##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K/A
 Amendment No. 1 to Form 10-K
 (Mark One)x
    
    ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to
 Commission file number 000-30277
 Knova Software, Inc. *
  Delaware
(State or Other Jurisdiction of Incorporation or Organization)
    
    25-1647861
(I.R.S. Employer Identification No.)10201 Torre Avenue, Suite 350
Cupertino, CA
(Address of Principal Executive Offices)
    
    95014
(Zip Code)
 (408) 863-5800
 12 Federal Street, One North Shore, Suite 503, Pittsburgh, PA 15212
  Title of Each Class
    
    Name of Each Exchange on Which RegisteredNone
    
    Not applicable
  Common Stock, par value $.01 per share
  o x
 o x
 x o
 o o x
 o x
 o
 The Wall Street Journal




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##### 



KNOVA SOFTWARE, INC.
FORM 10-K/A
 TABLE OF CONTENTS
 Item
    
    
    
    Page8
    
    Financial Statements and Supplementary Data
    
    
    69A
    
    Controls and Procedures
    
    
    2915
    
    Exhibits and Financial Statement Schedules
    
    
    30Signatures
    
    
    31EX-23.1EX-31.1EX-31.2EX-32
   
  2




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Explanatory Note
     3




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
  Page NumberReport of Independent Registered Public Accounting Firm
    
    
    5Consolidated Balance Sheets
    
    
    6Consolidated Statements of Operations
    
    
    7Consolidated Statements of Stockholders Equity
    
    
    8Consolidated Statements of Cash Flows
    
    
    10Notes to Consolidated Financial Statements
    
    
    11
 4




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
   
 5




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##### Table of Contents



ServiceWare Technologies, Inc.
Consolidated Balance Sheets
 December 31,2004
    
    
    2003AssetsCurrent assetsCash and cash equivalents
    
    $
    1,672,305
    
    
    $
    1,437,721Marketable securities, available for sale
    
    
    9,266,461
    
    
    
    Accounts receivable, less allowance for doubtful accounts of $94,588 in 2004
and $100,000 in 2003
    
    
    2,529,081
    
    
    
    3,348,279Prepaid expenses and other current assets
    
    
    513,072
    
    
    
    419,551Total current assets
    
    
    13,980,919
    
    
    
    5,205,551Non current assetsProperty and equipmentOffice furniture, equipment, and leasehold improvements
    
    
    1,510,616
    
    
    
    1,509,819Computer equipment and software
    
    
    4,830,356
    
    
    
    5,013,363Total property and equipment
    
    
    6,340,972
    
    
    
    6,523,182Less accumulated depreciation
    
    
    (5,890,323
    )
    
    
    (6,001,671
    )450,649
    
    
    
    521,511Purchased technology, net
    
    
    
    
    
    
    33,337Goodwill
    
    
    2,323,791
    
    
    
    2,323,791Other non current assets
    
    
    197,611
    
    
    
    Total long term assets
    
    
    2,972,051
    
    
    
    2,878,639Total assets
    
    $
    16,952,970
    
    
    $
    8,084,190Liabilities and stockholders equityCurrent liabilitiesRevolving line of credit
    
    $
    
    
    
    $
    250,000Accounts payable
    
    
    1,693,333
    
    
    
    1,098,978Accrued compensation and benefits
    
    
    407,014
    
    
    
    274,438Deferred revenue  licenses
    
    
    378,885
    
    
    
    22,548Deferred revenue  services
    
    
    2,720,380
    
    
    
    2,457,931Current portion of capital lease obligations
    
    
    34,211
    
    
    
    41,698Other current liabilities
    
    
    571,919
    
    
    
    478,583Total current liabilities
    
    
    5,805,742
    
    
    
    4,624,176Convertible debt, net of unamortized discount of $979,680 in 2003
    
    
    
    
    
    
    2,753,033Non current deferred revenue
    
    
    322,676
    
    
    
    545,618Capital lease obligations
    
    
    60,961
    
    
    
    54,117Total liabilities
    
    
    6,189,379
    
    
    
    7,976,944Commitments and ContingenciesStockholders equityCommon stock, $0.01 par value; 50,000,000 shares authorized, 5,268,899 and
2,468,454 shares issued and 5,252,241 and 2,432,501 shares outstanding in 2004
and 2003, respectively
    
    
    526,890
    
    
    
    246,845Additional paid-in capital
    
    
    83,360,602
    
    
    
    76,432,608Treasury stock, at cost, 16,655 and 35,952 shares in 2004 and 2003, respectively
    
    
    (62,166
    )
    
    
    (133,568
    )Deferred compensation
    
    
    (161,682
    )
    
    
    Warrants
    
    
    4,765,479
    
    
    
    46,400Accumulated other comprehensive income
    
    
    513,759
    
    
    
    Accumulated deficit
    
    
    (78,179,291
    )
    
    
    (76,485,039
    )Total stockholders equity
    
    
    10,763,591
    
    
    
    107,246Total liabilities and stockholders equity
    
    $
    16,952,970
    
    
    $
    8,084,190
 The accompanying notes are an integral part of the consolidated financial statements.
 6




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##### Table of Contents



ServiceWare Technologies, Inc.
Consolidated Statements of Operations
 Year ended December 31,2004
    
    
    2003
    
    
    2002RevenuesLicenses
    
    $
    5,243,910
    
    
    $
    4,934,345
    
    
    $
    3,781,220Services
    
    
    7,258,217
    
    
    
    6,577,090
    
    
    
    6,377,130Total revenues
    
    
    12,502,127
    
    
    
    11,511,435
    
    
    
    10,158,350Cost of revenuesCost of licenses
    
    
    412,972
    
    
    
    270,325
    
    
    
    969,034Cost of services
    
    
    4,372,888
    
    
    
    2,923,355
    
    
    
    3,664,867Total cost of revenues
    
    
    4,785,860
    
    
    
    3,193,680
    
    
    
    4,633,901Gross margin
    
    
    7,716,267
    
    
    
    8,317,755
    
    
    
    5,524,449Operating expensesSales and marketing
    
    
    4,781,641
    
    
    
    5,116,062
    
    
    
    5,375,205Research and development
    
    
    2,197,588
    
    
    
    1,961,959
    
    
    
    2,899,142General and administrative
    
    
    2,402,891
    
    
    
    2,119,126
    
    
    
    2,963,919Intangible assets amortization
    
    
    
    
    
    
    146,746
    
    
    
    346,439Restructuring and other special charges (income)
    
    
    
    
    
    
    (20,000
    )
    
    
    (419,173
    )Total operating expenses
    
    
    9,382,120
    
    
    
    9,323,893
    
    
    
