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

                                  Form 10-KSB/A
                                (Amendment No. 2)

[ 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, 1997

[   ] 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

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no 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. $11,094,930

The aggregate  market value of Common Stock,  $.01 par value per share,  held by
non-affiliates of the registrant was $18,018,715 on March 23, 1998 (based on the
average  bid and ask price per  share of Common  Stock on that date as  reported
over-the-counter by the National Quotation Bureau).  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 23, 1998, there were 24,082,714  shares of Common Stock, $.01 par value
per share, of the registrant outstanding.

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Part III is replaced in its entirety as follows:
--------------------------------------------------------------------------------
                                    PART III
--------------------------------------------------------------------------------

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

Directors

     The Board of Directors  currently  consists of six members:  Dr.  Frederick
Hayes-Roth,  Neil A. Jacobstein,  Dr. Larry E. Druffel,  General Robert T. Marsh
(Ret.),  William  G.  Roth,  and James C.  Workman.  The Board of  Directors  is
comprised of three classes of directors,  each class  representing  one-third of
the Board,  with one class of the Board being  elected each year. At each Annual
Meeting  thereafter,  any director of the class whose term is expiring  would be
voted upon, and upon election,  such director would serve a three-year  term. At
the 1996 Annual  Meeting,  Neil  Jacobstein  and William G. Roth were elected as
Class II  directors  to serve a  three-year  term.  At the 1997 Annual  Meeting,
General Marsh (Ret.) and Dr.  Hayes-Roth  were elected as Class III directors to
serve a three-year  term. At the 1998 Annual  Meeting,  Dr. Larry E. Druffel and
James C.  Workman,  as Class I  directors,  are  proposed  to be elected to hold
office for a  three-year  term  until  their  successors  are duly  elected  and
qualified.

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

Class I Directors nominated for election at the 1998 Annual Meeting

      Dr. Larry E. Druffel     57     Director                     1997
      James C. Workman         55     Director                     1993

Class II Directors whose terms expire at the 1999 Annual Meeting

      Neil A. Jacobstein       43     President and                1993
                                      Chief Operating Officer
      William G. Roth          59     Director                     1991

Class III Directors whose terms expire at the 2000 Annual Meeting

      Dr. Frederick Hayes-Roth 50     Chairman of the Board and    1993
                                      Chief Executive Officer
      Gen. Robert T. Marsh     73     Director                     1987

--------------------------------------------------------------------------------
      Class I Nominees for a Term Expiring in 2001

      The nominees for election have  indicated a willingness  to serve,  but if
either  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,  57, was  appointed  to the Board of
Directors  in May 1997.  He is  currently  President  and  Director of the South
Carolina Research Authority (SCRA), a public non-profit organization since 1996.
He holds a doctorate degree in computer science from Vanderbilt University and a
master  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 has also served as the Director of Computer  Software and
Systems,  Office of Deputy  Undersecretary  of Defense for Research and Advanced

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Technology,  Washington, DC. Dr. Druffel was a former Vice President of Rational
Software  from  1983 to  1986,  and he has  served  on the  faculty  of the USAF
Academy.   Dr.   Druffel  is  the  author  of  numerous   books  and  papers  on
high-technology issues.

     James C. Workman.  Mr.  Workman,  55, 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 on January 26, 1993, Mr. Workman resigned from
his interim  executive  officer  position but retained a seat on the Board.  Mr.
Workman has served as a self-employed attorney/consultant since leaving American
Standard  Inc.  in 1989 where he was Senior  Vice  President,  Air  Conditioning
Products.
      
      Continuing Class II Directors for a Term Expiring in 1999

     Neil A. Jacobstein.  Mr.  Jacobstein,  43, is President and Chief Operating
Officer of the Company. Mr. Jacobstein was elected to these positions and became
a director of the Company in January 1993.  After joining  Teknowledge,  Inc. in
1984 as a Knowledge  Engineer,  Mr.  Jacobstein was promoted to Senior Knowledge
Engineer  and later to the  position  of Manager of the  Research  and  Advanced
Development Group in 1985. He was promoted to Vice President and General Manager
of the Research and Advanced Systems  Development  Group in 1987 and became Vice
President and General  Manager of the Knowledge  Systems  Division in 1989.  Mr.
Jacobstein  also  serves  as the  Chairman  of the  Board  of  Directors  of the
Institute for Molecular Manufacturing, a nonprofit organization.

