##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31, 2005                                                 
|          
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file number 000-30277


Knova Software, Inc.


(Exact Name of Registrant as Specified in Its Charter)


|                                                                                        |  |                                         
|--------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                |  | 25-1647861                              
|(State or Other Jurisdiction of
    Incorporation or Organization)                      |  | (I.R.S. Employer
    Identification No.)
|                                                                                       
|10201 Torre Avenue, Suite 350
    Cupertino, CA(Address of Principal Executive Offices) |  | 95014(Zip Code)                         

Registrants telephone number, including area code:


(408) 863-5800


(Former name or former address, if changed since last
report.)


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


|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of Each Class |  | Name of Each Exchange on Which Registered
|                    |  |                                          
|None                |  | Not applicable                           

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


Common Stock, par value $.01 per share


(Title of Class)


o þ


o þ


þ o


S-K 10-K 10-K. o


12b-2




|                             |                        |                            | 
|---------------------------- | ---------------------- | -------------------------- | 
|Large accelerated filer    o | Accelerated filer    o | Non-accelerated filer    þ | 

12b-2 o þ


The Wall Street Journal.




DOCUMENTS INCORPORATED BY REFERENCE




EXHIBITS INDEX IS LOCATED ON PAGE 66










---



##### 










KNOVA SOFTWARE, INC.


ANNUAL REPORT ON


FORM 10-K


FOR THE YEAR ENDED DECEMBER 31, 2005


TABLE OF CONTENTS


|         |  |                                                                                                                       |  |                                  |      |  |    | 
|-------- |  | --------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ---- |  | -- | 
|Item     |  |                                                                                                                       |  |                                  | Page | 
|         |  |                                                                                                                       |  |                                  |      | 
|PART I  
|1        |  | Business                                                                                                              |  |                                  | 2    | 
|         |  |                                                                                                                       |  | Overview                         |      |  | 2  | 
|         |  |                                                                                                                       |  | Products                         |      |  | 2  | 
|         |  |                                                                                                                       |  | Strategy                         |      |  | 4  | 
|         |  |                                                                                                                       |  | Services                         |      |  | 5  | 
|         |  |                                                                                                                       |  | Customers                        |      |  | 5  | 
|         |  |                                                                                                                       |  | Sales and Marketing              |      |  | 6  | 
|         |  |                                                                                                                       |  | Strategic Alliances              |      |  | 6  | 
|         |  |                                                                                                                       |  | Research and Development         |      |  | 7  | 
|         |  |                                                                                                                       |  | Competition                      |      |  | 7  | 
|         |  |                                                                                                                       |  | Intellectual Property            |      |  | 7  | 
|         |  |                                                                                                                       |  | Employees                        |      |  | 8  | 
|         |  |                                                                                                                       |  | Forward-looking Statements       |      |  | 8  | 
|         |  |                                                                                                                       |  | Internet Address and SEC Reports |      |  | 9  | 
|         |  |                                                                                                                       |  | Business History                 |      |  | 9  | 
|1A       |  | Risk Factors                                                                                                          |  |                                  | 9    | 
|1B       |  | Unresolved Staff Comments                                                                                             |  |                                  | 18   | 
|2        |  | Properties                                                                                                            |  |                                  | 18   | 
|3        |  | Legal Proceedings                                                                                                     |  |                                  | 18   | 
|4        |  | Submission of Matters to a Vote of Security
    Holders                                                               |  |                                  | 18   | 
|PART II 
|5        |  | Market for Registrants Common Equity,
    Related Stockholder Matters, and Issuer Purchases of Equity
    Securities |  |                                  | 18   | 
|6        |  | Selected Financial Data                                                                                               |  |                                  | 19   | 
|7        |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                             |  |                                  | 20   | 
|7A       |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                        |  |                                  | 28   | 
|8        |  | Financial Statements and Supplementary
    Data                                                                       |  |                                  | 29   | 
|9        |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                              |  |                                  | 53   | 
|9A       |  | Controls and Procedures                                                                                               |  |                                  | 53   | 
|9B       |  | Other Information                                                                                                     |  |                                  | 53   | 
|PART III
|10       |  | Directors and Executive Officers of the
    Registrant                                                                |  |                                  | 53   | 
|11       |  | Executive Compensation                                                                                                |  |                                  | 56   | 
|12       |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                    |  |                                  | 59   | 
|13       |  | Certain Relationships and Related
    Transactions                                                                    |  |                                  | 62   | 
|14       |  | Principal Accountants Fees and
    Services                                                                          |  |                                  | 62   | 
|PART IV 
|15       |  | Exhibits and Financial Statement
    Schedules                                                                        |  |                                  | 63   | 
|         |  |                                                                                                                       |  | Signatures                       |      |  | 65 | 
|EX-23.1 
|EX-31.1 
|EX-31.2 
|EX-32   



1



---



##### Table of Contents



PART I







|        |         
|------- | --------
|Item 1. | Business




Overview













Products








| |   |                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Customer service organizations can increase service-agent
    productivity and customer retention while decreasing service
    costs, training costs and resolution time.                                                                                                            
|
| |  | Customer service organizations can ensure consistent service and
    customer interactions across channels by providing a unified
    view of knowledge, enforcing consistent resolution processes in
    the contact center, and providing seamless escalation with CRM
    systems.
|
| |  | Enterprises can provide customer self-service that reduces
    service costs, improves customer satisfaction, and facilitates
    sales and marketing of products and services.                                                                                                      
|
| |  | Information technology organizations can increase the
    effectiveness of employee help desk operations while decreasing
    internal technical support costs.                                                                                                                      

2



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##### Table of Contents





| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Enterprises can preserve and enhance their existing deployments
    of traditional call center, CRM and help desk applications, as
    well as content management, knowledge management and workflow
    tools.





| |                        
| | -----------------------
| | Knova Application Suite







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Knova Contact Centeris an assisted-service application
    for customer service and help desk agents that enables them to
    resolve customer issues and questions more effectively. Knova
    Contact Center integrates a sophisticated knowledge management
    system with additional features such as search, collaboration,
    interview scripting, email response, and knowledge authoring.
    Knova Contact Center features business process support
    integrated with customer relationship management systems that
    can tailor the resolution experience based on the
    customers or employees issue or question.
|
| |  | Knova Self-Serviceis a self-service application that
    enables customers and employees to resolve their own issues and
    questions on an enterprise website. Knova Self-Service provides
    a wide range of features, including guided search and business
    process support that can provide a personalized and guided
    resolution experience based on the issue or question the
    customer or employee has.                                                                                                                                                                                                             
|
| |  | Knova Forumsis an application for online customer
    communities and forums that enables customers to discuss and
    collaborate on topics of interest, including an
    enterprises products and services. Knova Forums enables
    customers and employees to assist each other, reducing service
    delivery costs and providing valuable insight to the enterprise.                                                                                                                                                                                                                                                           
|
| |  | Knova Field Serviceis a mobile support application that
    enables field technicians and service professionals to search
    the knowledge base and resolve problems at the customer site.
    Knova Field Service runs on a disconnected laptop computer and
    synchronizes via a network connection with the Field Service
    application server to update the knowledge base content.                                                                                                                                                                                                                                          
|
| |  | Knova Knowledge Deskis a packaged knowledge management
    solution for service and help desks to resolve questions, author
    knowledge, and manage repositories of intellectual capital.
    Knova Knowledge Desk is integrated with traditional service and
    help desk applications from companies such as Remedy and Hewlett
    Packard (HP). It is based on a patented
    self-learning search technology that is designed to improve with
    usage. Knova Knowledge Desk features application modules for
    different user types and functions.                                                                      



| |                         
| | ------------------------
| | Knova Knowledge Platform





| |   |                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A knowledge auto-classification engine that automatically tags
    and organizes disparate knowledge sources, including
    unstructured documents, transaction data, experts, and authored
    support content.                                                                                                                                                               
|
| |  | A natural language processing (NLP) search engine that
    enables users to find the knowledge they require based on their
    query, intent, and goal. This search engine also provides a
    guided search experience based on a patented approach to
    knowledge management that enables users to narrow search results
    by dynamic parameters and drill-drown options.

3



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A patented self-learning search and knowledge management
    technology called the Cognitive Processor that enables
    organizations to capture and manage repositories of intellectual
    capital and knowledge. The Cognitive Processor uses patented
    algorithm technology based on neural network and Bayesian
    statistical principles that enable learning and improvement from
    past transactions.
|
| |  | The Resolution Flow business process engine is a rules-based
    engine that guides users through a designed service experience
    based on the context of their query, profile, or case.                                                                                                                                                                                                                         
|
| |  | Application Programming Interfaces (APIs) and pre-built adaptors
    for integrating the Knova Application Suite with complementary
    business applications from vendors such as Siebel, Amdocs,
    PeopleSoft, Remedy, HP and others, using industry-standard
    protocols and approaches.                                                                                                                    



| |                            
| | ---------------------------
| | Technology and Architecture










Strategy






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Support Successful Customer Implementations. Our success
    depends on our customers successful implementations of
    Knova applications. To this end, we actively support the
    customers deployment efforts by providing Internet and
    telephone technical support, instructor-led training, and
    account management teams.                                                                                                                                                                                                                                                                                                                           
|
| |  | Maintain and Extend Our Advanced Technology Position. We
    intend to broaden our position in the knowledge management and
    customer service and support solutions market by continuing to
    increase the performance, functionality, and scalability of our
    solutions. We plan to continue to devote resources to the
    development of new and innovative technologies and products, to
    increase efficiencies, to offer immediate answers, and to
    minimize service response time. We intend to expand our current
    offerings to incorporate advances in knowledge acquisition,
    business process support, and multi-channel interactions.
|
| |  | Expand Strategic Alliances. To broaden our market
    presence, enter new geographic and vertical markets, and
    increase adoption of our solutions, we plan to strengthen
    existing and pursue additional strategic alliances with
    consultants, systems integrators, value-added resellers, and
    independent software vendors of complementary products. We
    intend to use these relationships to increase our sales by
    taking advantage of these organizations industry
    expertise, business relationships, and sales and marketing
    resources.                                                                                         
|
| |  | Further Develop International Presence. To capitalize on
    international opportunities for our SRM applications and
    knowledge management solutions, we intend to expand our
    international presence through global offices as well as local
    distributors, including Merlin Information Systems in the United
    Kingdom.                                                                                                                                                                                                                                                                                                                              

4



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Services


Professional Services.