    11,165,532Loss from operations
    
    
    (1,665,853
    )
    
    
    (1,006,138
    )
    
    
    (5,641,083
    )Other income (expense)Interest expense
    
    
    (1,277,961
    )
    
    
    (1,951,326
    )
    
    
    (1,235,722
    )Other (net)
    
    
    1,249,562
    
    
    
    (21,841
    )
    
    
    51,444Other income (expense), net
    
    
    (28,399
    )
    
    
    (1,973,167
    )
    
    
    (1,184,278
    )Net loss
    
    $
    (1,694,252
    )
    
    $
    (2,979,305
    )
    
    $
    (6,825,361
    )Net loss per share, basic and diluted
    
    $
    (0.33
    )
    
    $
    (1.23
    )
    
    $
    (2.85
    )Shares used in computing per share amounts
    
    
    5,140,378
    
    
    
    2,419,750
    
    
    
    2,395,639
 The accompanying notes are an integral part of the consolidated financial statements.
 7




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##### Table of Contents



ServiceWare Technologies, Inc.
Consolidated Statements of Stockholders Equity
 AdditionalCommon Stock
    
    
    paid in
    
    
    Treasury stock
    
    
    DeferredShares
    
    
    Amount
    
    
    capital
    
    
    Shares
    
    
    Amount
    
    
    compensationBalance at December 31, 2001
    
    
    2,382,816
    
    
    $
    246,549
    
    
    $
    71,774,297
    
    
    
    82,675
    
    
    $
    (307,160
    )
    
    $
    (113,896
    )Exercise of stock options
    
    
    16,000
    
    
    
    
    
    
    
    (13,144
    )
    
    
    (16,000
    )
    
    
    59,444
    
    
    
    Issuance of stock for Employee Stock Purchase Plan
    
    
    9,520
    
    
    
    296
    
    
    
    6,161
    
    
    
    (6,558
    )
    
    
    24,365
    
    
    
    Stock based compensation
    
    
    
    
    
    
    
    
    
    
    78,344
    
    
    
    
    
    
    
    
    
    
    
    Amortization of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104,348Beneficial conversion feature of convertible notes
    
    
    
    
    
    
    
    
    
    
    2,338,068
    
    
    
    
    
    
    
    
    
    
    
    Other comprehensive income (loss):Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2002
    
    
    2,408,336
    
    
    
    246,845
    
    
    
    74,183,726
    
    
    
    60,117
    
    
    
    (223,351
    )
    
    
    (9,548
    )Exercise of stock options
    
    
    9,060
    
    
    
    
    
    
    
    (8,479
    )
    
    
    (9,060
    )
    
    
    33,660
    
    
    
    Issuance of stock for Employee Stock Purchase Plan
    
    
    15,105
    
    
    
    
    
    
    
    (17,602
    )
    
    
    (15,105
    )
    
    
    56,123
    
    
    
    Beneficial conversion feature of convertible notes
    
    
    
    
    
    
    
    
    
    
    906,799
    
    
    
    
    
    
    
    
    
    
    
    Expiration of warrants
    
    
    
    
    
    
    
    
    
    
    1,368,164
    
    
    
    
    
    
    
    
    
    
    
    Amortization of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,548Other comprehensive income (loss):Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2003
    
    
    2,432,501
    
    
    
    246,845
    
    
    
    76,432,608
    
    
    
    35,952
    
    
    
    (133,568
    )
    
    
    Exercise of warrants and stock options
    
    
    19,725
    
    
    
    213
    
    
    
    31,724
    
    
    
    (17,600
    )
    
    
    65,120
    
    
    
    Beneficial conversion feature of convertible notes
    
    
    
    
    
    
    
    
    
    
    232,672
    
    
    
    
    
    
    
    
    
    
    
    Issuance of stock under Employee Stock Purchase Plan
    
    
    1,697
    
    
    
    
    
    
    
    2,069
    
    
    
    (1,697
    )
    
    
    6,282
    
    
    
    Issuance of common stock and warrants, net of $574 of issuance costs
    
    
    1,230,769
    
    
    
    123,077
    
    
    
    2,681,865
    
    
    
    
    
    
    
    
    
    
    
    Issuance of warrants for settlement of lawsuit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock related to note conversion
    
    
    1,535,386
    
    
    
    153,539
    
    
    
    3,684,928
    
    
    
    
    
    
    
    
    
    
    
    Stock based compensation awards
    
    
    32,163
    
    
    
    3,216
    
    
    
    294,736
    
    
    
    
    
    
    
    
    
    
    
    (297,952
    )Stock based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136,270Other comprehensive income (loss):Unrealized gain on short term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2004
    
    
    5,252,241
    
    
    $
    526,890
    
    
    $
    83,360,602
    
    
    
    16,655
    
    
    $
    (62,166
    )
    
    $
    (161,682
    )
 The accompanying notes are an integral part of the consolidated financial statements.
 8




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##### Table of Contents



AccumulatedOther
    
    
    
    
    
    
    Totalcomprehensive
    
    
    Accumulated
    
    
    Stockholders'Warrants
    
    
    income (loss)
    
    
    Deficit
    
    
    EquityBalance at December 31, 2001
    
    $
    1,414,564
    
    
    $
    (24,263
    )
    
    $
    (66,680,373
    )
    
    $
    6,309,718Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,300Issuance of stock for Employee Stock Purchase Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,822Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,344Amortization of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104,348Beneficial conversion feature of convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,338,068Comprehensive loss:Currency translation adjustment
    
    
    
    
    
    
    (12,556
    )
    
    
    
    
    
    
    (12,556
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (6,825,361
    )
    
    
    (6,825,361
    )Total other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,837,917
    )Balance at December 31, 2002
    
    
    1,414,564
    
    
    
    (36,819
    )
    
    
    (73,505,734
    )
    
    
    2,069,683Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,181Issuance of stock for Employee Stock Purchase Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,521Beneficial conversion feature of convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    906,799Expiration of warrants
    
    
    (1,368,164
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,548Other comprehensive income (loss):Currency translation adjustment
    
    
    
    
    
    
    36,819
    
    
    
    
    
    
    
    36,819Net loss
    
    
    
    
    
    
    
    
    
    
    (2,979,305
    )
    
    
    (2,979,305
    )Total other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,942,486
    )Balance at December 31, 2003
    
    
    46,400
    
    
    
    
    
    
    
    (76,485,039
    )
    
    
    107,246Exercise of warrants and stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,057Issuance of stock under Employee Stock Purchase Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,351Beneficial conversion feature of convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    232,672Issuance of
common stock and warrants, net of $574 of issuance costs
    
