1998     93,608    16,700

Dennis Bugbee, VP and CFO(4)                 2000    134,162    16,061
Dennis Bugbee, Director of Finance           1999    116,383    12,843
Dennis Bugbee, Director of Finance           1998    109,172    9,000
--------------------------------------------------------------------------------

(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.

(3)  Mr.  Jacobstein  was  elected  Chairman  of the Board  and Chief  Executive
     Officer on November 22, 1999.

(4)  Mr. Bugbee was appointed Vice President and CFO on April 14, 2000


<PAGE>


Stock Option Grants and Exercises

     The following tables set forth  information  regarding the value of options
held by the  executive  officers  named  in the  Summary  Compensation  Table at
December 31, 2000. A total of 628,500 options were granted to employees in 2000.

                      OPTION GRANTS IN LAST FISCAL YEAR(1)
--------------------------------------------------------------------------------
                                            % of
                             Number of      Total
                             Securities    Options
                             Underlying   Granted to
                              Options    Employees in    Exercise
                              Granted    Fiscal Year     or Base     Expiration
Name                            (#)          (%)       Price ($/Sh)     Date
--------------------------------------------------------------------------------
Neil Jacobstein,
Chair, Pres, CEO                --           --            --           --
--------------------------------------------------------------------------------
Benedict O'Mahoney,
VP Adm&Legal                  27,000         --           3.81       11/23/09
--------------------------------------------------------------------------------
Dennis Bugbee,
VP and CFO                    20,000         --           3.81       11/23/09
--------------------------------------------------------------------------------

(1)  Generally,  the right to exercise an option under the Company's  1998 Stock
     Option  Plan (the  "Option  Plan")  vests in  quarterly  increments  over a
     four-year  period  commencing on the date of grant. The Option Plan permits
     the grant of both incentive stock options within the meaning of Section 422
     of the Internal Revenue Code, as amended,  and nonstatutory  stock options.
     The exercise price of incentive  stock options must at least equal the fair
     value of the Common Stock of the Company on the date of grant. The exercise
     price of  nonstatutory  stock  options  must equal at least 85% of the fair
     market value of the Common  Stock of the Company on the date of grant.  The
     exercise  price of  options  granted to any person who at the time of grant
     owns stock representing more than 10% of the voting power of all classes of
     stock of the Company or any parent or  subsidiary  corporations  must be at
     least  110% of the fair  market  value of the  Common  Stock on the date of
     grant and term of such options cannot exceed ten years.

            AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
                              YEAR-END OPTION VALUE
--------------------------------------------------------------------------------
                                                  Number of         Value of
                                                  Securities      Unexercised
                                                  Underlying      In-the-Money
                                                  Unexercised        Options
                         Shares                    Options           at FYE
                        Acquired       Value        at FYE        (Exercisable/
                      on Exercise    Realized    (Exercisable/    Unexercisable)
Name                      (#)          (1)       Unexercisable)        (2)
--------------------------------------------------------------------------------
Neil Jacobstein,
Chair, Pres, CEO (4)    390,854     $1,570,793        -/-             -/-
--------------------------------------------------------------------------------
Benedict O'Mahoney,
VP Adm &Legal                                     21,333/50,667       -/-
--------------------------------------------------------------------------------
Dennis Bugbee,
VP and CFO(5)              --             --      19,583/45,417       -/-
--------------------------------------------------------------------------------

(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, 2000 closing  price of $1.69 and the grant price.  None of the
     options  granted to  executives  in 1998 and 1999 were  in-the-money  as of
     December 31, 2000.

(3)  Mr.  Jacobstein  was  elected  Chairman  of the Board  and Chief  Executive
     Officer on November 22, 1999.



<PAGE>


Employment Arrangements

     Neil  Jacobstein,  Chairman  of the Board,  Chief  Executive  Officer,  and
President,  has an  employment  agreement  with the Company that provides for an
annual  base  salary  of  $195,000.  Mr.  Jacobstein's  also  has  an  incentive
compensation plan that provides for additional  compensation when certain target
objectives are achieved in six strategic  categories that will be determined and
assessed  by the Board of  Directors  to a maximum  of 120% of his  annual  base
salary.  Mr.  Jacobstein  did not earn a  regular  bonus in 2000;  however,  Mr.
Jacobstein  did earn  $114,000  from a  sign-on  bonus as a  consequence  of his
consolidating  the roles of President and Chief Executive Officer of the Company
in November  1999. Mr.  Jacobstein has a severance  package that entitles him to
severance  benefits  equal to his most  recent  twelve-month  salary  and bonus;
except 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 salaries 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 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 30, 2001 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.

--------------------------------------------------------------------------------
Name and Address of                 Common Stock Owned       Percent
Beneficial Owner                      Beneficially(i)        of Class
--------------------------------------------------------------------------------
Mark J. Hanna                           267,607(2)             4.7%
327 Plaza Real, Suite 319
Boca Raton, FL 33432

Dennis A. Bugbee(1)                      69,098(3)             1.21%

Larry E. Druffel(1)                      20,000(4)              *

Frederick Hayes-Roth                    542,552(5)             9.5%
1810 Embarcadero Road
Palo Alto, CA 94303

Neil A. Jacobstein(1)                   698,857(6)            12.3%

Ivan L. Lustig(1)(7)                       --                  --

Robert T. Marsh(1)                       22,000(8)              *

Benedict O'Mahoney(1)                    31,666(9)              *

James C. Workman(1)                      22,000(10)             *

All Directors and Executive             863,621(11)           15.2%
Officers of the Company as
a Group (6 Persons)
--------------------------------------------------------------------------------

(i)  All share  numbers  have been  adjusted  to give  effect to a  one-for-five
     reverse stock split on December 22, 1998

*    Less than 1%

(1)  The  address of all  directors  and  executive  officers  is the  Company's
     Executive Offices located at 1810 Embarcadero  Road, Palo Alto,  California
     94303.