Customer Support. e-mail.


Account Management and Technical Support.





Customers




|                                                       
|-------------------------------------------------------
|Technology                                             
|Business Objects                                       
|EBay Inc.                                              
|First Data Corporation                                 
|Genesys Telecommunications Laboratory                  
|Hewlett Packard                                        
|Intersystems Corporation                               
|Intuit, Inc.                                           
|Invensys Systems, Inc.                                 
|McAfee, Inc.                                           
|Mercury Interactive                                    
|Novell                                                 
|Partech, Inc.                                          
|Plato, Inc.                                            
|Qlogic Corporation                                     
|Sage Software, Inc.                                    
|Softbrands                                             
|Tellabs North America, Inc.                            
|Texas Instruments, Inc.                                
|Toshiba America                                        
|Trend Micro Incorporated                               
|Vision Solutions                                       
|VMWare, Inc.                                           
|                                                       
|Services                                               
|C3i, Inc.                                              
|Circle Company Associates, Inc.                        
|Electronic Data Systems Corporation                    
|SEI Information Technology, Inc.                       
|                                                       
|Telecommunications                                     
|Aastra Intecom (EADS)                                  
|Cingular Wireless LLC                                  
|Qualcomm, Inc.                                         
|SaskTel                                                
|U.S. Cellular Corporation                              
|                                                       
|Automotive                                             
|Ford Motor Company                                     
|                                                       
|Healthcare & Biotech                                   
|Allina Hospitals & Clinics                             
|Aventis Pharmaceuticals, Inc.                          
|Express Scripts, Inc.                                  
|GE Healthcare                                          
|McKesson Provider Technologies                         
|Omnicell                                               
|United Health Technologies                             
|University of Utah Vanderbilt University Medical Center
|                                                       
|Government/ Public Sector                              
|Northeastern University                                
|State of Washington                                    
|United States Navy                                     
|U.S. Patent & Trademark Office                         
|The University of Iowa                                 

5



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|                                       
|---------------------------------------
|                                       
|Financial Services                     
|Aegon Equity Group                     
|AmSouth Bank                           
|Dow Jones & Company, Inc.              
|Fifth Third Bank                       
|H&R Block, Inc.                        
|Prudential Insurance Company of America
|Reuters Limited                        
|The Travelers Indemnity Company        
|Wachovia                               
|Wausau Financial Systems               
|                                       
|Retail/ Consumer Goods                 
|Jack in the Box, Inc.                  
|Mattel, Inc.                           
|Nestle Waters NA, Inc.                 
|Sharp Electronics                      
|Staples, Inc.                          
|Tommy Hilfiger USA, Inc.               
|                                       
|Industrial/ Manufacturing              
|Eaton Electrical                       
|Hughes Supply, Inc.                    
|Johnson Controls, Inc.                 
|Pactiv Corporation                     




Sales & Marketing











Strategic Alliances






| |   |                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Resellers and Distributors: We have active reseller
    relationships with Amdocs Software Systems Limited and Hewlett
    Packard, which provide complementary CRM and service desk
    solutions, as well as Capgemini Technologies, LLC, eVergance
    Partners, LLC, and Merlin Information Systems, which provide
    consulting and implementation services.             
|
| |  | Complementary Software Partners: We participate in
    several alliance programs of vendors who provide complementary
    business applications and software. These include Siebel
    Systems, Inc., Amdocs Software Systems Limited, Remedy, Hewlett
    Packard, and Genesys Telecommunications Laboratory.                                                                 
|
| |  | Consulting and System Integration Partners: We work
    closely with leading system integration, consulting and
    outsourcing firms, and has established alliances with Capgemini
    Technologies, LLC, Electronic Data Systems Corporation,
    eVergance Partners, LLC, Stratacom, Inc., Hewlett Packard, and
    Merlin Information Systems.                             
|
| |  | Technology Partners: To deploy our software effectively
    across varied IT environments, we maintain technology
    partnerships with Inxight Software, Inc., Business Objects, and
    WebMethods, Inc. In addition, our software is developed on and
    tested against platform software from providers of database,
    operating system and application server software.

6



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Research and Development








10-K.





Competition


e-Service,









Intellectual Property




7



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Employees







Forward-looking Statements


10-K






| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | Our plans and strategies,                                                                     
|
| |  | Our anticipation of profitability or cash flow from operations,                               
|
| |  | The development of our business,                                                              
|
| |  | The expected market for our services and products,                                            
|
| |  | Other statements contained in this report regarding matters that
    are not historical facts.





8



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Internet Address and SEC Reports


www.knova.com 10-K 10-K, 10-Q 8-K,





Business History













|         |             
|-------- | ------------
|Item 1A. | Risk Factors





| |                                                         
| | --------------------------------------------------------
| | We may not be able to reverse our history of
    losses.



9



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##### Table of Contents





| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may need additional capital to fund continued business
    operations and we cannot be sure that additional financing will
    be available when and if needed.





| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are not able to obtain capital when needed, we may
    need to dramatically change our business strategy and direction,
    including pursuing options to sell or merge our business.





| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Our cash flow may not be sufficient to permit repayment of
    our debt when due.





| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | We may not succeed in attracting and retaining the
    personnel we need for our business.





| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A significant percentage of our product development is
    performed by a third party internationally, the loss of which
    could substantially impair our product development
    efforts.



10



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| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | It is difficult to draw conclusions about our future
    performance based on our past performance due to significant
    fluctuations in our quarterly operating results.







period-to




| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The markets for knowledge management and service
    resolution management are evolving and, if they do not grow
    rapidly, our business will be adversely affected.





| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | We currently have one core product family. If the demand
    for this line of products declines, our business will be
    adversely affected.



11



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| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Due to the lengthy sales cycles of our products and
    services, the timing of our sales is difficult to predict and
    may cause us to miss our revenue expectations.





| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to expand our business internationally,
    and, if we do, we face risks relating to international
    operations.





| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | If we are not able to keep pace with rapid technological
    change, sales of our products may decrease.





| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on technology licensed to us by third parties,
    and the loss of this technology could delay implementation of
    our products, injure our reputation or force us to pay higher
    royalties.





| |                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Problems arising from the use of our products with other
    vendors products could cause us to incur significant
    costs, divert attention from our product development efforts and
    cause customer relations problems.



12



---



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| |                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If third parties cease to provide open program interfaces
    for their customer relationship management software, it will be
    difficult to integrate our software with theirs. This may
    decrease the attractiveness of our products.





| |                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face intense competition from both established and
    recently formed entities, and this competition may adversely
    affect our revenues and profitability because we compete in the
    emerging markets for knowledge management and service resolution
    management solutions.





| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | If our software products contain errors or failures, sales
    of these products could decrease.

out-of




| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We could incur substantial costs as a result of product
    liability claims because our products are critical to the
    operations of our customers businesses.





| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | If our customers system security is breached and
    confidential information is stolen, our business and reputation
    could suffer.



13



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| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | We may acquire or make investments in companies or
    technologies that could hurt our business.





| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | failure to integrate the acquired assets and/or companies with
    our current business;                                                                       
|
| |  | the price we pay may exceed the value we eventually realize;                                                                                                   
|
| |  | potential loss of share value to our existing stockholders as a
    result of issuing equity securities as part or all of the
    purchase price;              
|
| |  | potential loss of key employees from either our current business
    or the acquired business;                                                                 
|
| |  | entering into markets in which we have little or no prior
    experience;                                                                                      
|
| |  | diversion of managements attention from other business
    concerns;                                                                                          
|
| |  | assumption of unanticipated liabilities related to the acquired
    assets; and                                                                                
|
| |  | the business or technologies we acquire or in which we invest
    may have limited operating histories and may be subject to many
    of the same risks we are.





| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to protect our intellectual property
    rights, which may cause us to incur significant costs in
    litigation and an erosion in the value of our brands and
    products.





14



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| |                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may initiate lawsuits to protect or enforce our
    patents. Lawsuits may be expensive and, depending on the
    verdict, we may lose some, if not all, of our intellectual
    property rights, and this may impair our ability to compete in
    the market.





| |                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The success of our software products depends on its
    adoption by our customers employees. If these employees do
    not accept the implementation of our products, our customers may
    fail to renew their service contracts and we may have difficulty
    attracting new customers.







| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on increased business from our new customers
    and, if we fail to grow our client base or generate repeat
    business, our operating results could be adversely
    affected.







| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | A decline in information technology spending could reduce
    the sale of our products.



15



---



##### Table of Contents







| |                                                                              
| | -----------------------------------------------------------------------------
| | Increasing government regulation of the Internet could
    harm our business.







| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | We may become involved in securities class action
    litigation, which could divert managements attention and
    harm our business.





| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | Our stock price may be adversely affected since our stock
    is not listed on an exchange or The Nasdaq Stock Market.





16



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| |                                                                             
| | ----------------------------------------------------------------------------
| | Shares available for future sale could adversely affect
    our stock price.





| |                                                                               
| | ------------------------------------------------------------------------------
| | Our business could be harmed if we lose the services of
    our key personnel.





| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | Our management owns a significant percentage of our
    company and will be able to exercise significant influence over
    our actions.