    
    4,614,154
    
    
    
    
    
    
    
    
    
    
    
    7,419,096Issuance of warrants for settlement of lawsuit
    
    
    104.925
    
    
    
    
    
    
    
    
    
    
    
    104,925Issuance of common stock related to note conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,838,467Stock based compensation awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136,270Other comprehensive income (loss):Unrealized gain on short term investments
    
    
    
    
    
    
    513,759
    
    
    
    
    
    
    
    513,759Net loss
    
    
    
    
    
    
    
    
    
    
    (1,694,252
    )
    
    
    (1,694,252
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,180,493
    )Balance at December 31, 2004
    
    $
    4,765,479
    
    
    $
    513,759
    
    
    $
    (78,179,291
    )
    
    $
    10,763,591
 9




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##### Table of Contents



ServiceWare Technologies, Inc.
Consolidated Statements of Cash Flows
 Year ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from operating activitiesNet loss
    
    $
    (1,694,252
    )
    
    $
    (2,979,305
    )
    
    $
    (6,825,361
    )Adjustments to reconcile net loss to net cash provided by (used in) operations:Non cash items:Depreciation
    
    
    316,267
    
    
    
    801,195
    
    
    
    1,654,655Amortization of intangible assets and warrants
    
    
    33,337
    
    
    
    206,297
    
    
    
    800,710Warrants issued in connection with settlement of lawsuit
    
    
    104,925
    
    
    
    
    
    
    
    Amortization of beneficial conversion feature related to convertible notes
    
    
    1,162,150
    
    
    
    1,429,603
    
    
    
    885,948Amortization of discount on convertible notes
    
    
    50,196
    
    
    
    115,341
    
    
    
    109,456Interest expense paid by issuing convertible notes
    
    
    105,760
    
    
    
    347,032
    
    
    
    135,681Provision for doubtful accounts
    
    
    
    
    
    
    25,000
    
    
    
    (70,000
    )Stock based compensation
    
    
    136,270
    
    
    
    
    
    
    
    78,344Other non cash items
    
    
    (7,362
    )
    
    
    32,905
    
    
    
    (17,885
    )Non cash portion of legal settlement
    
    
    (850,000
    )
    
    
    
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    819,198
    
    
    
    (1,839,021
    )
    
    
    517,094Other assets
    
    
    (230,132
    )
    
    
    (7,354
    )
    
    
    635,543Accounts payable
    
    
    594,355
    
    
    
    (53,995
    )
    
    
    515,662Accrued compensation and benefits
    
    
    132,576
    
    
    
    114,440
    
    
    
    (640,776
    )Deferred revenue
    
    
    395,844
    
    
    
    870,830
    
    
    
    (1,861,824
    )Other liabilities
    
    
    116,156
    
    
    
    (15,923
    )
    
    
    (1,175,685
    )Net cash provided by (used in) operating activities
    
    
    1,185,288
    
    
    
    (952,955
    )
    
    
    (5,258,438
    )Cash flows from investing activitiesPurchase of short term investments
    
    
    (13,227,702
    )
    
    
    
    
    
    
    (3,004,882
    )Sales of short term investments
    
    
    5,325,000
    
    
    
    500,080
    
    
    
    2,491,003Property and equipment acquisitions
    
    
    (207,814
    )
    
    
    (94,558
    )
    
    
    (13,602
    )Payments for purchase of InfoImage assets
    
    
    
    
    
    
    
    
    
    
    (100,000
    )Increase in restricted cash
    
    
    (61,000
    )
    
    
    
    
    
    
    Proceeds from sale of equipment
    
    
    1,460
    
    
    
    12,153
    
    
    
    15,620Net cash (used in) provided by investing activities
    
    
    (8,170,056
    )
    
    
    417,675
    
    
    
    (611,861
    )Cash flows from financing activitiesRepayments of principal of capital lease obligation
    
    
    (32,332
    )
    
    
    (38,500
    )
    
    
    (37,310
    )Repayments of principal of term loan
    
    
    
    
    
    
    
    
    
    
    (258,197
    )Repayments of borrowings under revolving line of credit
    
    
    (250,000
    )
    
    
    (800,000
    )
    
    
    Proceeds from borrowings under revolving line of credit
    
    
    
    
    
    
    250,000
    
    
    
    800,000Proceeds from issuance of convertible notes, net of debt issuance costs
    
    
    
    
    
    
    
    
    
    
    2,975,000Proceeds from equity funding, net of issuance costs
    
    
    7,419,096
    
    
    
    
    
    
    
    Proceeds from stock option and employee stock purchase plan issuances
    
    
    82,588
    
    
    
    63,702
    
    
    
    76,960Net cash provided by (used in) financing activities
    
    
    7,219,352
    
    
    
    (524,798
    )
    
    
    3,556,453Effect of exchange rate changes on cash
    
    
    
    
    
    
    36,598
    
    
    
    (14,873
    )Increase (decrease) in cash and cash equivalents
    
    
    234,584
    
    
    
    (1,023,480
    )
    
    
    (2,328,719
    )Cash and cash equivalents at beginning of year
    
    
    1,437,721
    
    
    
    2,461,201
    
    
    
    4,789,920Cash and cash equivalents at end of year
    
    $
    1,672,305
    
    
    $
    1,437,721
    
    
    $
    2,461,201Supplemental disclosures of cash flow informationCash paid during the year for:Interest
    
    $
    9,765
    
    
    $
    14,613
    
    
    $
    21,444Supplemental disclosures of non-cash transactionsConversion of convertible debt and accrued interest to common stock
    
    $
    3,838,467
    
    
    $
    
    
    
    $
    Expiration of warrants at no consideration
    
    $
    
    
    
    $
    1,368,164
    
    
    $
    Exercise of warrants by bank
    
    $
    22,820
    
    
    $
    
    
    
    $
    Unrealized gain on short term investments
    
    $
    513,759
    
    
    $
    
    
    
    $
    Property, plant, and equipment acquired under capital leases
    
    $
    31,689
    
    
    $
    
    
    
    $
    92,000Increase in Additional Paid-In Capital related to beneficial conversion feature
    
    $
    232,672
    
    
    $
    906,799
    
    
    $
    2,338,068Non cash portion of legal settlement
    
    $
    850,000
    
    
    $
    
    
    
    $
    
 The accompanying notes are an integral part of the consolidated financial statements.
 10




---



##### Table of Contents



ServiceWare Technologies, Inc.