(2)  The information  concerning the Common Stock owned  beneficially by Mark J.
     Hanna was  obtained  from a  Schedule  13D filed  with the  Securities  and
     Exchange Commission on August 29, 1997.

(3)  Includes  22,916  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, 2001.

(4)  Includes  12,000  shares,  which  may be  purchased  upon the  exercise  of
     director  stock  options  that are  currently  exercisable  or will  become
     exercisable within 60 days of April 30, 2001.

(5)  Dr. Hayes-Roth resigned 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.

(6)  Mr.  Jacobstein  has exercised all of his stock  options.  Includes  18,000
     shares owned by Mr. Jacobstein's spouse;  however, Mr. Jacobstein disclaims
     beneficial ownership.

(7)  Ivan Lustig was elected to the Board on March 12, 2001. Mr. Lustig received
     a grant to purchase  3,000  shares on his election to the Board that may be
     exercised one year from the date of the grant.

(8)  Includes  22,000  shares,  which  may be  purchased  upon the  exercise  of
     director  stock  options  that are  currently  exercisable  or will  become
     exercisable within 60 days of April 30, 2001.

(9)  Includes  24,666  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, 2001.

(10) Includes  18,000  shares,  which  may be  purchased  upon the  exercise  of
     director  stock  options  that are  currently  exercisable  or will  become
     exercisable  within 60 days of April 30, 2001.  Mr.  Workman's  spouse owns
     4,000 shares beneficially.

(11) Includes options for 99,582 shares, which are currently exercisable or will
     become exercisable within 60 days of April 30, 2001.

Item 12. Certain Relationships and Related Transactions

     In  November  1999,  Teknowledge  agreed to  provide  seed  money 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 it has since changed its business
plan  to  providing   business-to-business   commercial  mortgage  transactions.
Teknowledge  retains  19.9% of  GlobalStake.com  via Series A Preferred  shares.
Through  December  31,  2000,   Teknowledge  has  provided:   (1)  approximately
$1,134,000  (including  approximately  $923,000  during 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. The Company's CEO maintains one out of six seats
on the Board of Directors of GlobalStake.com.

The components of the investment in GlobalStake.com during 2000 are as follows:

Direct investment                                    $500,000
Consulting services                                   351,000
Operating expenses                                     72,000
                                                     --------
                                                     $923,000
                                                     ========



<PAGE>



Item 13.   Exhibits and Reports on Form 8-K

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

           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.
<TABLE>
<CAPTION>

Exhibit No.                Description

<S>     <C>        <C>
        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)
</TABLE>

<PAGE>
                                       20
<TABLE>
<CAPTION>

Exhibit No.               Description

<S>    <C>         <C>
       10.1        Stock Option Agreement between the Company and Frederick Hayes-Roth, dated
                   November 29, 1993 (5)

       10.2        Stock Option Agreement between the Company and Neil Jacobstein, dated
                   November 29, 1993 (5)

       10.3        Stock Option Agreement between the Company and Frederick Hayes-Roth, dated
                   April 1, 1994 (5)

       10.4        Stock Option Agreement between the Company and Neil Jacobstein, dated
                   April 1, 1994 (5)

       10.5        Change of Control Agreement, dated November 21, 1994, between Teknowledge Corporation
                   and Frederick Hayes-Roth and Neil Jacobstein (1)

       10.6        Stock Option Agreement between the Company and Frederick Hayes-Roth, dated
                   March 30, 1995 (5)

       10.7        Stock Option Agreement between the Company and Neil Jacobstein, dated
                   March 30, 1995 (5)

       10.8        Teknowledge Corporation 1998 Stock Option Plan (3)

       10.8.1      Executive  Compensation  Plan,  adopted by  resolution  of the
                   Company's Compensation Committee, dated November 22, 1999

       10.8.2      Contract Agreement with GlobalStake.com, dated November 22, 1999

       23.1        Consent of Arthur Andersen LLP, independent public accountants

       27          Financial Data Schedule
</TABLE>

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.

(b)      Reports on Form 8-K

         None.
<PAGE>
                                       21


(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.

(d)      Financial Statement Schedules

         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.
<PAGE>
                                       22

                                   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 1, 2001                                   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.
<TABLE>
<CAPTION>

              Name                                     Capacity                                    Date

<S>                                                <C>                                         <C>
/s/ Neil A. Jacobstein                             Chairman of the Board                       April 1, 2001
Neil A. Jacobstein                                 of Directors and
                                                   Chief Executive Officer
                                                   (Principal Executive
                                                   Officer)

/s/ Dennis A. Bugbee                               Vice President Finance,                     April 1, 2001
Dennis A. Bugbee                                   Chief Financial Officer
                                                   (Principal Financial and
                                                    Accounting Officer)

/s/ Lawrence Druffel                               Director                                    April 1, 2001
Lawrence Druffel

/s/ Benedict O'Mahoney                             Director,  Vice President,                  April 1, 2001
Benedict O'Mahoney                                 Administration and
                                                   Legal Affairs

/s/ General Robert T. Marsh                        Director                                    April 1, 2001
General Robert T. Marsh (Ret.)