     William G. Roth.  Mr. Roth, 59, was elected as a director of the Company in
January  1991.  Mr. Roth  retired as Chairman of the Board of Directors of Dravo
Corporation in 1994 after holding that position since 1989. Since his retirement
in  1994,  Mr.  Roth  continues  to  serve  as a  member  of the  Board of Dravo
Corporation  and the Company.  Mr. Roth is also a director of Amcast  Industrial
Corporation  and Service  Experts  Incorporated,  and Chairman of the  Company's
Human Resources Committee.

      Continuing Class III Directors for a Term Expiring in 2000

     Dr. Frederick Hayes-Roth.  Dr. Hayes-Roth, 50, is Chairman of the Board and
Chief Executive Officer of the Company.  Dr. Hayes-Roth was elected Chairman and
Chief Executive  Officer of the Company in January 1993. Dr.  Hayes-Roth  joined
Teknowledge,  Inc. in November  1981 as Executive  Vice  President and served as
Chief  Scientist  and Vice  President of the  Research and Advanced  Development
Group from April 1985 to June 1986; as Vice President,  Research and New Product
Development,  from June 1986 to  January  1987;  as  Executive  Vice  President,
Research and Advanced Systems  Development from January 1987 to May 1988; and as
Executive Vice President and Chief Scientist from May 1988 to January 1993.

     General  Robert T.  Marsh.  General  Marsh  (Retired),  73,  was  elected a
director of American Cimflex Corporation (a predecessor to the Company) in 1987.
He retired as Chairman of the Board of Thiokol  Corporation in 1991.  Since 1995
he has served as Executive  Director of the Air Force Aid Society,  a non-profit
charitable  organization  serving the Air Force community,  and he is the former
Chairman of the President's  Commission on Critical  Infrastructure  Protection.
General Marsh is Director and Chairman of the Board of CAE Electronics, Inc. and
Comverse Government  Systems,  Inc. He is also a member of the Board of Trustees
of MITRE  Corporation.  General Marsh is Chairman of the  Company's  Finance and
Audit Committee.

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Executive Officers

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

      Dennis A. Bugbee, 51, is Director of Finance, Treasurer, 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  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.

Item 10.    Executive Compensation

      The  following  table sets forth the cash  compensation  paid to the Chief
Executive  Officer  and to each of the two  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, 1997, 1996, and 1995.

                           SUMMARY COMPENSATION TABLE

                                                    Annual
                                               Compensation (3)

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

Name and Principal Position            Year         Salary         Bonus
                                                     $(1)          $(2)
------------------------------------------------------------------------------
Frederick Hayes-Roth, Chair, CEO       1997        208,084        96,769
Frederick Hayes-Roth, Chair, CEO       1996        196,388        128,639
Frederick Hayes-Roth, Chair, CEO       1995        181,352        68,403

Neil Jacobstein, Pres, COO             1997        134,692        63,664
Neil Jacobstein, Pres, COO             1996        128,468        84,330
Neil Jacobstein, Pres, COO             1995        118,000        44,842

Dennis Bugbee, Dir. of Finance         1997         98,635         7,500
Dennis Bugbee, Dir. of Finance         1996         93,842         5,000
Dennis Bugbee, Dir. of Finance         1995         90,700         5,000
------------------------------------------------------------------------------

(1) Includes 401(k) deferred  compensation and 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) No options were granted to executive officers in 1997, 1996, or 1995.