Notes to Consolidated Financial Statements


December 31, 2004




|        |                            
|------- | ---------------------------
|Note 1. | Organization of the Company









| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | Strengthen relationships with customers, partners, suppliers and
    employees
|
| |  | Decrease operating costs                                                      
|
| |  | Improve creation, dissemination and sharing of enterprise
    knowledge       
|
| |  | Integrate seamlessly with existing technology investments                     







|        |                                
|------- | -------------------------------
|Note 2. | Significant Accounting Policies

Principles of Consolidation




Revenue Recognition




11



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)






| |                  
| | -----------------
| | Licenses revenues





| |                  
| | -----------------
| | Services revenues







Cost of revenues






Cash and Cash Equivalents




Restricted Cash




Marketable securities, available for sale




12



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)






Accounts receivable and allowance for doubtful accounts




Property and Equipment




Impairment of long-lived assets




Internal Use Computer Software




13



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)


Intangible Assets and Goodwill






Goodwill and
Other Intangible Assets


Concentration of Credit Risk/ Major Customers






Capitalized Software




14



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)


Advertising Costs




Foreign Currency Translation




Stock Based Compensation






|                   |                                                                                |      |       |            |      |   |       |            |   |   |       |            |  
|------------------ | ------------------------------------------------------------------------------ | ---- | ----- | ---------- | ---- | - | ----- | ---------- | - | - | ----- | ---------- | -
|                   |                                                                                | 2004 |       |            | 2003 |   |       | 2002       |  
|                   |                                                                                |      |       |            |      |   |       |            |  
|                   | Net loss from continuing operations, as reported                               |      | $     | (1,694,252 | )    |   | $     | (2,979,305 | ) |   | $     | (6,825,361 | )
|                   | Add: Compensation expense reported in earnings                                 |      |       | 136,270    |      |   |       |           |   |   |       | 78,344     |  
|                   | Less: Total stock based compensation expense under SFAS 123                    |      |       | (576,003   | )    |   |       | (1,809,000 | ) |   |       | (2,472,344 | )
|                   |                                                                                |      |       |            |      |   |       |            |  
|                   | Net loss                                                                       |      | $     | (2,133,985 | )    |   | $     | (4,788,305 | ) |   | $     | (9,219,361 | )
|                   |                                                                                |      |       |            |      |   |       |            |  
|                   | Weighted average shares used to calculate basic and diluted loss
    per share |      |       | 5,140,378  |      |   |       | 2,419,750  |   |   |       | 3,295,639  |  
|Net loss per share |                                                                                | $    | (0.42 | )          |      | $ | (1.98 | )          |   | $ | (2.80 | )         



|                                |  |      |      |   |      |  |      |      |  |  |      |  
|------------------------------- |  | ---- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                                |  | 2004 |      |   | 2003 |  |      | 2002 | 
|                                |  |      |      |   |      |  |      |      | 
|Volatility, annual rate         |  |      | 150  | % |      |  | 325  | %    |  |  | 221  | %
|Dividend yield                  |  |      | 0.0  | % |      |  | 0.0  | %    |  |  | 0.0  | %
|Expected life, in years         |  |      | 3    |   |      |  | 3    |      |  |  | 3    |  
|Average risk-free interest rate |  |      | 2.82 | % |      |  | 1.98 | %    |  |  | 3.10 | %

15



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




Use of Estimates




Net Loss Per Share




Other Comprehensive Income (Loss)




Impact of Recently Issued Accounting Standards




Participating Securities and
the Two  Class Method Under FASB Statement
No. 128, Earnings Per Share




16



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)






|        |                                    
|------- | -----------------------------------
|Note 3. | Fair Value of Financial Instruments





|        |                    
|------- | -------------------
|Note 4. | Accounts Receivable



|                                |                   |              |           |           |      |   |           |           | 
|------------------------------- | ----------------- | ------------ | --------- | --------- | ---- | - | --------- | --------- | 
|                                |                   | December 31, |          
|                                |                   |              |          
|                                |                   | 2004         |           |           | 2003 |  
|                                |                   |              |           |           |      |  
|Billed receivables              |                   | $            | 2,623,669 |           |      | $ | 3,393,829 |          
|Unbilled receivables            |                   |              |          |           |      |   | 54,450    |          
|                                |                   |              |           |           |      |  
|                                |                   |              | 2,623,669 |           |      |   | 3,448,279 |          
|Allowance for doubtful accounts |                   |              | (94,588   | )         |      |   | (100,000  | )        
|                                |                   |              |           |           |      |  
|                                | Total receivables |              | $         | 2,529,081 |      |   | $         | 3,348,279 | 
|                                |                   |              |           |           |      |  



|                           |  |         |          |  
|-------------------------- |  | ------- | -------- | -
|                           |  | Balance |         
|                           |  |         |         
|Balance, January 1, 2002   |  | $       | 376,142  |  
|Reduction of expense       |  |         | (70,000  | )
|Amounts written off        |  |         | (135,144 | )
|                           |  |         |         
|Balance, December 31, 2002 |  |         | 170,998  |  
|Net charge to expense      |  |         | 25,000   |  
|Amounts written off        |  |         | (95,998  | )
|                           |  |         |         
|Balance, December 31, 2003 |  |         | 100,000  |  
|Amounts written off        |  |         | (5,412   | )
|                           |  |         |         
|Balance, December 31, 2004 |  | $       | 94,588   |  
|                           |  |         |         

17



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




|        |                               
|------- | ------------------------------
|Note 5. | Intangible Assets and Goodwill



|                           |  |              |         |              |        |   |             |              |  |   |            |  |  |             |           |  |              |   |           |            |  |   |           |  |  |   |           | 
|-------------------------- |  | ------------ | ------- | ------------ | ------ | - | ----------- | ------------ |  | - | ---------- |  |  | ----------- | --------- |  | ------------ | - | --------- | ---------- |  | - | --------- |  |  | - | --------- | 
|                           |  |              |         | December 31, |       
|                           |  |              |         |              |       
|                           |  |              |         | 2004         |        |   | 2003        |             
|                           |  |              |         |              |        |   |             |             
|                           |  | Amortization |         |              |        |   | Accumulated |              |  |   |            |  |  | Accumulated |           |  |             
|Description                |  | Period       |         |              | Amount |   |             | Amortization |  |   | Net Amount |  |  | Amount      |           |  | Amortization |   |           | Net Amount | 
|                           |  |              |         |              |        |   |             |              |  |   |            |  |  |             |           |  |              |   |           |            | 
|Molloy Group customer list |  |              | 4 years |              |        | $ | 1,043,543   |              |  | $ | 1,043,543  |  |  | $           |          |  |              | $ | 1,043,543 |            |  | $ | 1,043,543 |  |  | $ |          | 
|InfoImage technology       |  |              | 3 years |              |        |   | 100,000     |              |  |   | 100,000    |  |  |             |          |  |              |   | 100,000   |            |  |   | 66,663    |  |  |   | 33,337    | 
|                           |  |              |         |              |        |   |             |              |  |   |            |  |  |             |           |  |              |   |           |            | 
|Total intangible assets    |  |              |         |              |        | $ | 1,143,543   |              |  | $ | 1,143,543  |  |  | $           |          |  |              | $ | 1,143,543 |            |  | $ | 1,110,206 |  |  | $ | 33,337    | 
|                           |  |              |         |              |        |   |             |              |  |   |            |  |  |             |           |  |              |   |           |            | 
|Goodwill                   |  |              |         |              |        |   |             |              |  |   |            |  |  | $           | 2,323,791 |  |              |   |           |            |  |   |           |  |  | $ | 2,323,791 | 
|                           |  |              |         |              |        |   |             |              |  |   |            |  |  |             |           |  |              |   |           |            | 