/s/ James C. Workman                               Director                                    April 1, 2001
James C. Workman
</TABLE>




<PAGE>
                                       23



                          ANNUAL REPORT ON FORM 10-KSB

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

                          LIST OF FINANCIAL STATEMENTS

                                CERTAIN EXHIBITS

                  FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000
                  AND FOR THE TWO YEARS ENDED DECEMBER 31, 2000

                             TEKNOWLEDGE CORPORATION

                              PALO ALTO, CALIFORNIA

<PAGE>
                                       24

                             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:
<TABLE>
<CAPTION>

                                                                                                                   Page

<S>                                                                                                                <C>
Report of Independent Public Accountants                                                                           25

Consolidated Balance Sheet - December 31, 2000                                                                     26

Consolidated Statements of Operations and Comprehensive Income -
Years ended December 31, 2000 and 1999                                                                             27

Consolidated Statements of Stockholders' Equity - Years ended December 31, 2000 and 1999                           28

Consolidated Statements of Cash Flows - Years ended December 31, 2000 and 1999                                     29

Notes to Consolidated Financial Statements                                                                         30 - 42
</TABLE>





<PAGE>
                                       25

                    Report Of Independent Public Accountants


To Teknowledge Corporation:


We have  audited the  accompanying  consolidated  balance  sheet of  Teknowledge
Corporation (a Delaware Corporation) and subsidiary as of December 31, 2000, and
the related  consolidated  statements of operations  and  comprehensive  income,
stockholders'  equity and cash flows for the two years ended  December  31, 2000
and 1999.  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 audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 audits  provide a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Teknowledge Corporation and its
subsidiary  as of December 31,  2000,  and the results of their  operations  and
their  cash  flows  for the two years ended  December  31,  2000  and 1999 in
conformity with accounting principles generally accepted in the United States.


/s/ Arthur Andersen LLP
Arthur Andersen LLP



San Jose, California
March 29, 2001


<PAGE>
                                       26


<TABLE>
<CAPTION>

                             TEKNOWLEDGE CORPORATION
                           CONSOLIDATED BALANCE SHEET
                             AS OF DECEMBER 31, 2000


                                     ASSETS

                                                                                      December 31,
                                                                                          2000
                                                                                    -----------------
Current assets:

<S>                                                                               <C>
     Cash and cash equivalents                                                    $        1,049,052
                                                                                    -----------------
     Receivables:
        Billed, net of allowance of $515,000                                               3,508,070
        Unbilled                                                                           1,252,648
                                                                                    -----------------
            Total receivables                                                              4,760,718

     Deferred tax asset, current                                                             268,000
     Deposits and prepaid expenses                                                            38,373
                                                                                    -----------------
        Total current assets                                                               6,116,143

Capitalized software development costs, net of accumulated
     amortization of $386,232                                                              2,291,661

Fixed assets, at cost
     Computer and other equipment                                                          3,437,440
     Furniture and fixtures                                                                  121,577
     Leasehold improvements                                                                  838,398
                                                                                    -----------------
                                                                                           4,397,415
     Less:  Accumulated depreciation                                                      (3,911,255)
                                                                                    -----------------
                                                                                             486,160
Investment in Globalstake                                                                  1,134,307
Deferred tax asset, noncurrent                                                               500,000
Other assets, noncurrent                                                                      24,541
                                                                                    -----------------

Total assets                                                                     $        10,552,812
                                                                                    =================

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                                             $        2,098,095
     Line of credit, current                                                               1,350,000
     Payroll and related liabilities                                                         732,706
     Other accrued liabilities                                                               278,716
                                                                                    -----------------
        Total current liabilities                                                          4,459,517

Commitments and contingencies (Notes 4 and 11)

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,
       5,690,835 shares issued and outstanding                                                56,908
     Additional paid-in capital                                                            1,772,048
     Retained earnings since January 1, 1993
        (following quasi-reorganization)                                                   4,264,339
                                                                                    -----------------
        Total stockholders' equity                                                         6,093,295
                                                                                    -----------------

Total liabilities and stockholders' equity                                        $       10,552,812
                                                                                    =================

 The accompanying notes are an integral part of this consolidated financial statement.
</TABLE>
<PAGE>
                                       27


<TABLE>
<CAPTION>
                             TEKNOWLEDGE CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                            AND COMPREHENSIVE INCOME


                                                                  Years Ended December 31,
                                                                    2000            1999

<S>                                                      <C>              <C>
             Revenues                                    $     14,376,024 $    11,094,672
                                                           ---------------  --------------
             Costs and expenses:
              Cost of revenues                                  9,788,202       7,049,550
              General and administrative                        3,039,488       2,410,001
              Sales and marketing                                 474,780         512,040
              Research and development                            557,850         599,231
                                                           ---------------  --------------
               Total costs and expenses                        13,860,320      10,570,822
                                                           ---------------  --------------
               Operating income                                   515,704         523,850
             Other income, net                                      8,313         115,381
                                                           ---------------  --------------
             Income before tax                                    524,017         639,231
             Provision for income tax                             132,000         255,692
                                                           ---------------  --------------
             Net income and
              comprehensive income                       $        392,017 $       383,539
                                                           ===============  ==============