Stock Option Grants and Exercises

     The following tables set forth  information  regarding the value of options
held by the Chief Executive Officer and the other highly paid executive officers
named in the Summary  Compensation  Table at December 31, 1997. Dr.  Hayes-Roth,
Mr. Jacobstein,  and Mr. Bugbee were not granted options in 1997. Dr. Hayes-Roth
and Mr.  Bugbee  exercised  options  in 1997 for a total of  106,400  and 45,228
shares,  respectively.  Dr.  Hayes-Roth  and Mr.  Jacobstein  were each  granted
options to purchase 2,252,880 shares of Common Stock in 1994, 2,002,880 of which
vested in equal  quarterly  increments of 250,360 shares over a two-year  period
commencing September 30, 1994 and ending June 30, 1996.

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

--------------------------------------------------------------------------------
                                                                    Value of
                                                   Number of      Unexercised
                                                   Securities     In-the-Money
                              Shares               Underlying       Options
                              Acquired   Value    Unexercised        at FYE
Name                          on        Realized Options at FYE  (Exercisable/
                              Exercise    (1)    (Exercisable/   Unexercisable)
                                 (#)             Unexercisable)       (2)
--------------------------------------------------------------------------------
Frederick Hayes-Roth,         106,400   $53,200   1,731,480/-      $785,481/-
Chair, CEO
--------------------------------------------------------------------------------
Neil Jacobstein, Pres, COO        -        -      2,032,880/-      $928,525/-
--------------------------------------------------------------------------------
Dennis Bugbee, Dir. of         45,228   $16,889   25,000/6,250   $11,500/$2,875
Finance
--------------------------------------------------------------------------------

(1)   The value  realized upon exercise is the  difference  between the exercise
      price and the 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, 1997 bid price of $.49 and the grant  price.  Of the options
      granted to executives  since the  inception of the Plan,  only the options
      granted  in 1990 or  later  were in the  money  for a total  of  3,795,610
      shares.  Dr.  Hayes-Roth has 112,119 shares and Mr.  Jacobstein has 38,192
      shares that are exercisable but  not-in-the-money  at exercise prices from
      $2.45 to $3.53 per share.

Directors Compensation

      Directors  Fees.  Each  non-employee  member  of the  Board  of  Directors
receives  cash  compensation  totaling  $10,000,  which  is  paid  in  quarterly
increments.  While working on the  President's  Commission,  Gen.  Marsh did not
receive compensation.  In addition to their regular compensation,  directors are
entitled to be  reimbursed  for related  travel,  lodging and other  expenses in
attending board and committee meetings.

      Directors  Option  Plan.  The Company  maintains  a stock  option plan for
non-employee directors. The Directors Option Plan, as amended at the 1995 Annual
Meeting of Stockholders,  provides that each Eligible Director shall be granted,
on the date such director  becomes an Eligible  Director,  an initial  option to
purchase  15,000 shares of Common Stock,  and on the date of each annual meeting
thereafter,  each  continuing  Eligible  Director shall be granted an additional
option to purchase  15,000 shares of Common Stock.  Options to purchase  190,000
shares of Common Stock have been granted  since the  inception of the  Directors
Option Plan and 60,000 shares remain to be granted. An amendment to increase the
number of shares  authorized  under the Plan from 250,000 to 500,000 shares will
be considered and voted upon at the 1998 Annual Meeting of the  Stockholders  as
presented herein.

Employment Arrangements

      Frederick  Hayes-Roth,  Chief Scientist,  Chairman of the Board, and Chief
Executive Officer,  and Neil Jacobstein,  President and Chief Operating Officer,
each has an employment  agreement with the Company that provides for annual base
salaries of $222,000 and $146,000, respectively. Each executive is also eligible
for severance benefits for a one-year period. The 1998 Agreement, dated December
17,  1997,  includes  an  incentive  compensation  plan with  target  objectives
established  in the  five  strategic  categories  of cash  flow,  profitability,
bookings,  E-Commerce  business products and services,  and stock  appreciation,
which were  determined  and  assessed by the Board of  Directors to a maximum of
100% of base salary.

      The Company entered into a change of control agreement with Dr. Hayes-Roth
and Mr.  Jacobstein  on November 21, 1994.  The  agreement  provides that in the
event  of a  change  of  control,  which  is  defined  in the  agreement  as any
consolidation  or  merger  of the  Company  in  which  the  Company  is not  the

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continuing or surviving  corporation,  Dr. Hayes-Roth and Mr. Jacobstein will be
entitled to receive severance benefits which 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 of their most
recent respective annual salary.