|        |     
|------- | ----
|Note 6. | Debt

Credit Facilities




Convertible Notes








18



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)














|        |                                        
|------- | ---------------------------------------
|Note 7. | Restructuring and Other Special Charges





19



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




|                                      |  |                |      |               |               |   |      |       |  |   |       |   |  |   |       |  
|------------------------------------- |  | -------------- | ---- | ------------- | ------------- | - | ---- | ----- |  | - | ----- | - |  | - | ----- | -
|                                      |  |                |      | Reduction and |               |   |      |       | 
|                                      |  | Severance and  |      |               | Relocation of |   |      |       |  |  
|                                      |  | Other Benefits |      |               | Facilities    |   |      | Other |  |   | Total |  
|                                      |  |                |      |               |               |   |      |       |  |   |       |  
|Accrual at January 1, 2002            |  | $              | 131  |               |               | $ | 767  |       |  | $ | 154   |   |  | $ | 1,052 |  
|Charges                               |  |                |     |               |               |   |     |       |  |   | 113   |   |  |   | 113   |  
|Payments                              |  |                |     |               |               |   | (250 | )     |  |   | (267  | ) |  |   | (517  | )
|Changes in estimates                  |  |                | (131 | )             |               |   | (401 | )     |  |   |      |   |  |   | (532  | )
|                                      |  |                |      |               |               |   |      |       |  |   |       |  
|Accrual at December 31, 2002          |  |                |     |               |               |   | 116  |       |  |   |      |   |  |   | 116   |  
|Payments                              |  |                |     |               |               |   | (96  | )     |  |   |      |   |  |   | (96   | )
|Changes in estimates                  |  |                |     |               |               |   | (20  | )     |  |   |      |   |  |   | (20   | )
|                                      |  |                |      |               |               |   |      |       |  |   |       |  
|Accrual at December 31, 2003 and 2004 |  | $              |     |               |               | $ |     |       |  | $ |      |   |  | $ |      |  
|                                      |  |                |      |               |               |   |      |       |  |   |       |  



|                                                 |  |                         |     |   |      |   |      |  
|------------------------------------------------ |  | ----------------------- | --- | - | ---- | - | ---- | -
|                                                 |  | Year Ended December 31, |    
|                                                 |  |                         |    
|                                                 |  | 2003                    |     |   | 2002 |  
|                                                 |  |                         |     |   |      |  
|Restructuring costs                              |  | $                       | (20 | ) |      | $ | (532 | )
|Executive loan forgiveness and related tax costs |  |                         |    |   |      |   | 50   |  
|Reserve for stockholder loans                    |  |                         |    |   |      |   | 63   |  
|                                                 |  |                         |     |   |      |  
|Total restructuring and other special charges    |  | $                       | (20 | ) |      | $ | (419 | )
|                                                 |  |                         |     |   |      |  





|        |              
|------- | -------------
|Note 8. | Capital Stock

Common Stock and Preferred Stock








Stock Split




20



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)


Stock offering








|        |                  
|------- | -----------------
|Note 9. | Stock Option Plan





|                                       |  |             |          |   |                 |   |               |                  |  |   |        | 
|-------------------------------------- |  | ----------- | -------- | - | --------------- | - | ------------- | ---------------- |  | - | ------ | 
|                                       |  | Options     |          |   | Option Price    |   |               | Weighted Average | 
|                                       |  | Outstanding |          |   | Range per Share |   |               | Exercise Price   | 
|                                       |  |             |          |   |                 |   |               |                  | 
|Options outstanding, December 31, 2001 |  |             | 413,848  |   |                 | $ | 2.40 - $70.00 |                  |  | $ | 11.81  | 
|Options granted                        |  |             | 367,950  |   |                 | $ | 3.20 - $ 5.80 |                  |  | $ | 4.025  | 
|Options exercised                      |  |             | (16,000  | ) |                 | $ | 2.50 - $ 3.80 |                  |  | $ | 2.894  | 
|Options forfeited                      |  |             | (208,968 | ) |                 | $ | 2.40 - $70.00 |                  |  | $ | 13.55  | 
|                                       |  |             |          |   |                 |   |               |                  | 
|Options outstanding, December 31, 2002 |  |             | 556,830  |   |                 | $ | 2.40 - $70.00 |                  |  | $ | 5.059  | 
|Options granted                        |  |             | 97,046   |   |                 | $ | 2.60 - $ 7.00 |                  |  | $ | 3.635  | 
|Options exercised                      |  |             | (9,060   | ) |                 | $ | 2.60 - $ 4.50 |                  |  | $ | 3.623  | 
|Options forfeited                      |  |             | (68,045  | ) |                 | $ | 2.60 - $25.00 |                  |  | $ | 4.393  | 
|                                       |  |             |          |   |                 |   |               |                  | 
|Options outstanding, December 31, 2003 |  |             | 576,771  |   |                 | $ | 2.50 - $70.00 |                  |  | $ | 4.710  | 
|Options granted                        |  |             | 380,445  |   |                 | $ | 4.09 - $ 8.19 |                  |  | $ | 5.7913 | 
|Options exercised                      |  |             | (17,600  | ) |                 | $ | 2.60 - $ 4.50 |                  |  | $ | 4.2083 | 
|Options forfeited                      |  |             | (72,567  | ) |                 | $ | 2.60 - $51.25 |                  |  | $ | 5.8896 | 
|                                       |  |             |          |   |                 |   |               |                  | 
|Options outstanding, December 31, 2004 |  |             | 867,049  |   |                 | $ | 2.50 - $70.00 |                  |  | $ | 5.0950 | 
|                                       |  |             |          |   |                 |   |               |                  | 
|Options exercisable, December 31, 2004 |  |             | 491,763  |   |                 | $ | 2.50 - $70.00 |                  |  | $ | 4.7095 | 
|                                       |  |             |          |   |                 |   |               |                  | 