Voting agreements in place
assure election of our current directors for 2006.






| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Terrorist attacks and other attacks or acts of war may
    adversely affect the markets on which our common stock trades,
    our financial condition and our results of operations.





| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The regulatory environment surrounding accounting and
    corporate governance subjects us to certain legal uncertainties
    in the operation of our business and may increase the cost of
    doing business.



17



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|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments








|        |           
|------- | ----------
|Item 2. | Properties








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings










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



PART II




|        |                                                                                                                      
|------- | ---------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters, and Issuer Purchases of Equity
    Securities

Market for our common stock


over-the


18



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|     |                |      |   |      |     |  |   |      | 
|---- | -------------- | ---- | - | ---- | --- |  | - | ---- | 
|     |                | High |   |      | Low | 
|     |                |      |   |      |     | 
|2004 |                |      |   |      |     |  |   |     
|     | First Quarter  |      | $ | 8.90 |     |  | $ | 5.80 | 
|     | Second Quarter |      | $ | 6.80 |     |  | $ | 5.20 | 
|     | Third Quarter  |      | $ | 5.90 |     |  | $ | 3.20 | 
|     | Fourth Quarter |      | $ | 5.40 |     |  | $ | 3.60 | 
|2005 |                |      |   |      |     |  |   |     
|     | First Quarter  |      | $ | 6.80 |     |  | $ | 3.87 | 
|     | Second Quarter |      | $ | 4.50 |     |  | $ | 3.00 | 
|     | Third Quarter  |      | $ | 4.25 |     |  | $ | 3.20 | 
|     | Fourth Quarter |      | $ | 3.60 |     |  | $ | 2.50 | 



Dividend Policy









|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                                       |                         |                                       |        |       |      |   |        |       |   |   |        |       |   |      |        |       |   |   |         |        |  
|------------------------------------------------------ | ----------------------- | ------------------------------------- | ------ | ----- | ---- | - | ------ | ----- | - | - | ------ | ----- | - | ---- | ------ | ----- | - | - | ------- | ------ | -
|                                                       |                         | For the Year Ended December 31,       |       
|                                                       |                         |                                       |       
|                                                       |                         | 2005                                  |        |       | 2004 |   |        | 2003  |   |   | 2002   |       |   | 2001 |       
|                                                       |                         |                                       |        |       |      |   |        |       |   |   |        |       |   |      |       
|                                                       |                         | (In thousands, except per share data) |       
|STATEMENT OF OPERATIONS DATA                           |                         |                                       |        |       |      |   |        |       |   |   |        |       |   |      |        |       |   |   |         |       
|Total revenues                                         |                         | $                                     | 23,595 |       |      | $ | 12,502 |       |   | $ | 11,511 |       |   | $    | 10,158 |       |   | $ | 12,427  |       
|Net loss from continuing operations                    |                         |                                       | (5,095 | )     |      |   | (1,694 | )     |   |   | (2,979 | )     |   |      | (6,825 | )     |   |   | (31,486 | )     
|Net income (loss) per common share, basic and diluted: |                         |                                       |        |       |      |   |        |       |   |   |        |       |   |      |        |       |   |   |         |       
|                                                       | Continuing operations   |                                       |        | (0.61 | )    |   |        | (0.33 | ) |   |        | (1.23 | ) |      |        | (2.85 | ) |   |         | (13.00 | )
|                                                       | Discontinued operations |                                       |        |      |      |   |        |      |   |   |        |      |   |      |        |      |   |   |         | 0.73   |  
|                                                       |                         |                                       |        |       |      |   |        |       |   |   |        |       |   |      |       
|Net loss per share                                     |                         | $                                     | (0.61  | )     |      | $ | (0.33  | )     |   | $ | (1.23  | )     |   | $    | (2.85  | )     |   | $ | (12.27  | )     
|                                                       |                         |                                       |        |       |      |   |        |       |   |   |        |       |   |      |       

|                   |                |                    |   |        |      |  |   |        |  |  |      |       |  |      |   |       |  |  |   |        | 
|------------------ | -------------- | ------------------ | - | ------ | ---- |  | - | ------ |  |  | ---- | ----- |  | ---- | - | ----- |  |  | - | ------ | 
|                   |                | As of December 31, |  
|                   |                |                    |  
|                   |                | 2005               |   |        | 2004 |  |   | 2003   |  |  | 2002 |       |  | 2001 |  
|                   |                |                    |   |        |      |  |   |        |  |  |      |       |  |      |  
|                   |                | (In thousands)     |  
|Balance Sheet Data |                |                    |   |        |      |  |   |        |  |  |      |       |  |      |   |       |  |  |   |       
|                   | Total assets   |                    | $ | 38,992 |      |  | $ | 16,953 |  |  | $    | 8,084 |  |      | $ | 8,735 |  |  | $ | 13,886 | 
|                   | Long term debt |                    |   | 306    |      |  |   | 384    |  |  |      | 599   |  |      |   | 109   |  |  |   | 443    | 



19



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations



Overview










Description of Statement of Operations




| |         
| | --------
| | Revenues



20



---



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| |                 
| | ----------------
| | Cost of Revenues





| |                
| | ---------------
| | Operating Costs



Critical Accounting Policies and Estimates






| |                    
| | -------------------
| | Revenue Recognition



97-2,


21



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##### Table of Contents







| |                    
| | -------------------
| | Accounts Receivable





| |                               
| | ------------------------------
| | Intangible Assets and Goodwill





| |             
| | ------------
| | Income Taxes



22



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##### Table of Contents



Results of Operations




|                            |          |                                 |                                |                        |            |            |           |      |       |      |            |           |            |           |           |      |       |      |            |           |            |           |           |      |       |      |      | 
|--------------------------- | -------- | ------------------------------- | ------------------------------ | ---------------------- | ---------- | ---------- | --------- | ---- | ----- | ---- | ---------- | --------- | ---------- | --------- | --------- | ---- | ----- | ---- | ---------- | --------- | ---------- | --------- | --------- | ---- | ----- | ---- | ---- | 
|                            |          | For the Year Ended December 31, |                               
|                            |          |                                 |                               
|                            |          | 2005                            |                                |                        | 2004       |            |           | 2003 |      
|                            |          |                                 |                                |                        |            |            |           |      |      
|Revenues:                   |          |                                 |                                |                        |            |            |           |      |       |      |            |           |            |           |           |      |       |      |            |           |            |           |           |     
|                            | Licenses |                                 | $                              | 8,957,479              |            |            |           | 38.0 | %     |      | $          | 5,243,910 |            |           |           | 41.9 | %     |      | $          | 4,934,345 |            |           |           | 42.9 | %    
|                            | Services |                                 |                                | 14,637,476             |            |            |           | 62.0 |       |      |            | 7,258,217 |            |           |           | 58.1 |       |      |            | 6,577,090 |            |           |           | 57.1 |      
|                            |          |                                 |                                |                        |            |            |           |      |       |      |            |           |            |           |           |      |       |     
|                            |          | Total revenues                  |                                |                        | 23,594,955 |            |           |      | 100.0 |      |            |           | 12,502,127 |           |           |      | 100.0 |      |            |           | 11,511,435 |           |           |      | 100.0 |     
|                            |          |                                 |                                |                        |            |            |           |      |       |      |            |           |            |           |           |      |       |     
|Cost of revenues:           |          |                                 |                                |                        |            |            |           |      |       |      |            |           |            |           |           |      |       |      |            |           |            |           |           |     
|                            |          |                                 | Cost of licenses               |                        |            | 892,576    |           |      |       | 3.8  |            |           |            | 412,972   |           |      |       | 3.3  |            |           |            | 270,325   |           |      |       | 2.3  |     
|                            |          |                                 | Cost of services               |                        |            | 8,711,239  |           |      |       | 36.9 |            |           |            | 4,372,888 |           |      |       | 35.0 |            |           |            | 2,923,355 |           |      |       | 25.4 |     
|                            |          |                                 |                                |                        |            |            |           |      |       |      |            |           |            |           |           |      |       |     
|                            |          |                                 |                                | Total cost of revenues |            |            | 9,603,815 |      |       |      | 40.7       |           |            |           | 4,785,860 |      |       |      | 38.3       |           |            |           | 3,193,680 |      |       |      | 27.7 | 
|                            |          |                                 |                                |                        |            |            |           |      |       |      |            |           |            |           |           |      |       |     
|Gross margin                |          |                                 | 13,991,140                     |                        |            |            | 59.3      |      |       |      | 7,716,267  |           |            |           | 61.7      |      |       |      | 8,317,755  |           |            |           | 72.3      |     
|Operating expenses:         |          |                                 |                                |                        |            |            |           |      |       |      |            |           |            |           |           |      |       |      |            |           |            |           |           |     
|                            |          |                                 | Sales and marketing            |                        |            | 8,122,507  |           |      |       | 34.4 |            |           |            | 4,781,641 |           |      |       | 38.2 |            |           |            | 5,116,062 |           |      |       | 44.5 |     
|                            |          |                                 | Research and development       |                        |            | 5,664,487  |           |      |       | 24.0 |            |           |            | 2,197,588 |           |      |       | 17.6 |            |           |            | 1,961,959 |           |      |       | 17.0 |     
|                            |          |                                 | General and administrative     |                        |            | 3,939,076  |           |      |       | 16.7 |            |           |            | 2,402,891 |           |      |       | 19.2 |            |           |            | 2,119,126 |           |      |       | 18.4 |     
|                            |          |                                 | Intangible assets amortization |                        |            | 256,850    |           |      |       | 1.1  |            |           |            |          |           |      |       | 0.0  |            |           |            | 146,746   |           |      |       | 1.3  |     
|                            |          |                                 | Restructuring charges          |                        |            | 1,355,350  |           |      |       | 5.7  |            |           |            |          |           |      |       | 0.0  |            |           |            | (20,000   | )         |      |       | (0.2 | )   
|                            |          |                                 |                                |                        |            |            |           |      |       |      |            |           |            |           |           |      |       |     
|                            |          |                                 | Total operating expenses       |                        |            | 19,338,270 |           |      |       | 81.9 |            |           |            | 9,382,120 |           |      |       | 75.0 |            |           |            | 9,323,893 |           |      |       | 81.0 |     
|                            |          |                                 |                                |                        |            |            |           |      |       |      |            |           |            |           |           |      |       |     
|Loss from operations        |          |                                 | (5,347,130                     | )                      |            |            | (22.6     | )    |       |      | (1,665,853 | )         |            |           | (13.3     | )    |       |      | (1,006,138 | )         |            |           | (8.7      | )   
|Other income (expense), net |          |                                 | 252,309                        |                        |            |            | 1.1       |      |       |      | (28,399    | )         |            |           | (0.2      | )    |       |      | (1,973,167 | )         |            |           | (17.1     | )   
|                            |          |                                 |                                |                        |            |            |           |      |       |      |            |           |            |           |           |      |       |     
|Net loss                    |          | $                               | (5,094,821                     | )                      |            |            | (21.5     | )%   |       | $    | (1,694,252 | )         |            |           | (13.5     | )%   |       | $    | (2,979,305 | )         |            |           | (25.8     | )%  
|                            |          |                                 |                                |                        |            |            |           |      |       |      |            |           |            |           |           |      |       |     