             Net income and comprehensive income per share:
                                 - Basic                 $           0.07 $          0.08
                                                           ===============  ==============
                                 - Diluted               $           0.07 $          0.07
                                                           ===============  ==============

             Shares used in computing  Net income and  comprehensive  income per
              share:
                                 - Basic                        5,477,651       5,050,386
                                                           ===============  ==============
                                 - Diluted                      5,958,303       5,795,717
                                                           ===============  ==============




The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
                                       28


<TABLE>
<CAPTION>
                             TEKNOWLEDGE CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



                                           Common Stock        Additional
                                         Shares       Par        Paid-in        Retained      Treasury
                                         Issued      Value       Capital        Earnings        Stock        Total

<S>                                  <C>       <C>         <C>          <C>             <C>          <C>
Balance, December 31, 1998            4,954,954 $   49,550  $  1,553,980 $     3,488,783 $          - $  5,092,313

Repurchase of common stock                    -          -             -               -     (291,494)    (291,494)

Exercise of stock options               347,586      3,475        60,454               -      110,397      174,326

Net income                                    -          -             -         383,539            -      383,539

Reversal of net operating
    loss carryforwards established
    prior to quasi-reorganization             -          -       180,968               -            -      180,968
                                    ------------  ---------   -----------  --------------  -----------  -----------

Balance, December 31, 1999            5,302,540     53,025     1,795,402       3,872,322     (181,097)   5,539,652

Exercise of stock options               388,295      3,883       (23,354)              -      181,097      161,626

Net income                                    -          -             -         392,017            -      392,017

                                    ------------  ---------   -----------  --------------  -----------  -----------

Balance, December 31, 2000            5,690,835 $   56,908  $  1,772,048 $     4,264,339 $          - $  6,093,295
                                    ============  =========   ===========  ==============  ===========  ===========






 The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
                                       29


<TABLE>
<CAPTION>
                                   TEKNOWLEDGE CORPORATION
                            CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                      Years Ended December 31,
                                                                        2000             1999
Cash flows from operating activities:
<S>                                                            <C>              <C>
  Net income                                                   $      392,017   $      383,539
  Adjustments to reconcile net income
   to net cash provided by operating activities:
   Depreciation and amortization                                      540,145          359,839
   Provision for doubtful accounts                                    505,000                -
   Changes in assets and liabilities:
    Receivables                                                    (2,002,576)        (729,359)
    Deposits and prepaid expenses                                      37,319           11,167
    Other assets                                                        4,855                -
    Deferred tax asset                                                132,000          180,968
    Accounts payable                                                1,350,691           86,083
    Accrued liabilities                                               130,511          (65,467)
                                                                 -------------    -------------
   Net cash provided by operating activities                        1,089,962          226,770
                                                                 -------------    -------------

Cash flows from investing activities:
  Investment in GlobalStake                                          (922,541)        (211,766)
  Capitalization of software development costs                     (2,213,665)        (185,460)
  Purchase of fixed assets                                           (367,723)        (139,373)
                                                                 -------------    -------------
   Net cash used for investing activities                          (3,503,929)        (536,599)
                                                                 -------------    -------------

Cash flows from financing activities:
  Proceeds from issuance of common stock                              161,626          174,326
  Proceeds from line of credit                                      1,350,000                -
  Repurchase of common stock                                                -         (291,494)
                                                                 -------------    -------------
   Net cash provided by (used for) financing activities             1,511,626         (117,168)
                                                                 -------------    -------------
Net decrease in cash and cash equivalents                            (902,341)        (426,997)

Cash and cash equivalents at beginning of period                    1,951,393        2,378,390
                                                                 -------------    -------------
Cash and cash equivalents at end of period                     $    1,049,052   $    1,951,393
                                                                 =============    =============
Supplemental disclosure of cash flow information:
Cash paid for income taxes                                     $       38,756   $       18,200
                                                                 =============    =============

Cash paid for interest expense                                 $       56,501   $            -
                                                                 =============    =============


 The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
                                       30


                             TEKNOWLEDGE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2000



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  ("Cimflex")
        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.  Adjustments to
        previously  established  reserves and any subsequent  realization of tax
        benefits  existing  at the  date  of the  quasi-reorganization  will  be
        recorded as adjustments to additional 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 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  expands  its  business  from  being  focused  on
        government  sponsored  contracts to a broader commercial  customer base;
        from sales of R&D  consulting  services to commercial  sales of software
        licenses, maintenance, and related consulting services, it is subject to
        risks  inherent to companies at a similar  stage of  development.  These
        include  successful  introduction and market  acceptance of the software
        product  and  related   services;   sufficient   resources   to  develop
        enhancements  to the  existing  product 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 product and
        solutions are targeted to the account aggregation market where customers
        are mainly  financial  institutions.  Risk factors that affect financial
        institutions  such  as  industry  consolidation,  or a  downturn  in the
        overall economy could also have an adverse effect on the Company.

2.      Summary of Significant Accounting Policies

        Use of Estimates in the Preparation of Financial Statements

               The  preparation  of  financial  statements  in  conformity  with
        generally accepted  accounting  principles  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.

<PAGE>
                                       31


2.      Summary of Significant Accounting Policies (cont'd)

        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, 2000, the Company's  funds were invested almost entirely in
        money market instruments at various institutions.