21



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




|                         |  |                     |         |  |                     |  |     |                  |  |                   |              |  |  |                  |         |  |  |   |         | 
|------------------------ |  | ------------------- | ------- |  | ------------------- |  | --- | ---------------- |  | ----------------- | ------------ |  |  | ---------------- | ------- |  |  | - | ------- | 
|                         |  | Options Outstanding |         |  | Options Exercisable | 
|                         |  |                     |         |  |                     | 
|                         |  | Options Outstanding |         |  | Weighted Average    |  |     |                  |  | Exercisable as of |              |  | 
|                         |  | as of December 31,  |         |  | Remaining           |  |     | Weighted Average |  |                   | December 31, |  |  | Weighted Average |        
|Range of Exercise Prices |  | 2004                |         |  | Contractual Life    |  |     | Exercise Price   |  |                   | 2004         |  |  | Exercise Price   |        
|                         |  |                     |         |  |                     |  |     |                  |  |                   |              |  |  |                  |        
|$ 0.000 - $ 2.500        |  |                     | 95,000  |  |                     |  | 6.7 |                  |  | $                 | 2.5000       |  |  |                  | 95,000  |  |  | $ | 2.5000  | 
|$ 2.501 - $ 3.500        |  |                     | 109,126 |  |                     |  | 7.7 |                  |  | $                 | 2.9114       |  |  |                  | 89,038  |  |  | $ | 2.9762  | 
|$ 3.501 - $ 4.000        |  |                     | 170,850 |  |                     |  | 6.8 |                  |  | $                 | 3.9598       |  |  |                  | 170,350 |  |  | $ | 3.9608  | 
|$ 4.010 - $ 5.900        |  |                     | 235,851 |  |                     |  | 8.2 |                  |  | $                 | 5.0393       |  |  |                  | 93,599  |  |  | $ | 4.4843  | 
|$ 5.901 - $ 6.000        |  |                     | 205,497 |  |                     |  | 8.5 |                  |  | $                 | 5.9900       |  |  |                  |        |  |  |   |        | 
|$ 6.010 - $ 6.900        |  |                     | 8,800   |  |                     |  | 8.5 |                  |  | $                 | 6.4886       |  |  |                  | 4,400   |  |  | $ | 6.5227  | 
|$ 6.901 - $11.000        |  |                     | 19,828  |  |                     |  | 6.4 |                  |  | $                 | 9.8203       |  |  |                  | 17,278  |  |  | $ | 10.1645 | 
|$11.010 - $28.000        |  |                     | 13,838  |  |                     |  | 4.5 |                  |  | $                 | 20.0144      |  |  |                  | 13,838  |  |  | $ | 20.0144 | 
|$28.010 - $35.000        |  |                     | 8,000   |  |                     |  | 6.0 |                  |  | $                 | 28.1200      |  |  |                  | 8,000   |  |  | $ | 28.1200 | 
|$35.010 - $70.000        |  |                     | 259     |  |                     |  | 3.9 |                  |  | $                 | 49.1204      |  |  |                  | 260     |  |  | $ | 49.0769 | 
|                         |  |                     |         |  |                     |  |     |                  |  |                   |              |  |  |                  |        
|                         |  |                     | 867,049 |  |                     |  | 7.6 |                  |  | $                 | 5.0950       |  |  |                  | 491,763 |  |  | $ | 4.7095  | 
|                         |  |                     |         |  |                     |  |     |                  |  |                   |              |  |  |                  |        



Employee Stock Purchase Plan




22



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




|         |         
|-------- | --------
|Note 10. | Warrants



|                           |  |             |         |   |                 |   |                | 
|-------------------------- |  | ----------- | ------- | - | --------------- | - | -------------- | 
|                           |  | Warrants    |         |   | Warrant Price   |  
|                           |  | Outstanding |         |   | Range per Share |  
|                           |  |             |         |   |                 |  
|Balance, January 1, 2002   |  |             | 74,862  |   |                 | $ | 15.00 - $90.00 | 
|Warrants granted           |  |             | 5,000   |   |                 | $ | 4.60           | 
|Warrants exercised         |  |             |        |   |                 |   |                | 
|Warrants expired           |  |             | (13,333 | ) |                 | $ | 70.00          | 
|                           |  |             |         |   |                 |  
|Balance, December 31, 2002 |  |             | 66,529  |   |                 | $ | 4.60 - $90.00  | 
|Warrants granted           |  |             |        |   |                 |   |                | 
|Warrants exercised         |  |             |        |   |                 |   |                | 
|Warrants expired           |  |             | (50,047 | ) |                 | $ | 15.00 - $70.00 | 
|                           |  |             |         |   |                 |  
|Balance, December 31, 2003 |  |             | 16,482  |   |                 | $ | 4.60 - $37.50  | 
|Warrants granted           |  |             | 627,883 |   |                 | $ | 7.20 - $ 8.39  | 
|Warrants exercised         |  |             | (5,000  | ) |                 | $ | 4.59           | 
|Warrants expired           |  |             | (3,481  | ) |                 | $ | 37.50          | 
|                           |  |             |         |   |                 |  
|Balance, December 31, 2004 |  |             | 635,884 |   |                 | $ | 7.20 - $37.50  | 
|                           |  |             |         |   |                 |  



|            |         |  |               |   |       |                 |  |  |          | 
|----------- | ------- |  | ------------- | - | ----- | --------------- |  |  | -------- | 
|Warrants    |         |  | Warrant Price |   |       |                
|Outstanding |         |  | per Share     |   |       | Expiration Date | 
|            |         |  |               |   |       |                 | 
|            | 615,384 |  |               | $ | 7.20  |                 |  |  | 1/30/09  | 
|            | 8,000   |  |               | $ | 37.50 |                 |  |  | 12/10/06 | 
|            | 12,500  |  |               | $ | 8.40  |                 |  |  | 1/16/07  | 
|            |         |  |               |   |       |                 | 
|            | 635,884 |  |               |   |       |                 |  |  |          | 
|            |         |  |               |   |       |                 | 