Years Ended December 31, 2005 and 2004




| |         
| | --------
| | Revenues







23



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| |                 
| | ----------------
| | Cost of Revenues







| |                   
| | ------------------
| | Operating Expenses

Sales and Marketing.


Research and Development.


General and Administrative.


Intangible Assets Amortization.


Restructuring charges.


Other income (expense), net.


24



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Years Ended December 31, 2004 and 2003




| |         
| | --------
| | Revenues









| |                 
| | ----------------
| | Cost of Revenues







| |                   
| | ------------------
| | Operating Expenses

Sales and Marketing.


Research and Development.


General and Administrative.


Intangible Assets Amortization.


Other income (expense), net.


25



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Liquidity and Capital Resources
















Contractual Obligations




26



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|                              |  |                        |       |           |        |   |       |       |  |     |       |  |  |   |     | 
|----------------------------- |  | ---------------------- | ----- | --------- | ------ | - | ----- | ----- |  | --- | ----- |  |  | - | --- | 
|                              |  | Payments Due by Period |      
|                              |  |                        |      
|                              |  |                        |       | Less Than |        |   | 1-3   |       |  | 4-5 |      
|                              |  | Total                  |       |           | 1 Year |   |       | Years |  |     | Years | 
|                              |  |                        |       |           |        |   |       |       |  |     |       | 
|                              |  | (In thousands)         |      
|Line of credit borrowing      |  | $                      | 3,600 |           |        | $ | 3,600 |       |  | $   |      |  |  | $ |    | 
|Capital lease obligations     |  |                        | 80    |           |        |   | 43    |       |  |     | 37    |  |  |   |    | 
|Operating lease obligations   |  |                        | 1,191 |           |        |   | 561   |       |  |     | 528   |  |  |   | 102 | 
|                              |  |                        |       |           |        |   |       |       |  |     |       | 
|Total contractual obligations |  | $                      | 4,871 |           |        | $ | 4,204 |       |  | $   | 565   |  |  | $ | 102 | 
|                              |  |                        |       |           |        |   |       |       |  |     |       | 

Off-Balance Sheet Arrangements




Recent Accounting Pronouncements








Forward Looking Statements




27



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|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk







28



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|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data



|                                                        |  |        |    | 
|------------------------------------------------------- |  | ------ | -- | 
|                                                        |  | Page   |   
|                                                        |  | Number |   
|                                                        |  |        |   
|Report of Independent Registered Public Accounting Firm |  |        | 30 | 
|Consolidated Balance Sheets                             |  |        | 31 | 
|Consolidated Statements of Operations                   |  |        | 32 | 
|Consolidated Statements of Stockholders Equity         |  |        | 33 | 
|Consolidated Statements of Cash Flows                   |  |        | 34 | 
|Notes to Consolidated Financial Statements              |  |        | 35 | 

29



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Report of Independent Registered Public Accounting Firm










| |                               
| | ------------------------------
| | /s/ PricewaterhouseCoopers LLP





30



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Knova Software, Inc.


Consolidated Balance Sheets


|                                                                            |                                                                                                                                                                                                                  |                                                         |                                            |             |            |            |           |             |            |            | 
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------------ | ----------- | ---------- | ---------- | --------- | ----------- | ---------- | ---------- | 
|                                                                            |                                                                                                                                                                                                                  | December 31,                                            |                                           
|                                                                            |                                                                                                                                                                                                                  |                                                         |                                           
|                                                                            |                                                                                                                                                                                                                  | 2005                                                    |                                            |             | 2004       |           
|                                                                            |                                                                                                                                                                                                                  |                                                         |                                            |             |            |           
|ASSETS                                                                     
|Current assets                                                              |                                                                                                                                                                                                                  |                                                         |                                            |             |            |            |           |            
|                                                                            | Cash and cash equivalents                                                                                                                                                                                        |                                                         | $                                          | 6,730,766   |            |            | $         | 1,672,305   |           
|                                                                            | Marketable securities                                                                                                                                                                                            |                                                         |                                            | 5,461,016   |            |            |           | 9,266,461   |           
|                                                                            | Accounts receivable, less allowance for doubtful accounts of
    $126,111 at December 31, 2005 and $94,588 at
    December 31, 2004                                                                              |                                                         |                                            | 6,442,391   |            |            |           | 2,529,081   |           
|                                                                            | Prepaid expenses and other current assets                                                                                                                                                                        |                                                         |                                            | 780,546     |            |            |           | 513,072     |           
|                                                                            |                                                                                                                                                                                                                  |                                                         |                                            |             |            |           
|                                                                            |                                                                                                                                                                                                                  |                                                         | Total current assets                       |             |            | 19,414,719 |           |             |            | 13,980,919 | 
|Non current assets                                                          |                                                                                                                                                                                                                  |                                                         |                                            |             |            |            |           |            
|                                                                            | Property and equipment                                                                                                                                                                                           |                                                         |                                            |             |            |            |           |             |           
|                                                                            |                                                                                                                                                                                                                  | Office furniture, equipment, and leasehold improvements |                                            |             | 1,518,027  |            |           |             | 1,510,616  |           
|                                                                            |                                                                                                                                                                                                                  | Computer equipment                                      |                                            |             | 5,165,969  |            |           |             | 4,830,356  |           
|                                                                            |                                                                                                                                                                                                                  |                                                         |                                            |             |            |           
|                                                                            |                                                                                                                                                                                                                  |                                                         | Total property and equipment               |             |            | 6,683,996  |           |             |            | 6,340,972  | 
|                                                                            |                                                                                                                                                                                                                  | Less accumulated depreciation                           |                                            |             | (6,318,897 | )          |           |             | (5,890,323 | )         
|                                                                            |                                                                                                                                                                                                                  |                                                         |                                            |             |            |           
|                                                                            | Property and equipment, net                                                                                                                                                                                      |                                                         |                                            | 365,099     |            |            |           | 450,649     |           
|Intangible assets, net of amortization of $778,196 at
    December 31, 2005 |                                                                                                                                                                                                                  |                                                         | 4,603,995                                  |             |            |            |          |            
|Goodwill                                                                    |                                                                                                                                                                                                                  |                                                         | 14,484,947                                 |             |            |            | 2,323,791 |            
|Other noncurrent assets                                                     |                                                                                                                                                                                                                  |                                                         | 123,111                                    |             |            |            | 197,611   |            
|                                                                            |                                                                                                                                                                                                                  |                                                         |                                            |             |            |           
|                                                                            |                                                                                                                                                                                                                  |                                                         | Total noncurrent assets                    |             |            | 19,577,152 |           |             |            | 2,972,051  | 
|                                                                            |                                                                                                                                                                                                                  |                                                         |                                            |             |            |           
|                                                                            |                                                                                                                                                                                                                  |                                                         | Total assets                               |             | $          | 38,991,871 |           |             | $          | 16,952,970 | 
|                                                                            |                                                                                                                                                                                                                  |                                                         |                                            |             |            |           
|                                                                           
|LIABILITIES AND STOCKHOLDERS EQUITY                                       
|Current liabilities                                                         |                                                                                                                                                                                                                  |                                                         |                                            |             |            |            |           |            
|                                                                            | Accounts payable                                                                                                                                                                                                 |                                                         |                                            | 1,635,911   |            |            |           | 1,693,333   |           
|                                                                            | Accrued compensation and benefits                                                                                                                                                                                |                                                         |                                            | 1,002,940   |            |            |           | 407,014     |           
|                                                                            | Deferred revenue  licenses                                                                                                                                                                                      |                                                         |                                            | 1,571,616   |            |            |           | 378,885     |           
|                                                                            | Deferred revenue  services                                                                                                                                                                                      |                                                         |                                            | 5,113,942   |            |            |           | 2,720,380   |           
|                                                                            | Accrued restructuring charges                                                                                                                                                                                    |                                                         |                                            | 261,252     |            |            |           |            |           
|                                                                            | Line of credit  short term                                                                                                                                                                                      |                                                         |                                            | 3,600,000   |            |            |           |            |           
|                                                                            | Current portion of capital lease obligations                                                                                                                                                                     |                                                         |                                            | 39,636      |            |            |           | 34,211      |           
|                                                                            | Other current liabilities                                                                                                                                                                                        |                                                         |                                            | 794,942     |            |            |           | 571,919     |           
|                                                                            |                                                                                                                                                                                                                  |                                                         |                                            |             |            |           
|                                                                            |                                                                                                                                                                                                                  |                                                         | Total current liabilities                  |             |            | 14,020,239 |           |             |            | 5,805,742  | 
|Noncurrent deferred revenue                                                 |                                                                                                                                                                                                                  |                                                         | 181,603                                    |             |            |            | 322,676   |            
|Other noncurrent liabilities                                                |                                                                                                                                                                                                                  |                                                         | 88,519                                     |             |            |            |          |            
|Capital lease obligations                                                   |                                                                                                                                                                                                                  |                                                         | 35,454                                     |             |            |            | 60,961    |            
|                                                                            |                                                                                                                                                                                                                  |                                                         |                                            |             |            |           
|                                                                            |                                                                                                                                                                                                                  |                                                         | Total liabilities                          |             |            | 14,325,815 |           |             |            | 6,189,379  | 
|Commitments and Contingencies                                               |                                                                                                                                                                                                                  |                                                         |                                            |             |            |            |           |            
|Stockholders equity                                                        |                                                                                                                                                                                                                  |                                                         |                                            |             |            |            |           |            
|                                                                            | Common stock, $0.01 par; 50,000,000 shares authorized,
    8,770,296 and 5,268,896 shares issued and 8,744,112 and
    5,252,241 shares outstanding at December 31, 2005 and
    December 31, 2004, respectively |                                                         |                                            | 561,766     |            |            |           | 526,890     |           
|                                                                            | Additional paid in capital                                                                                                                                                                                       |                                                         |                                            | 100,997,498 |            |            |           | 83,360,602  |           
|                                                                            | Treasury stock, 26,184 and 16,655 shares at
    December 31, 2005 and December 31, 2004, respectively                                                                                                            |                                                         |                                            | (150,554    | )          |            |           | (62,166     | )         
|                                                                            | Deferred compensation                                                                                                                                                                                            |                                                         |                                            | (5,453      | )          |            |           | (161,682    | )         
|                                                                            | Warrants                                                                                                                                                                                                         |                                                         |                                            | 6,549,347   |            |            |           | 4,765,479   |           
|                                                                            | Accumulated other comprehensive income (loss)                                                                                                                                                                    |                                                         |                                            | (12,436     | )          |            |           | 513,759     |           
|                                                                            | Accumulated deficit                                                                                                                                                                                              |                                                         |                                            | (83,274,112 | )          |            |           | (78,179,291 | )         
|                                                                            |                                                                                                                                                                                                                  |                                                         |                                            |             |            |           
|                                                                            |                                                                                                                                                                                                                  |                                                         | Total stockholders equity                 |             |            | 24,666,056 |           |             |            | 10,763,591 | 
|                                                                            |                                                                                                                                                                                                                  |                                                         |                                            |             |            |           
|                                                                            |                                                                                                                                                                                                                  |                                                         | Total liabilities and stockholders equity |             | $          | 38,991,871 |           |             | $          | 16,952,970 | 
|                                                                            |                                                                                                                                                                                                                  |                                                         |                                            |             |            |           