        Accounts Receivable and Unbilled Receivables

               Accounts  receivable and unbilled  receivables as of December 31,
        2000 consists of the following:

<TABLE>
<CAPTION>

        U.S. Government:

          <S>                                                                       <C>
          Amounts billed                                                            $2,029,510
          Unbilled costs and accrued profit                                            315,328
          Costs in excess of amounts billed                                                  -
                                                                                    ----------
                                                                                     2,344,838
                                                                                    ----------
        Commercial Customers:
          Amounts billed                                                             1,993,560
          Unbilled costs and accrued profit                                            499,755
          Costs in excess of amounts billed                                            437,565
                                                                                    ----------
                                                                                     2,930,880
                                                                                    ----------
                                                                                     5,275,718
          Allowance for uncollectible accounts                                        (515,000)
                                                                                    ----------
            Total receivables, net                                                  $4,760,718
                                                                                    ==========
</TABLE>

               Unbilled  receivables   primarily  represent  timing  differences
        between incurred costs and billed costs on progress completed as well as
        costs in excess of amounts billed.

        Concentration of Credit and Customer Risk

               In 2000,  approximately  64% of the Company's total revenues were
        recorded in connection with U.S.  Government  contracts,  principally of
        the  cost-plus-fixed-fee  type,  compared to approximately  85% in 1999.
        These  contracts  are  predominantly  funded  by  the  Defense  Advanced
        Research Projects Agency (DARPA) and administered by various  government
        agencies.  For the years ended December 31, 2000 and 1999, DARPA was the
        sponsor of the Company's three largest government  contracts  accounting
        for 57% and 58%, respectively, of government revenue.


<PAGE>
                                       32


2.     Summary of Significant Accounting Policies (cont'd)

               The Company's  customers for its financial systems solutions have
        been mainly small  financial  institutions  and resellers.  During 2000,
        three  resellers  accounted  for  43%  of  financial  systems  solutions
        revenues.  The  Company  performs  periodic  credit  evaluations  of its
        commercial customers and generally does not require collateral. However,
        due to the increased level of financial systems solutions sales in 2000,
        the  Company  has  experienced  slower  collections  and higher  average
        receivable  balances from its commercial  customers.  As of December 31,
        2000, 56% of total receivables  related to financial systems  solutions.
        As such the provision for uncollectible accounts has been increased from
        $10,000 to $515,000.  The Company has not experienced a credit loss from
        a government customer nor does it anticipate such losses.

        Capitalized Software Development Costs

               Teknowledge  capitalizes software development costs starting from
        the point  technological  feasibility is determined and continuing until
        the general availability of the product.  During 2000 and 1999, software
        development   costs  of  $2,213,665   and  $185,460  were   capitalized,
        respectively.  Amortization  costs were  $281,747 in 2000 and $92,923 in
        1999.

               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 remaining  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  $258,398  in 2000 and
        $266,916 in 1999.

        Investment in GlobalStake.com

               At December 31, 2000 the Company owned 19.9% of  GlobalStake.com
        and the investment is carried at cost (see Note 12).

        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.

<PAGE>
                                       33


2.      Summary of Significant Accounting Policies (cont'd)

        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 market or
        in private during the  twelve-month  period ending  December 15, 1999 at
        prevailing prices. Repurchases will be 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, 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  solutions 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. A certain  portion of the fee charged
        to the government is retained and may be billed after the final indirect
        rates are  submitted  to the  government;  however,  they are subject to
        future review and approval by the Defense Contract Audit Agency. Revenue
        on the retained fee,  therefore,  is not recognized  until billed to the
        government.  The Company last received  final overhead rate approval for
        costs incurred through December 31, 1997.

        (b)    Software license and services

               Revenue  is  recognized  in  accordance  with SOP 97-2  using the
        residual method.  Revenue earned under software license  agreements with
        end users are generally  recognized as revenue upon contract  execution,
        provided  all  shipment  obligations  have been  met,  fees are fixed or
        determinable,  and collection is probable. Revenue earned under software
        license  agreements  for  2000 and 1999  was  $1,046,145  and  $156,436,
        respectively.  Revenue from post-contract customer support is recognized
        ratably over the period the customer support services are provided,  and
        software  consulting  services  revenue is  recognized  as services  are
        performed.

<PAGE>
                                       34


2.      Summary of Significant Accounting Policies (cont'd)

        Earnings Per Share

                Basic and  diluted  net  earnings  per share  are  presented  in
        conformity  with SFAS No.  128,  "Earnings  per  Share," for all periods
        presented.  In accordance with SFAS No. 128, 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 common stock equivalents during the period.
        Common stock equivalents  included in the diluted calculation consist of
        dilutive shares  issuable upon the exercise of outstanding  common stock
        options.

                A summary of the earnings per share  calculation for each of the
        two years ended  December 31, 2000 and 1999 is as follows (in thousands,
        except per share amounts).

                                                                2000        1999
        Basic earnings per share:
                Net income                                    $  392      $  384
                                                              ------      ------
                Weighted average common shares                 5,478       5,050
                                                              ------      ------
        Basic earnings per share                              $ 0.07      $ 0.08
                                                              ======      ======

        Diluted earnings per share:
                Net income                                    $  392      $  384
                                                              ------      ------
                Weighted average common shares                 5,478       5,050
                Weighted average common shares equivalent:
                  Options                                        480         746
                  Diluted weighted average common shares       5,958       5,796
                                                               -----       -----
        Diluted earnings per share                            $ 0.07      $ 0.07
                                                              ======      ======

        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  adoption  did not  have a  significant
        effect on the Company's  results of operations as the Company  continues
        to apply the principles of Accounting Principles Board (APB) Opinion No.
        25 and related  interpretations  in accounting  for the Company's  stock
        plans.