23



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




|         |                             
|-------- | ----------------------------
|Note 11. | Capital and Operating Leases



|                                           |            |                |         |        |                  |   |         |         | 
|------------------------------------------ | ---------- | -------------- | ------- | ------ | ---------------- | - | ------- | ------- | 
|Year Ending December 31,                   |            | Capital Leases |         |        | Operating Leases |  
|                                           |            |                |         |        |                  |  
|                                           | 2005       |                | $       | 39,071 |                  |   | $       | 205,440 | 
|                                           | 2006       |                |         | 28,178 |                  |   |         | 214,048 | 
|                                           | 2007       |                |         | 18,996 |                  |   |         | 224,267 | 
|                                           | 2008       |                |         | 18,499 |                  |   |         | 234,698 | 
|                                           | Thereafter |                |         |       |                  |   |         | 102,137 | 
|                                           |            |                |         |        |                  |  
|Total minimum lease payments               |            |                | 104,744 |        |                  | $ | 980,590 |        
|                                           |            |                |         |        |                  |  
|Less amount representing interest          |            |                | 9,572   |        |                  |   |         |        
|                                           |            |                |         |        |                  |  
|Present value of capital lease obligations |            |                | 95,172  |        |                  |   |         |        
|Less current maturities                    |            |                | 34,211  |        |                  |   |         |        
|                                           |            |                |         |        |                  |  
|Non current capital lease obligations      |            | $              | 60,961  |        |                  |   |         |        
|                                           |            |                |         |        |                  |  











|         |             
|-------- | ------------
|Note 12. | Income Taxes



|                                                                                 |  |                         |          |   |      |   |            |      |  |   |            |  
|-------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                 |  | Year Ended December 31, |         
|                                                                                 |  |                         |         
|                                                                                 |  | 2004                    |          |   | 2003 |   |            | 2002 | 
|                                                                                 |  |                         |          |   |      |   |            |      | 
|Income tax provision (benefit) computed at statutory federal
    income tax rate |  | $                       | (576,046 | ) |      | $ | (1,012,964 | )    |  | $ | (2,320,621 | )
|State income taxes, net of federal tax benefit, if any                           |  |                         | (100,639 | ) |      |   | (176,971   | )    |  |   | (405,426   | )
|Other (principally goodwill and meals and entertainment)                         |  |                         | 35,882   |   |      |   | 15,640     |      |  |   | 48,812     |  
|Research tax credit                                                              |  |                         | 75,790   |   |      |   | 75,790     |      |  |   |           |  
|Foreign loss                                                                     |  |                         |         |   |      |   | 166,952    |      |  |   | 332,984    |  
|Deferred tax asset valuation allowance                                           |  |                         | 565,013  |   |      |   | 931,553    |      |  |   | 2,344,251  |  
|                                                                                 |  |                         |          |   |      |   |            |      | 
|Total benefit for income taxes                                                   |  | $                       |         |   |      | $ |           |      |  | $ |           |  
|                                                                                 |  |                         |          |   |      |   |            |      | 

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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




|                                  |                                   |              |             |            |      |   |             |            | 
|--------------------------------- | --------------------------------- | ------------ | ----------- | ---------- | ---- | - | ----------- | ---------- | 
|                                  |                                   | December 31, |            
|                                  |                                   |              |            
|                                  |                                   | 2004         |             |            | 2003 |  
|                                  |                                   |              |             |            |      |  
|Deferred tax assets (liabilities) |                                   |              |             |            |      |   |             |           
|                                  | Accounts receivable               |              | $           | 38,000     |      |   | $           | 40,000     | 
|                                  | Property and equipment            |              |             | 72,000     |      |   |             | 136,000    | 
|                                  | Intangible assets and goodwill    |              |             | 5,776,000  |      |   |             | 5,762,000  | 
|                                  | Deferred license revenue          |              |             | (149,000   | )    |   |             |           | 
|                                  | Net operating loss carryforwards  |              |             | 25,479,000 |      |   |             | 24,796,000 | 
|                                  | Research tax credit carryforwards |              |             | 1,049,000  |      |   |             | 973,000    | 
|                                  |                                   |              |             |            |      |  
|Total net deferred tax assets     |                                   |              | 32,265,000  |            |      |   | 31,707,000  |           
|Valuation allowance               |                                   |              | (32,265,000 | )          |      |   | (31,707,000 | )         
|                                  |                                   |              |             |            |      |  
|Net deferred tax asset            |                                   | $            |            |            |      | $ |            |           
|                                  |                                   |              |             |            |      |  







|         |                   
|-------- | ------------------
|Note 13. | Net Loss Per Share



|                                      |                                                                                |      |       |            |      |   |       |            |   |   |       |            |  
|------------------------------------- | ------------------------------------------------------------------------------ | ---- | ----- | ---------- | ---- | - | ----- | ---------- | - | - | ----- | ---------- | -
|                                      |                                                                                | 2004 |       |            | 2003 |   |       | 2002       |  
|                                      |                                                                                |      |       |            |      |   |       |            |  
|Numerator:                            |                                                                                |      |       |            |      |   |       |            |   |   |       |           
|                                      | Net loss from operations                                                       |      | $     | (1,694,252 | )    |   | $     | (2,979,305 | ) |   | $     | (6,825,361 | )
|Denominator:                          |                                                                                |      |       |            |      |   |       |            |   |   |       |           
|                                      | Denominator for basic and diluted loss per share 
    weighted average shares |      |       | 5,140,378  |      |   |       | 2,419,750  |   |   |       | 2,395,639  |  
|Net loss per share, basic and diluted |                                                                                | $    | (0.33 | )          |      | $ | (1.23 | )          |   | $ | (2.85 | )         





|         |                
|-------- | ---------------
|Note 14. | Retirement Plan



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




|         |                  
|-------- | -----------------
|Note 15. | Segment Reporting





| |                       
| | ----------------------
| | Geographic Information

|              |  |                         |            |            |           |   |         |             |            |   |            |  |  |             |         |  |           |   |            |  |  |   |           | 
|------------- |  | ----------------------- | ---------- | ---------- | --------- | - | ------- | ----------- | ---------- | - | ---------- |  |  | ----------- | ------- |  | --------- | - | ---------- |  |  | - | --------- | 
|              |  | Year Ended December 31, |           
|              |  |                         |           
|              |  | 2004                    |            |            | 2003      |   |         | 2002        |           
|              |  |                         |            |            |           |   |         |             |           
|              |  |                         |            | Long-Lived |           |   |         |             | Long-Lived |   |            |  |  | Long-Lived  |        
|              |  | Revenues(a)             |            |            | Assets(b) |   |         | Revenues(a) |            |   | Assets(b)  |  |  | Revenues(a) |         |  | Assets(b) |  
|              |  |                         |            |            |           |   |         |             |            |   |            |  |  |             |         |  |           |  
|United States |  | $                       | 11,430,354 |            |           | $ | 450,649 |             |            | $ | 10,716,304 |  |  | $           | 521,511 |  |           | $ | 8,961,285  |  |  | $ | 1,251,921 | 
|International |  |                         | 1,071,773  |            |           |   |        |             |            |   | 795,131    |  |  |             |        |  |           |   | 1,197,065  |  |  |   | 7,265     | 
|              |  |                         |            |            |           |   |         |             |            |   |            |  |  |             |         |  |           |  
|Total         |  | $                       | 12,502,127 |            |           | $ | 450,649 |             |            | $ | 11,511,435 |  |  | $           | 521,511 |  |           | $ | 10,158,350 |  |  | $ | 1,259,186 | 
|              |  |                         |            |            |           |   |         |             |            |   |            |  |  |             |         |  |           |  






|    |                                                                                               
|--- | ----------------------------------------------------------------------------------------------
|(a) | Revenues are attributed to the United States and International
    based on customer location.