31



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Knova Software, Inc.


Consolidated Statements of Operations


|                                             |                                |                         |            |            |      |   |            |            |   |   |            |            |  
|-------------------------------------------- | ------------------------------ | ----------------------- | ---------- | ---------- | ---- | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                             |                                | Year Ended December 31, |           
|                                             |                                |                         |           
|                                             |                                | 2005                    |            |            | 2004 |   |            | 2003       |  
|                                             |                                |                         |            |            |      |   |            |            |  
|Revenues                                     |                                |                         |            |            |      |   |            |            |   |   |            |           
|                                             | License                        |                         | $          | 8,957,479  |      |   | $          | 5,243,910  |   |   | $          | 4,934,345  |  
|                                             | Services                       |                         |            | 14,637,476 |      |   |            | 7,258,217  |   |   |            | 6,577,090  |  
|                                             |                                |                         |            |            |      |   |            |            |  
|Total revenues                               |                                |                         | 23,594,955 |            |      |   | 12,502,127 |            |   |   | 11,511,435 |           
|Cost of revenues                             |                                |                         |            |            |      |   |            |            |   |   |            |           
|                                             | Cost of licenses               |                         |            | 892,576    |      |   |            | 412,972    |   |   |            | 270,325    |  
|                                             | Cost of services               |                         |            | 8,711,239  |      |   |            | 4,372,888  |   |   |            | 2,923,355  |  
|                                             |                                |                         |            |            |      |   |            |            |  
|Total cost of revenues                       |                                |                         | 9,603,815  |            |      |   | 4,785,860  |            |   |   | 3,193,680  |           
|                                             |                                |                         |            |            |      |   |            |            |  
|Gross margin                                 |                                |                         | 13,991,140 |            |      |   | 7,716,267  |            |   |   | 8,317,755  |           
|Operating expenses                           |                                |                         |            |            |      |   |            |            |   |   |            |           
|                                             | Sales and marketing            |                         |            | 8,122,507  |      |   |            | 4,781,641  |   |   |            | 5,116,062  |  
|                                             | Research and development       |                         |            | 5,664,487  |      |   |            | 2,197,588  |   |   |            | 1,961,959  |  
|                                             | General and administrative     |                         |            | 3,939,076  |      |   |            | 2,402,891  |   |   |            | 2,119,126  |  
|                                             | Intangible assets amortization |                         |            | 256,850    |      |   |            |           |   |   |            | 146,746    |  
|                                             | Restructuring charges          |                         |            | 1,355,350  |      |   |            |           |   |   |            | (20,000    | )
|                                             |                                |                         |            |            |      |   |            |            |  
|Total operating expenses                     |                                |                         | 19,338,270 |            |      |   | 9,382,120  |            |   |   | 9,323,893  |           
|                                             |                                |                         |            |            |      |   |            |            |  
|Loss from operations                         |                                |                         | (5,347,130 | )          |      |   | (1,665,853 | )          |   |   | (1,006,138 | )         
|Other income (expense), net                  |                                |                         |            |            |      |   |            |            |   |   |            |           
|                                             | Interest expense               |                         |            | (9,763     | )    |   |            | (1,277,961 | ) |   |            | (1,951,326 | )
|                                             | Other, net                     |                         |            | 262,072    |      |   |            | 1,249,562  |   |   |            | (21,841    | )
|                                             |                                |                         |            |            |      |   |            |            |  
|Other income (expense), net                  |                                |                         | 252,309    |            |      |   | (28,399    | )          |   |   | (1,973,167 | )         
|                                             |                                |                         |            |            |      |   |            |            |  
|Net loss                                     |                                | $                       | (5,094,821 | )          |      | $ | (1,694,252 | )          |   | $ | (2,979,305 | )         
|                                             |                                |                         |            |            |      |   |            |            |  
|Net loss per common share, basic and diluted |                                | $                       | (0.61      | )          |      | $ | (0.33      | )          |   | $ | (1.23      | )         
|Shares used in computing per share amounts   |                                |                         | 8,341,426  |            |      |   | 5,140,378  |            |   |   | 2,419,750  |           



32



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##### Table of Contents



Knova Software, Inc.