        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. The Company provides software
        products  and   consulting   services  for   government  and  commercial
        applications. The Company operates five interdependent operating

<PAGE>
                                       35


2.      Summary of Significant Accounting Policies (cont'd)

        units within one reporting  segment.  The chief decision maker 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  limited  revenue
        detail.  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. On this
        basis,  the Company is organized  and operates as one business  segment,
        providing  software products and consulting  services for government and
        commercial applications.

        Recent Accounting Pronouncements

               In June 1998,  the Financial  Accounting  Standards  Board issued
        SFAS  No.  133,  "Accounting  for  Derivative  Instruments  and  Hedging
        Activities",  which  requires  companies to value  derivative  financial
        instruments,   including  those  used  for  hedging   foreign   currency
        exposures,  at  current  market  value  with the impact of any change in
        market value being  charged  against  earnings in each  period.  In June
        1999,  the  Financial  Accounting  Standards  Board issued SFAS No. 137,
        "Accounting for Derivative  Instruments and Hedging Activities  Deferral
        of the Effective  Date of SFAS No. 133" to defer the  effective  date of
        SFAS No. 133 until fiscal years  beginning after June 15, 2000. To date,
        the Company has not entered  into any  derivative  financial  instrument
        contracts.  Thus the Company anticipates that SFAS No. 133 will not have
        a material impact on its consolidated financial statements.

3.      Other Accrued Liabilities

               Other accrued  liabilities as of December 31, 2000 consist of the
        following:

               Provision for contract charges                          $100,216
               Other                                                    178,500
                                                                       --------
                                                                       $278,716
                                                                       ========

4.      Commitments

               The Company  leases its facilities  and certain  equipment  under
        operating leases. As of December 31, 2000, the Company had active leases
        in the following locations:

               Location                                      Date Lease Expires
               Marina Del Rey, California                     December 31, 2001
               Palo Alto, California                              April 4, 2002
               Cleveland, Ohio                                 October 31, 2005
               Arlington, Virginia                                June 30, 2001
               Fairfax, Virginia                                  June 30, 2002



<PAGE>
                                       36


4.      Commitments (cont'd)

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

                   Year Ending
                   December 31,
                       2001                                          $  718,000
                       2002                                             200,000
                       2003                                              38,000
                       2004                                              39,000
                       2005                                              34,000
                                                                     ----------
                                                                     $1,029.000
                                                                     ==========

               Rent  expense  for the years  ended  December  31,  2000 and 1999
        totaled approximately, $699,000 and $646,000, respectively.

5.      Line of Credit and Financing Arrangements

               During  the year ended  December  31,  2000,  the  Company  had a
        $2,000,000  unsecured line of credit  agreement with a bank. The Company
        could borrow up to 60% of the eligible  receivables base, or $2,000,000,
        whichever  is lower.  The  maximum  rate that could be  charged  was one
        percent  over the bank's  prime rate (9.5% at December  31,  2000).  The
        agreement   includes   certain   financial   covenants  and   disclosure
        requirements. The line expired in February 2001. The outstanding balance
        as of December 31, 2000 was $1,350,000, which was refinanced in February
        2001 as discussed below.

               In January  2001,  the Company  entered an asset based  borrowing
        arrangement with a finance company. Borrowings under the arrangement are
        collateralized  by the assets of the Company.  The  outstanding  balance
        bears  a  monthly   finance  fee  of  1%.  The  Company   also  pays  an
        administrative   fee  of  0.5%  of  the  face  amount  of  each  account
        transferred to the arrangement.  Under the terms of the arrangement, the
        Company can borrow up to 80% of the eligible  receivables  base, up to a
        maximum  of  $2,000,000.   The  new  agreement   contains  no  financial
        covenants,  but has minimal disclosure  requirements.  In February 2001,
        the Company withdrew $1,350,000 on this financing arrangement.

6.      Income Taxes

               The Company accounts for income taxes in accordance with SFAS No.
        109,  "Accounting  for  Income  Taxes."  SFAS No.  109 is an  asset  and
        liability  approach for computing deferred income taxes based on enacted
        tax laws and rates  applicable  to the period in which the taxes  become
        payable.

               The Company has  reflected  as a reduction to the  provision  for
        income taxes the benefit  from tax losses  generated  subsequent  to the
        date of the quasi-reorganization  (see Note 1). The provision for income
        taxes differs from the statutory U.S. Federal income tax rate due to the
        following:



<PAGE>
                                       37



6.      Income Taxes (cont'd)
                                                                 2000      1999
        Provision at U.S. statutory rate                         34.0%     35.0%
        State income taxes, net of other Federal benefit          5.2       5.8
        Change in valuation allowance                             7.0         -
        Other                                                     1.0      (0.8)
        Benefit of tax credit carryforwards                     (22.1)        -
                                                                 ----      ----
               Effective tax rate                                25.1%     40.0%
                                                                 ====      ====

               The  components  of the  net  deferred  income  tax  asset  as of
        December 31, 2000 are as follows:

               Net operating loss carryforwards                     $23,736,615
               Tax credit carryforwards                               1,215,327
               Cumulative temporary differences                        (324,030)
                                                                    -----------
                                                                     24,627,912
               Valuation allowance                                  (23,859,912)
                                                                   ------------
               Net deferred income tax asset                       $    768,000
                                                                   ============

               The  valuation  allowance  provides  for  net  operating  losses,
        cumulative temporary differences and tax credit carryforwards, which may
        expire  before  they  can  be  used.  The  Company  believes  sufficient
        uncertainty  exists  regarding  the  realizability  of these items,  and
        accordingly, a valuation allowance has been established.