|    |  |                                                                          
|--- |  | -------------------------------------------------------------------------
|(b) |  | Long-lived assets include non-current tangible assets of the
    Company.



| |                
| | ---------------
| | Major Customers







|         |                           
|-------- | --------------------------
|Note 16. | Related Party Transactions





Gross
    
    
    GrossHistorical
    
    
    unrealized
    
    
    unrealized
    
    
    Faircost
    
    
    gain
    
    
    loss
    
    
    valueCommon stock
    
    $
    850,000
    
    
    $
    553,933
    
    
    
    
    
    
    $
    1,403,933Corporate bonds
    
    
    815,550
    
    
    
    
    
    
    
    (35,174
    )
    
    
    780,376Government bonds
    
    
    1,005,111
    
    
    
    
    
    
    
    (5,000
    )
    
    
    1,000,111Auction rate securities
    
    
    6,082,041
    
    
    
    
    
    
    
    
    
    
    
    6,082,041Total current available for sale securities
    
    $
    8,752,702
    
    
    $
    553,933
    
    
    $
    (40,174
    )
    
    $
    9,266,461










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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




|         |                                     
|-------- | ------------------------------------
|Note 17. | Quarterly Financial Data (unaudited)

|                             |                                              |               |   |            |                |  |   |               |   |  |                |           |   |  |   |           |  
|---------------------------- | -------------------------------------------- | ------------- | - | ---------- | -------------- |  | - | ------------- | - |  | -------------- | --------- | - |  | - | --------- | -
|                             |                                              | First Quarter |   |            | Second Quarter |  |   | Third Quarter |   |  | Fourth Quarter |          
|                             |                                              |               |   |            |                |  |   |               |   |  |                |          
|Year ended December 31, 2004 |                                              |               |   |            |                |  |   |               |   |  |                |           |   |  |   |          
|                             | Revenues                                     |               | $ | 1,836,774  |                |  | $ | 3,887,372     |   |  | $              | 3,973,360 |   |  | $ | 2,804,620 |  
|                             | Gross margin                                 |               |   | 1,000,927  |                |  |   | 2,880,608     |   |  |                | 2,363,799 |   |  |   | 1,470,933 |  
|                             | Net income (loss)                            |               |   | (2,709,705 | )              |  |   | 163,450       |   |  |                | 199,991   |   |  |   | 652,012   |  
|                             | Net income (loss) per common share, basic    |               |   | (0.55      | )              |  |   | 0.03          |   |  |                | 0.04      |   |  |   | 0.12      |  
|                             | Net income (loss) per common share, diluted  |               |   | 0.00       |                |  |   | 0.03          |   |  |                | 0.04      |   |  |   | 0.12      |  
|Year ended December 31, 2003 |                                              |               |   |            |                |  |   |               |   |  |                |           |   |  |   |          
|                             | Revenues                                     |               | $ | 2,125,861  |                |  | $ | 3,072,760     |   |  | $              | 2,730,988 |   |  | $ | 3,581,826 |  
|                             | Gross margin                                 |               |   | 1,279,868  |                |  |   | 2,262,922     |   |  |                | 1,909,320 |   |  |   | 2,865,646 |  
|                             | Net loss                                     |               |   | (1,942,791 | )              |  |   | (368,693      | ) |  |                | (494,016  | ) |  |   | (173,804  | )
|                             | Net loss per common share, basic and diluted |               |   | (0.81      | )              |  |   | (0.15         | ) |  |                | (0.20     | ) |  |   | (0.07     | )



|         |              
|-------- | -------------
|Note 18. | Contingencies









| |   |                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Without any admission of liability by either party, the Company
    and Primus agreed to dismiss with prejudice all the claims,
    counterclaims and reply claims in the Lawsuit and to deliver to
    each other mutual general releases.                                                                                              
|
| |  | The Company agreed to grant to Primus and its affiliates,
    including ATG, a fully paid, irrevocable, nonexclusive,
    nontransferable (with certain exceptions specified in the
    agreement), worldwide, perpetual limited license under the
    patents at issue in the Lawsuit and a covenant not to sue under
    those patents.

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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Primus agreed to pay the Company the sum of $800,000 in cash and
    ATG agreed to guarantee this cash payment obligation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Primus agreed to issue to the Company, immediately prior to the
    closing of ATGs acquisition of Primus, shares of Primus
    common stock having a value of $850,000 based on ATGs
    stock price at the time of issuance and without taking into
    account any future fluctuations in the stock price. Although the
    Company agreed to certain restrictions on transfer of the shares
    of ATG common stock issued to the Company in connection with the acquisition by ATG of Primus,
    the Company sold all of its shares of ATG common stock in first
    quarter 2005, for an aggregate gross sales price of $1,018,250.







|         |                  
|-------- | -----------------
|Note 19. | Subsequent Events









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##### Table of Contents






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of disclosure controls and procedures .


Changes in internal controls .


Reclassifications




29



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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 23.1
    
    Consent of PricewaterhouseCoopers LLP31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32
    
    Section 1350 Certifications
 30




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##### Table of Contents



Signatures
  KNOVA SOFTWARE, INC.By:
    /s/ Bruce ArmstrongBRUCE ARMSTRONGChief Executive Officer  Signature
    
    Capacity
    
    Date/s/ Bruce Armstrong
    
    President, Principal Executive Officer and Director
    
    January 17, 2006Bruce Armstrong/s/ Thomas Muise
    
    Chief Financial Officer and Principal Financial Officer
    
    January 17, 2006Thomas Muise/s/ Kelly Barefoot
    
    Controller and Principal Accounting Officer
    
    January 17, 2006Kelly Barefoot/s/ *

Kent Heyman
    
    Director/s/ *

Thomas Unterberg
    
    Director/s/ *
Timothy Wallace
    
    Director* By: /s/ Bruce Armstrong
    
    Attorney-in-Fact
    
    January 17, 2006Bruce Armstrong
 31