Consolidated Statements of Stockholders Equity


|                             |                                                                              |              |           |           |            |   |         |                |   |   |             |            |   |        |               |             |              |   |             |          |   |               |             |          |   |         |           |            |        |   |         |          |   |   |             |            |   |   |            |            |  
|---------------------------- | ---------------------------------------------------------------------------- | ------------ | --------- | --------- | ---------- | - | ------- | -------------- | - | - | ----------- | ---------- | - | ------ | ------------- | ----------- | ------------ | - | ----------- | -------- | - | ------------- | ----------- | -------- | - | ------- | --------- | ---------- | ------ | - | ------- | -------- | - | - | ----------- | ---------- | - | - | ---------- | ---------- | -
|                             |                                                                              |              |           |           |            |   |         |                |   |   |             |            |   |        |               | Accumulated |              |   |             |          |  
|                             |                                                                              |              |           |           |            |   |         |                |   |   |             | Other      |   |        |               |             |             
|                             |                                                                              | Common Stock |           |           | Additional |   |         | Treasury Stock |   |   |             |            |   |        | Comprehensive |             |              |   |             | Total    |  
|                             |                                                                              |              |           |           | Paid-in    |   |         |                |   |   | Deferred    |            |   |        |               | Income      |              |   | Accumulated |          |   | Stockholders |            
|                             |                                                                              | Shares       |           |           | Amount     |   |         | Capital        |   |   | Shares      |            |   | Amount |               |             | Compensation |   |             | Warrants |   |               | (Loss) Gain |          |   | Deficit |           |            | Equity |  
|                             |                                                                              |              |           |           |            |   |         |                |   |   |             |            |   |        |               |             |              |   |             |          |   |               |             |          |   |         |           |            |        |  
|Balance at December 31, 2002 |                                                                              |              | 2,408,336 |           |            | $ | 246,845 |                |   | $ | 74,183,726  |            |   |        | 60,117        |             |              | $ | (223,351    | )        |   | $             | (9,548      | )        |   | $       | 1,414,564 |            |        | $ | (36,819 | )        |   | $ | (73,505,734 | )          |   | $ | 2,069,683  |           
|                             | Exercise of stock options                                                    |              |           | 9,060     |            |   |         |               |   |   |             | (8,479     | ) |        |               | (9,060      | )            |   |             | 33,660   |   |               |             |         |   |         |           |           |        |   |         |         |   |   |             |           |   |   |            | 25,181     |  
|                             | Beneficial conversion feature of convertible notes                           |              |           |          |            |   |         |               |   |   |             | 906,799    |   |        |               |            |              |   |             |         |   |               |             |         |   |         |           |           |        |   |         |         |   |   |             |           |   |   |            | 906,799    |  
|                             | Expiration of warrants                                                       |              |           |          |            |   |         |               |   |   |             | 1,368,164  |   |        |               |            |              |   |             |         |   |               |             |         |   |         |           | (1,368,164 | )      |   |         |         |   |   |             |           |   |   |            |           |  
|                             | Amortization of warrants                                                     |              |           |          |            |   |         |               |   |   |             |           |   |        |               |            |              |   |             |         |   |               |             | 9,548    |   |         |           |           |        |   |         |         |   |   |             |           |   |   |            | 9,548      |  
|                             | Issuance of stock under Employee Stock Purchase Plan                         |              |           | 15,105    |            |   |         |               |   |   |             | (17,602    | ) |        |               | (15,105     | )            |   |             | 56,123   |   |               |             |         |   |         |           |           |        |   |         |         |   |   |             |           |   |   |            | 38,521     |  
|                             | Comprehensive (loss) income:                                                 |              |           |           |            |   |         |                |   |   |             |            |   |        |               |             |              |   |             |          |   |               |             |          |   |         |           |            |        |   |         |          |   |   |             |            |   |   |            |            |  
|                             | Currency translation adjustment                                              |              |           |          |            |   |         |               |   |   |             |           |   |        |               |            |              |   |             |         |   |               |             |         |   |         |           |           |        |   |         | 36,819   |   |   |             |           |   |   |            | 36,819     |  
|                             | Net loss                                                                     |              |           |          |            |   |         |               |   |   |             |           |   |        |               |            |              |   |             |         |   |               |             |         |   |         |           |           |        |   |         |         |   |   |             | (2,979,305 | ) |   |            | (2,979,305 | )
|                             |                                                                              |              |           |           |            |   |         |                |   |   |             |            |   |        |               |             |              |   |             |          |   |               |             |          |   |         |           |            |        |  
|                             | Total comprehensive (loss) income                                            |              |           |           |            |   |         |                |   |   |             |            |   |        |               |             |              |   |             |          |   |               |             |          |   |         |           |            |        |   |         |          |   |   |             |            |   |   |            | (2,942,486 | )
|                             |                                                                              |              |           |           |            |   |         |                |   |   |             |            |   |        |               |             |              |   |             |          |   |               |             |          |   |         |           |            |        |  
|Balance at December 31, 2003 |                                                                              |              | 2,432,501 |           |            |   | 246,845 |                |   |   | 76,432,608  |            |   |        | 35,952        |             |              |   | (133,568    | )        |   |               |            |          |   |         | 46,400    |            |        |   |        |          |   |   | (76,485,039 | )          |   |   | 107,246    |           
|                             | Exercise of warrants and stock options                                       |              |           | 19,725    |            |   |         | 213            |   |   |             | 31,724     |   |        |               | (17,600     | )            |   |             | 65,120   |   |               |             |         |   |         |           |           |        |   |         |         |   |   |             |           |   |   |            | 97,057     |  
|                             | Beneficial conversion feature of convertible notes                           |              |           |          |            |   |         |               |   |   |             | 232,672    |   |        |               |            |              |   |             |         |   |               |             |         |   |         |           |           |        |   |         |         |   |   |             |           |   |   |            | 232,672    |  
|                             | Issuance of common stock and warrants, net of $574,000 of
    issuance costs |              |           | 1,230,769 |            |   |         | 123,077        |   |   |             | 2,681,865  |   |        |               |            |              |   |             |         |   |               |             |         |   |         |           | 4,614,154  |        |   |         |         |   |   |             |           |   |   |            | 7,419,096  |  
|                             | Issuance of warrants for settlement of lawsuit                               |              |           |          |            |   |         |               |   |   |             |           |   |        |               |            |              |   |             |         |   |               |             |         |   |         |           | 104,925    |        |   |         |         |   |   |             |           |   |   |            | 104,925    |  
|                             | Issuance of common stock related to note conversion                          |              |           | 1,535,386 |            |   |         | 153,539        |   |   |             | 3,684,928  |   |        |               |            |              |   |             |         |   |               |             |         |   |         |           |           |        |   |         |         |   |   |             |           |   |   |            | 3,838,467  |  
|                             | Stock based compensation awards                                              |              |           | 32,163    |            |   |         | 3,216          |   |   |             | 294,736    |   |        |               |            |              |   |             |         |   |               |             | (297,952 | ) |         |           |           |        |   |         |         |   |   |             |           |   |   |            |           |  
|                             | Stock based compensation expense                                             |              |           |          |            |   |         |               |   |   |             |           |   |        |               |            |              |   |             |         |   |               |             | 136,270  |   |         |           |           |        |   |         |         |   |   |             |           |   |   |            | 136,270    |  
|                             | Issuance of stock under Employee Stock Purchase Plan                         |              |           | 1,697     |            |   |         |               |   |   |             | 2,069      |   |        |               | (1,697      | )            |   |             | 6,282    |   |               |             |         |   |         |           |           |        |   |         |         |   |   |             |           |   |   |            | 8,351      |  
|                             | Comprehensive (loss) income:                                                 |              |           |           |            |   |         |                |   |   |             |            |   |        |               |             |              |   |             |          |   |               |             |          |   |         |           |            |        |   |         |          |   |   |             |            |   |   |            |            |  
|                             | Unrealized gain on short term investments                                    |              |           |          |            |   |         |               |   |   |             |           |   |        |               |            |              |   |             |         |   |               |             |         |   |         |           |           |        |   |         | 513,759  |   |   |             |           |   |   |            | 513,759    |  
|                             | Net loss                                                                     |              |           |          |            |   |         |               |   |   |             |           |   |        |               |            |              |   |             |         |   |               |             |         |   |         |           |           |        |   |         |         |   |   |             | (1,694,252 | ) |   |            | (1,694,252 | )
|                             |                                                                              |              |           |           |            |   |         |                |   |   |             |            |   |        |               |             |              |   |             |          |   |               |             |          |   |         |           |            |        |  
|                             | Total comprehensive (loss) income                                            |              |           |           |            |   |         |                |   |   |             |            |   |        |               |             |              |   |             |          |   |               |             |          |   |         |           |            |        |   |         |          |   |   |             |            |   |   |            | (1,180,493 | )
|                             |                                                                              |              |           |           |            |   |         |                |   |   |             |            |   |        |               |             |              |   |             |          |   |               |             |          |   |         |           |            |        |  
|Balance at December 31, 2004 |                                                                              |              | 5,252,241 |           |            |   | 526,890 |                |   |   | 83,360,602  |            |   |        | 16,655        |             |              |   | (62,166     | )        |   |               | (161,682    | )        |   |         | 4,765,479 |            |        |   | 513,759 |          |   |   | (78,179,291 | )          |   |   | 10,763,591 |           
|                             | Exercise of stock options                                                    |              |           | 2,140     |            |   |         |               |   |   |             | (3,006     | ) |        |               | (2,140      | )            |   |             | 10,970   |   |               |             |         |   |         |           |           |        |   |         |         |   |   |             |           |   |   |            | 7,964      |  
|                             | Issuance of common stock for merger                                          |              |           | 3,501,400 |            |   |         | 35,014         |   |   |             | 17,261,902 |   |        |               |            |              |   |             |         |   |               |             |         |   |         |           |           |        |   |         |         |   |   |             |           |   |   |            | 17,296,916 |  
|                             | Issuance of warrants for merger                                              |              |           |          |            |   |         |               |   |   |             |           |   |        |               |            |              |   |             |         |   |               |             |         |   |         |           | 1,759,153  |        |   |         |         |   |   |             |           |   |   |            | 1,759,153  |  
|                             | Issuance of warrants to bank                                                 |              |           |          |            |   |         |               |   |   |             |           |   |        |               |            |              |   |             |         |   |               |             |         |   |         |           | 24,715     |        |   |         |         |   |   |             |           |   |   |            | 24,715     |  
|                             | Stock based compensation expense                                             |              |           |          |            |   |         |               |   |   |             | 382,549    |   |        |               |            |              |   |             |         |   |               |             | 121,392  |   |         |           |           |        |   |         |         |   |   |             |           |   |   |            | 503,941    |  
|                             | Issuance of stock under Employee Stock Purchase Plan                         |              |           | 2,115     |            |   |         |               |   |   |             | (4,549     | ) |        |               | (2,115      | )            |   |             | 10,841   |   |               |             |         |   |         |           |           |        |   |         |         |   |   |             |           |   |   |            | 6,292      |  
|                             | Forfeiture of restricted stock                                               |              |           | (13,784   | )          |   |         | (138           | ) |   |             |           |   |        |               | 13,784      |              |   |             | (110,199 | ) |               |             | 34,837   |   |         |           |           |        |   |         |         |   |   |             |           |   |   |            | (75,500    | )
|                             | Comprehensive loss:                                                          |              |           |           |            |   |         |                |   |   |             |            |   |        |               |             |              |   |             |          |   |               |             |          |   |         |           |            |        |   |         |          |   |   |             |            |   |   |            |            |  
|                             | Unrealized loss on short term investments                                    |              |           |          |            |   |         |               |   |   |             |           |   |        |               |            |              |   |             |         |   |               |             |         |   |         |           |           |        |   |         | (239,778 | ) |   |             |           |   |   |            | (239,778   | )
|                             | Reclassification adjustment for gains realized in net loss                   |              |           |          |            |   |         |               |   |   |             |           |   |        |               |            |              |   |             |         |   |               |             |         |   |         |           |           |        |   |         | (286,417 | ) |   |             |           |   |   |            | (286,417   | )
|                             | Net loss                                                                     |              |           |          |            |   |         |               |   |   |             |           |   |        |               |            |              |   |             |         |   |               |             |         |   |         |           |           |        |   |         |         |   |   |             | (5,094,821 | ) |   |            | (5,094,821 | )
|                             |                                                                              |              |           |           |            |   |         |                |   |   |             |            |   |        |               |             |              |   |             |          |   |               |             |          |   |         |           |            |        |  
|                             | Total comprehensive loss                                                     |              |           |           |            |   |         |                |   |   |             |            |   |        |               |             |              |   |             |          |   |               |             |          |   |         |           |            |        |   |         |          |   |   |             |            |   |   |            | (5,621,016 | )
|                             |                                                                              |              |           |           |            |   |         |                |   |   |             |            |   |        |               |             |              |   |             |          |   |               |             |          |   |         |           |            |        |  
|Balance at December 31, 2005 |                                                                              |              | 8,744,112 |           |            | $ | 561,766 |                |   | $ | 100,997,498 |            |   |        | 26,184        |             |              | $ | (150,554    | )        |   | $             | (5,453      | )        |   | $       | 6,549,347 |            |        | $ | (12,436 | )        |   | $ | (83,274,112 | )          |   | $ | 24,666,056 |           
|                             |                                                                              |              |           |           |            |   |         |                |   |   |             |            |   |        |               |             |              |   |             |          |   |               |             |          |   |         |           |            |        |  



33



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##### Table of Contents



Knova Software, Inc.