               At  December  31,  2000,  the  Company  had  net  operating  loss
        carryforwards  of approximately  $61 million  available to offset future
        Federal  taxable  income.   Any  subsequent   realization  of  tax  loss
        carryforwards that existed at the date of the quasi-reorganization  will
        be recorded as an adjustment to additional  paid-in-capital.  These loss
        carryforwards  expire through the year 2020. 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  provisions,  including  any
        change in ownership  interest of the Company  resulting from significant
        stock transactions.

               Realization  of the net  deferred  tax  asset of  $768,000  as of
        December 31, 2000 is dependent on generating  sufficient  taxable income
        to offset future deduction of the related items. Although realization is
        not assured, management believes it is more likely than not that the net
        deferred  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.

7.      401(k) Plan

               The  Company  has a 401(k)  plan  covering  all of the  Company's
        regular employees. 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% a year  over a  five-year
        period. The Company contributed  approximately  $210,000 and $200,000 to
        the plan during 2000 and 1999, respectively.

<PAGE>
                                       38



8.      Executive Compensation Plan

               The Chief  Executive  Officer of the  Company  has an  employment
        agreement with the Company for the year 2001. Besides base compensation,
        this  agreement  includes  an  incentive  compensation  plan with target
        objectives established in the six strategic categories of profitability,
        bookings,  achievement of revenue targets in Financial Systems,  outside
        investment,  and new products,  which will be determined and assessed by
        the Board of Directors to a maximum of 60% of base salary.  During 2000,
        the Board of Directors did not approve any bonus for the Chief Executive
        Officer.

9.      Stock-Based Compensation Plans

               The Company has two stock option plans. 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 is called the
        Teknowledge Plan for Non-Employee Directors (the "Directors' Plan"). The
        Company accounts for these plans under APB Opinion No. 25.

               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.  The  proforma
        diluted EPS calculation  excludes the effect of common stock equivalents
        for 2000, as they are anti-dilutive.

                                                       2000            1999
              Net Income (loss)   As Reported       $ 392,017        $383,539
                                  Pro Forma         $(149,695)       $166,703

              Diluted EPS         As Reported          $ 0.07           $0.07
                                  Pro Forma            $(0.03)          $0.03

               During 2000, the  stockholders  approved an amendment to the 1998
        Plan increasing the number of options the Company may grant to employees
        from 1,595,101 to 2,345,101 shares.  The Company has granted options for
        631,500  shares  ($2.06 - $11.25 per share) and  337,600  shares  ($3.50
        -$5.38 per share) in 2000 and 1999,  respectively,  and has reserved for
        issuance a total of 1,452,061  shares  through  December  31, 2000.  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  price on the date of grant.  For NSO, the exercise
        price of the  common  stock may not be less than 85% of the fair  market
        price 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 1998
        Stock Option Plan is scheduled to expire in April 2008.

               The aggregate  number of shares issued under the Directors'  Plan
        may not  exceed  100,000  shares of Common  Stock.  87,000  shares  were
        available  for future grant as of December  31,  2000.  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

<PAGE>
                                       39


9.      Stock-Based Compensation Plans (cont'd)

        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.

               Options to purchase a total of 57,000 shares were  outstanding as
        of December  31, 1999 at $.75 to $8.15 per share and a weighted  average
        fair value of $4.30 per  share.  Options  for  45,000  shares at $.75 to
        $8.15 per share and a weighted  average  fair value of $4.24 were vested
        at December 31,  1999.  No options  were  exercised in 1999.  Options to
        purchase 55,000 shares were  outstanding as of December 31, 2000 at $.75
        to $8.15 per share and a weighted average fair value of $4.54 per share.
        Options  for  46,000  shares at $.75 to $8.15  per share and a  weighted
        average of $4.46 per share were vested at December 31, 2000. Options for
        8,000 shares at $3.20 to $3.45 per share and a weighted average of $3.32
        per share were exercised during 2000.

               A summary of the status of the Company's stock option plans as of
        December 31, 2000 and 1999 is presented below:
<TABLE>
<CAPTION>

                                             2000                            1999
                                   ----------------------------   ------------------------
                                                     Wtd Avg                       Wtd Avg
                                       Shares       Ex Price        Shares        Ex Price
<S>                                 <C>              <C>          <C>               <C>
        Outstanding at beg.of year  1,104,012        $ 2.10       1,264,899         $ 1.44
        Granted                       640,500          3.88         349,600           3.98
        Exercised (1)                (433,365)         0.37        (372,786)          0.47
        Forfeited                     (87,856)         3.66        (137,701)          4.32
                                    ---------                     ---------
        Outstanding at end of year  1,223,291          3.53       1,104,012           2.10
                                    =========                    ==========

        Exercisable at end of year    299,307           3.10         591,749           .98
        Weighted average fair value
        of options granted             $3.60                           $2.53