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 27, 1998 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
Beneficial Owner                       Beneficially         Percent of Class
-------------------------------------------------------------------------------
Mark J. Hanna                            1,338,039(2)             5.6%
327 Plaza Real, Suite 319
Boca Raton, FL 33432

Dennis A. Bugbee(1)                        230,912(3)               *
Larry E. Druffel(1)                         15,000(4)               *
Frederick Hayes-Roth(1)                  3,446,381(5)             13.2%
Neil A. Jacobstein(1)                    3,352,516(6)             12.9%
Robert T. Marsh(1)                          71,000(7)               *
William G. Roth(1)                         110,000(8)               *
James C. Workman(1)                         65,000(9)               *
All   Directors   and  Executive         7,290,809(10)            25.9%
Officers  of  the  Company  as a
Group (7 Persons)
-------------------------------------------------------------------------------
* constitutes 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  31,250  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 27, 1998.
 (4)  Includes  15,000  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 27, 1998.
 (5)  Includes  1,843,599  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 27, 1998.
 (6)  Includes  2,071,072  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 27, 1998.
 (7)  Includes  71,000  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 27, 1998.
 (8)  Includes  40,000  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 27, 1998.

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 (9)  Includes  45,000  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 27, 1998. Mr.  Workman's  spouse owns
      20,000 shares beneficially.
 (10) Includes options for 4,116,921  shares which are currently  exercisable or
      will become exercisable within 60 days of April 27, 1998.

Item 12. Certain Relationships and Related Transactions

      On  May  15,  1997,  the  Company  and  Trilogy  Development  Group,  Inc.
("Trilogy") agreed to a settlement of all outstanding lawsuits and debts between
the companies. Prior to the settlement, Trilogy owned 3,223,453 shares of Common
stock or 12.3% of the Company.  Pursuant to the  Settlement  Agreement,  License
Agreement,  and Mutual  Release,  the Company  immediately  granted to Trilogy a
non-exclusive,  royalty-free  license  to the  Company's  United  States  Patent
4,591,983 in exchange for  2,338,969  shares of Company  stock owned by Trilogy,
which the Company valued at $1,005,000, and $400,000 in cash. The Agreement also
provided  for the  transfer  of certain  proxy  rights to the  Company and other
consideration,  including  the orderly  disposal of  Trilogy's  remaining  stock
ownership of approximately  900,000 shares in open market  transactions  through
May 14, 1998.

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                                   SIGNATURES

      In  accordance  with  the  requirements  of  Section  13 or  15(d)  of the
Securities  Exchange Act of 1934,  the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                          Teknowledge Corporation


Date:  May 6, 1998                        By:   /s/ Frederick Hayes-Roth
                                                ------------------------
                                                Frederick Hayes-Roth
                                                Chairman of the Board of
                                                Directors

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

           Name                        Capacity                     Date

/s/ Frederick Hayes-Roth           Chairman of the Board         May 6, 1998
---------------------------        of Directors and
Frederick Hayes-Roth               Chief Executive Officer
                                   (Principal Executive
                                    Officer)

/s/ Neil A. Jacobstein             President, Chief Operating    May 6, 1998
---------------------------        Officer and Director
Neil A. Jacobstein                 

/s/ Dennis A. Bugbee               Director of Finance,          May 6, 1998
---------------------------        Treasurer and Secretary
Dennis A. Bugbee                   (Principal Financial and
                                    Accounting Officer)

/s/ Lawrence Druffel               Director                       May 6, 1998
---------------------------
Lawrence Druffel

/s/ General Robert T. Marsh        Director                       May 6, 1998
---------------------------
General Robert T. Marsh

/s/ William G. Roth                Director                       May 6, 1998
---------------------------
William G. Roth

/s/ James C. Workman               Director                       May 6, 1998
---------------------------
James C. Workman