Consolidated Statements of Cash Flows


|                                                                                    |                                                                         |                                                                                          |                                   |           |          |            |             |           |           |          |            |           |           |            |  
|----------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | --------------------------------- | --------- | -------- | ---------- | ----------- | --------- | --------- | -------- | ---------- | --------- | --------- | ---------- | -
|                                                                                    |                                                                         | Year Ended December 31,                                                                  |                                  
|                                                                                    |                                                                         |                                                                                          |                                  
|                                                                                    |                                                                         | 2005                                                                                     |                                   |           | 2004     |            |             | 2003      |          
|                                                                                    |                                                                         |                                                                                          |                                   |           |          |            |             |           |          
|Cash flows from operating activities                                                |                                                                         |                                                                                          |                                   |           |          |            |             |           |           |          |            |          
|Net loss                                                                            |                                                                         | $                                                                                        | (5,094,821                        | )         |          | $          | (1,694,252  | )         |           | $        | (2,979,305 | )        
|Adjustments to reconcile net loss to net cash (used in) provided
    by operations: |                                                                         |                                                                                          |                                   |           |          |            |             |           |           |          |            |          
|                                                                                    | Non cash items:                                                         |                                                                                          |                                   |           |          |            |             |           |           |          |            |           |          
|                                                                                    |                                                                         | Depreciation                                                                             |                                   |           | 430,353  |            |             |           | 316,267   |          |            |           | 801,195   |           
|                                                                                    |                                                                         | Amortization of intangible assets                                                        |                                   |           | 778,196  |            |             |           | 33,337    |          |            |           | 206,297   |           
|                                                                                    |                                                                         | Cost of warrants issued                                                                  |                                   |           | 24,715   |            |             |           |          |          |            |           |          |           
|                                                                                    |                                                                         | Cost of warrants in connection with lease settlement                                     |                                   |           |         |            |             |           | 104,925   |          |            |           |          |           
|                                                                                    |                                                                         | Amortization of beneficial conversion feature related to
    convertible notes           |                                   |           |         |            |             |           | 1,162,150 |          |            |           | 1,429,603 |           
|                                                                                    |                                                                         | Amortization of discount on convertible notes                                            |                                   |           |         |            |             |           | 50,196    |          |            |           | 115,341   |           
|                                                                                    |                                                                         | Interest expense paid by issuing common stock                                            |                                   |           |         |            |             |           | 105,760   |          |            |           | 347,032   |           
|                                                                                    |                                                                         | Provision for doubtful accounts                                                          |                                   |           | 106,778  |            |             |           |          |          |            |           | 25,000    |           
|                                                                                    |                                                                         | Stock based compensation                                                                 |                                   |           | 503,941  |            |             |           | 136,270   |          |            |           |          |           
|                                                                                    |                                                                         | Forfeiture of restricted stock                                                           |                                   |           | (75,500  | )          |             |           |          |          |            |           |          |           
|                                                                                    |                                                                         | Acquired in-process research and development                                             |                                   |           | 420,935  |            |             |           |          |          |            |           |          |           
|                                                                                    |                                                                         | Other non-cash items                                                                     |                                   |           | 2,452    |            |             |           | (7,362    | )        |            |           | 32,905    |           
|                                                                                    |                                                                         | Non-cash portion of legal settlement                                                     |                                   |           |         |            |             |           | (850,000  | )        |            |           |          |           
|                                                                                    |                                                                         | Gain on sale of investments                                                              |                                   |           | (286,417 | )          |             |           |          |          |            |           |          |           
|                                                                                    |                                                                         | Changes in operating assets and liabilities, net of assets and
    liabilities acquired: |                                   |           |          |            |             |           |           |          |            |           |           |           
|                                                                                    |                                                                         |                                                                                          | Accounts receivable               |           |          | (1,987,591 | )           |           |           | 819,198  |            |           |           | (1,839,021 | )
|                                                                                    |                                                                         |                                                                                          | Other assets                      |           |          | 170,596    |             |           |           | (230,132 | )          |           |           | (7,354     | )
|                                                                                    |                                                                         |                                                                                          | Accounts payable                  |           |          | (1,201,272 | )           |           |           | 594,355  |            |           |           | (53,995    | )
|                                                                                    |                                                                         |                                                                                          | Accrued compensation and benefits |           |          | (19,142    | )           |           |           | 132,576  |            |           |           | 114,440    |  
|                                                                                    |                                                                         |                                                                                          | Accrued restructuring charges     |           |          | 261,252    |             |           |           |         |            |           |           |           |  
|                                                                                    |                                                                         |                                                                                          | Deferred revenue                  |           |          | 1,569,247  |             |           |           | 395,844  |            |           |           | 870,830    |  
|                                                                                    |                                                                         |                                                                                          | Other liabilities                 |           |          | (601,705   | )           |           |           | 116,156  |            |           |           | (15,923    | )
|                                                                                    |                                                                         |                                                                                          |                                   |           |          |            |             |           |          
|Net cash (used in) provided by operating activities                                 |                                                                         |                                                                                          | (4,997,983                        | )         |          |            | 1,185,288   |           |           |          | (952,955   | )        
|                                                                                    |                                                                         |                                                                                          |                                   |           |          |            |             |           |          
|Cash flows from investing activities                                                |                                                                         |                                                                                          |                                   |           |          |            |             |           |           |          |            |          
|Purchases of marketable securities                                                  |                                                                         |                                                                                          | (5,748,734                        | )         |          |            | (13,227,702 | )         |           |          |           |          
|Proceeds from sale of marketable securities                                         |                                                                         |                                                                                          | 9,314,401                         |           |          |            | 5,325,000   |           |           |          | 500,080    |          
|Proceeds from sale of assets                                                        |                                                                         |                                                                                          | 1,050                             |           |          |            | 1,460       |           |           |          | 12,153     |          
|Acquisition costs for Kanisa merger                                                 |                                                                         |                                                                                          | (561,653                          | )         |          |            |            |           |           |          |           |          
|Cash acquired from Kanisa merger                                                    |                                                                         |                                                                                          | 3,779,427                         |           |          |            |            |           |           |          |           |          
|Increase in restricted cash                                                         |                                                                         |                                                                                          |                                  |           |          |            | (61,000     | )         |           |          |           |          
|Property and equipment acquisitions                                                 |                                                                         |                                                                                          | (261,449                          | )         |          |            | (207,814    | )         |           |          | (94,558    | )        
|                                                                                    |                                                                         |                                                                                          |                                   |           |          |            |             |           |          
|Net cash provided by (used in) investing activities                                 |                                                                         |                                                                                          | 6,523,042                         |           |          |            | (8,170,056  | )         |           |          | 417,675    |          
|                                                                                    |                                                                         |                                                                                          |                                   |           |          |            |             |           |          
|Cash flows from financing activities                                                |                                                                         |                                                                                          |                                   |           |          |            |             |           |           |          |            |          
|Repayments of principal of capital lease obligations                                |                                                                         |                                                                                          | (80,854                           | )         |          |            | (32,332     | )         |           |          | (38,500    | )        
|Proceeds from borrowings                                                            |                                                                         |                                                                                          | 3,600,000                         |           |          |            |            |           |           |          | 250,000    |          
|Repayments of principal of revolving line of credit                                 |                                                                         |                                                                                          |                                  |           |          |            | (250,000    | )         |           |          | (800,000   | )        
|Proceeds from equity funding, net of debt issuance costs                            |                                                                         |                                                                                          |                                  |           |          |            | 7,419,096   |           |           |          |           |          
|Proceeds from stock option exercises and employee stock purchase
    plan issuances |                                                                         |                                                                                          | 14,256                            |           |          |            | 82,588      |           |           |          | 63,702     |          
|                                                                                    |                                                                         |                                                                                          |                                   |           |          |            |             |           |          
|Net cash provided by (used in) financing activities                                 |                                                                         |                                                                                          | 3,533,402                         |           |          |            | 7,219,352   |           |           |          | (524,798   | )        
|                                                                                    |                                                                         |                                                                                          |                                   |           |          |            |             |           |          
|Effect of exchange rate changes on cash                                             |                                                                         |                                                                                          |                                  |           |          |            |            |           |           |          | 36,598     |          
|Increase (decrease) in cash and cash equivalents                                    |                                                                         |                                                                                          | 5,058,461                         |           |          |            | 234,584     |           |           |          | (1,023,480 | )        
|Cash and cash equivalents at beginning of year                                      |                                                                         |                                                                                          | 1,672,305                         |           |          |            | 1,437,721   |           |           |          | 2,461,201  |          
|                                                                                    |                                                                         |                                                                                          |                                   |           |          |            |             |           |          
|Cash and cash equivalents at end of year                                            |                                                                         | $                                                                                        | 6,730,766                         |           |          | $          | 1,672,305   |           |           | $        | 1,437,721  |          
|                                                                                    |                                                                         |                                                                                          |                                   |           |          |            |             |           |          
|Supplemental disclosures of cash flow information:                                  |                                                                         |                                                                                          |                                   |           |          |            |             |           |           |          |            |          
|                                                                                    | Cash paid for interest                                                  |                                                                                          | $                                 | 9,763     |          |            | $           | 9,765     |           |          | $          | 14,613    |          
|                                                                                    |                                                                         |                                                                                          |                                   |           |          |            |             |           |          
|Supplemental disclosures of non-cash investing and financing
    activities:        |                                                                         |                                                                                          |                                   |           |          |            |             |           |           |          |            |          
|                                                                                    | Conversion of convertible debt and accrued interest to common
    stock |                                                                                          | $                                 |          |          |            | $           | 3,838,467 |           |          | $          |          |          
|                                                                                    | Exercise of warrants by bank                                            |                                                                                          |                                   |          |          |            |             | 22,820    |           |          |            |          |          
|                                                                                    | Issuance of warrants                                                    |                                                                                          |                                   | 1,783,868 |          |            |             |          |           |          |            |          |          
|                                                                                    | Assets acquired under capital lease obligations                         |                                                                                          |                                   |          |          |            |             | 31,689    |           |          |            |          |          
|                                                                                    | Expiration of warrants at no consideration                              |                                                                                          |                                   |          |          |            |             |          |           |          |            | 1,368,164 |          
|                                                                                    | Unrealized gain (loss) on investments                                   |                                                                                          |                                   | (12,436   | )        |            |             | 513,759   |           |          |            |          |          
|                                                                                    | Kanisa acquisition (Note 17)                                            |                                                                                          |                                   |           |          |            |             |           |           |          |            |           |          