        (1)  Includes 45,070 and 25,200 shares issued from Treasury shares during 2000 and 1999,
             respectively.
</TABLE>

               The following table  summarizes  information  about stock options
        outstanding at December 31, 2000:
<TABLE>
<CAPTION>

                                  Options Outstanding                 Options Exercisable
                                        Wtd Avg
         Range of         Shares      Contractual                     Shares
        Ex Prices       Outstanding      Life        Wtd Avg         Exercises    Wtd. Avg
          ($'s)           12/31/00      (Years)      Ex Price        12/31/00     Ex Price
<S>    <C>                <C>              <C>          <C>            <C>           <C>
       0.05 -  1.00           7,003        3.6          0.47             7,003       0.47
       1.01 -  3.00         501,688        8.6          2.08           154,688       2.08
       3.01 -  4.00         258,100        8.8          3.72            67,275       3.64
       4.01 - 11.25         456,500        9.2          5.06            70,341       6.41
                          ---------                                    -------
       0.05 - 11.25       1,223,291        8.8          3.53           299,307       3.10
                          =========                                    =======
</TABLE>

<PAGE>
                                       40


9.      Stock-Based Compensation Plans (cont'd)

               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  2000  and  1999,
        respectively;  risk-free interest rates of 6.2% and 5.6%; expected lives
        of 5.5 and 5.5 years;  expected volatility of 146% and 68%; and expected
        dividend yield of 0%.

               As of December 31, 2000, the following number of shares of Common
        Stock have been reserved for future issuance under both Plans:

               Teknowledge Corporation 1998 Stock Option Plan          1,452,061
               Stock Option Plan for Non-Employee Directors               87,000
                                                                       ---------
                                                                       1,539,061
                                                                       =========

10.     Other Income and Expense

               The composition of other income and expense is as follows:

                                                            2000          1999

               Interest Income                            $64,770       $112,637
               Interest Expense                           (56,501)             -
               Other                                           44          2,744
                                                          -------       --------
                                                          $ 8,313       $115,381
                                                          =======       ========

11.     Contingencies

        Change of Control - Severance Benefits

               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,  the Chief  Executive  Officer/President  of the
        Company  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 most recent annual salary.

        Rights Agreement

               On January 29, 1996, the Company's Board of Directors  approved a
        Rights Agreement (the "Plan"). The adoption of the Plan 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.



<PAGE>
                                       41



11.     Contingencies (cont'd)

               Under the Plan, stockholders will receive five Rights to purchase
        one one-hundredth of a share of a new series of 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 Company has  effected a
        one-for-five  reverse stock split on December 22, 1998.  Pursuant to the
        Plan,  the number of Rights  received per share of Common Stock held has
        been proportionately adjusted to reflect the effect of the reverse stock
        split.

               The Rights,  which will  initially  trade with the Common  Stock,
        become  exercisable to purchase one  one-hundredth of a share of the new
        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 the new  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.

        Legal Proceedings

               In 1999  Teknowledge  offered  to sell SAP a  license  to use the
        technology  related to Teknowledge's  Intelligent  Configuration  Patent
        Portfolio,  a  collection  of five  patents  relating  to  configuration
        technologies,  including the `983 patent.  In response to this offer, on
        October  8,  1999,   SAP  America,   Inc.  and  SAP   Aktiengesellschaft
        (collectively,  "SAP") filed a lawsuit against the Company in the United
        States  District Court for the District of Delaware.  The subject matter
        of the case involves Teknowledge's configuration systems patent, Bennett
        et al. U.S. Patent  4,591,983 (the "'983 patent") and the  configuration
        technology  associated  with the SAP R/3 System ("R/3  System").  SAP is
        seeking a judgment  against  Teknowledge that the `983 patent is invalid
        and is not infringed by the R/3 System; an award of attorney fees, costs
        of suit, and other relief the court may deem just and proper.

               In 1999 Teknowledge  filed a counterclaim  against SAP for patent
        infringement  of two of its patents.  The subject of the counter suit is
        the `983 patent entitled "Hierarchical Knowledge System" and U.S. Patent
        4,783,752 entitled "Knowledge Based Processing for Application  Programs
        Using Conventional Data Processing  Capabilities." The management of the
        Company  considers  the suit brought by SAP to be without  merit and has
        vigorously  defended its patent.  Teknowledge  and SAP are  finalizing a
        settlement  agreement  and  termination  of  the  lawsuit.  The  Company
        anticipates no adverse effect as a result of this settlement.



<PAGE>
                                       42



12.     Related Party Transactions

               In November 1999,  Teknowledge agreed to provide seed money 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
        during 2000 it modified  its strategy to focus on a business to business
        model for conducting  commercial real estate mortgages.  The Company has
        reviewed  the  revised  business  plan  and  cash  flow  projections  of
        GlobalStake.com,  and has  determined  that its  investment has not been
        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,  the ability to secure
        mortgage  financing sources and to negotiate a competitive  arrangement.
        The  Company   intends  to   periodically   review  the  performance  of
        GlobalStake.com in accordance with the business plan and SFAS121.

               To date Teknowledge has provided:  (1)  approximately  $1,134,000
        (including  approximately  $923,000  during  2000-see  details below) 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.

               The  Company's CEO maintains one out of six seats on the Board of
        Directors of  GlobalStake.com  and owns  approximately 12% of the common
        shares at December 31, 2000. These are non voting shares.

               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).