34



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##### Table of Contents



Knova Software, Inc.


Notes to Consolidated Financial Statements


December 31, 2005




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









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

Principles of Consolidation




Revenue Recognition


97-2,


35



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##### Table of Contents



Knova Software, Inc.


Notes to Consolidated Financial
Statements  (Continued)




| |                 
| | ----------------
| | License revenues





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







Cost of revenues






Cash and Cash Equivalents




Restricted Cash




Marketable securities, available for sale




36



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##### Table of Contents



Knova Software, 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


Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use


Intangible Assets and Goodwill




37



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##### Table of Contents



Knova Software, Inc.


Notes to Consolidated Financial
Statements  (Continued)


Goodwill and
Other Intangible Assets,


Concentration of Credit Risk/ Major Customers






Capitalized Software


Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed,


Research and Development




Advertising Costs




Stock Based Compensation


Share-Based Payment.


38



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##### Table of Contents



Knova Software, Inc.


Notes to Consolidated Financial
Statements  (Continued)






|                                                                        |  |      |            |   |      |   |            |      |  |   |            |  
|----------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                        |  | 2005 |            |   | 2004 |   |            | 2003 | 
|                                                                        |  |      |            |   |      |   |            |      | 
|Net loss, as reported                                                   |  | $    | (5,094,821 | ) |      | $ | (1,694,252 | )    |  | $ | (2,979,305 | )
|Add: stock based compensation expense included in reported net
    loss |  |      | 503,941    |   |      |   | 136,270    |      |  |   |           |  
|Less: total stock based compensation expense under
    SFAS No. 123     |  |      | (2,151,953 | ) |      |   | (576,003   | )    |  |   | (1,809,000 | )
|                                                                        |  |      |            |   |      |   |            |      | 
|Pro forma net loss                                                      |  | $    | (6,742,833 | ) |      | $ | (2,133,985 | )    |  | $ | (4,788,305 | )
|                                                                        |  |      |            |   |      |   |            |      | 
|Weighted average shares basic and diluted                               |  |      | 8,341,426  |   |      |   | 5,140,378  |      |  |   | 2,419,750  |  
|Net loss per share, basic and diluted                                   |  | $    | (0.81      | ) |      | $ | (0.42      | )    |  | $ | (1.98      | )



|                                |  |      |      |   |      |  |      |      |  |  |      |  
|------------------------------- |  | ---- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                                |  | 2005 |      |   | 2004 |  |      | 2003 | 
|                                |  |      |      |   |      |  |      |      | 
|Volatility, annual rate         |  |      | 107  | % |      |  | 150  | %    |  |  | 325  | %
|Dividend yield                  |  |      | 0.0  | % |      |  | 0.0  | %    |  |  | 0.0  | %
|Expected life, in years         |  |      | 6    |   |      |  | 3    |      |  |  | 3    |  
|Average risk-free interest rate |  |      | 4.03 | % |      |  | 2.82 | %    |  |  | 1.98 | %

Use of Estimates




Net Loss Per Share


Earnings Per
Share,


39



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##### Table of Contents



Knova Software, Inc.


Notes to Consolidated Financial
Statements  (Continued)


Other Comprehensive Income (Loss)




Impact of Recently Issued Accounting Standards


Share-Based Payment


Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20 and FASB Statement No. 3


Liquidity and Capital Resources






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



40



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##### Table of Contents



Knova Software, Inc.


Notes to Consolidated Financial
Statements  (Continued)




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



|                                |                   |              |           |           |      |   |           |           | 
|------------------------------- | ----------------- | ------------ | --------- | --------- | ---- | - | --------- | --------- | 
|                                |                   | December 31, |          
|                                |                   |              |          
|                                |                   | 2005         |           |           | 2004 |  
|                                |                   |              |           |           |      |  
|Billed receivables              |                   | $            | 6,344,413 |           |      | $ | 2,623,669 |          
|Unbilled receivables            |                   |              | 224,089   |           |      |   |          |          
|                                |                   |              |           |           |      |  
|                                |                   |              | 6,568,502 |           |      |   | 2,623,669 |          
|Allowance for doubtful accounts |                   |              | (126,111  | )         |      |   | (94,588   | )        
|                                |                   |              |           |           |      |  
|                                | Total receivables |              |           | 6,442,391 |      |   |           | 2,529,081 | 
|                                |                   |              |           |           |      |  



|                          |  |         |         |  
|------------------------- |  | ------- | ------- | -
|                          |  | Balance |        
|                          |  |         |        
|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  |  
|Net charge to expense     |  |         | 106,778 |  
|Amounts written off       |  |         | (75,255 | )
|                          |  |         |        
|Balance December 31, 2005 |  | $       | 126,111 |  
|                          |  |         |        



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



|                              |  |              |         |              |        |   |             |              |  |   |            |  |  |             |            |              |  |            |   |  |  |   |   |  |  |   |           | 
|----------------------------- |  | ------------ | ------- | ------------ | ------ | - | ----------- | ------------ |  | - | ---------- |  |  | ----------- | ---------- | ------------ |  | ---------- | - |  |  | - | - |  |  | - | --------- | 
|                              |  |              |         | December 31, |       
|                              |  |              |         |              |       
|                              |  |              |         | 2005         |        |   | 2004        |             
|                              |  |              |         |              |        |   |             |             
|                              |  | Amortization |         |              |        |   | Accumulated |              |  |   |            |  |  | Accumulated |            |             
|Description                   |  | Period       |         |              | Amount |   |             | Amortization |  |   | Net Amount |  |  | Amount      |            | Amortization |  | Net Amount |  
|                              |  |              |         |              |        |   |             |              |  |   |            |  |  |             |            |              |  |            |  
|Kanisa core technology        |  |              | 7 years |              |        | $ | 3,981,190   |              |  | $ | 521,346    |  |  | $           | 3,459,844  |              |  | $          |  |  |  | $ |  |  |  | $ |          | 
|Kanisa customer relationships |  |              | 5 years |              |        |   | 1,401,001   |              |  |   | 256,850    |  |  |             | 1,144,151  |              |  |            |  |  |  |   |  |  |  |   |          | 
|                              |  |              |         |              |        |   |             |              |  |   |            |  |  |             |            |              |  |            |   |  | 
|Total intangible assets       |  |              |         |              |        | $ | 5,382,191   |              |  | $ | 778,196    |  |  | $           | 4,603,995  |              |  | $          |  |  |  | $ |  |  |  | $ |          | 
|                              |  |              |         |              |        |   |             |              |  |   |            |  |  |             |            |              |  |            |   |  | 
|Goodwill                      |  |              |         |              |        |   |             |              |  |   |            |  |  | $           | 14,484,947 |              |  |            |   |  |  |   |   |  |  | $ | 2,323,791 | 
|                              |  |              |         |              |        |   |             |              |  |   |            |  |  |             |            |              |  |            |   |  | 



|     |  |   |         | 
|---- |  | - | ------- | 
|2006 |  | $ | 848,942 | 
|2007 |  |   | 848,942 | 
|2008 |  |   | 848,942 | 
|2009 |  |   | 848,942 | 
|2010 |  |   | 592,091 | 

41



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##### Table of Contents



Knova Software, Inc.


Notes to Consolidated Financial
Statements  (Continued)




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

Credit Facilities




Convertible Notes






00-27, Application of EITF Issue No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios, to Certain
Convertible Instruments,






42



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##### Table of Contents



Knova Software, Inc.


Notes to Consolidated Financial
Statements  (Continued)








|        |                      
|------- | ---------------------
|Note 7. | Restructuring Charges





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

Common Stock and Preferred Stock








Stock Split




Stock offering






43



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##### Table of Contents



Knova Software, Inc.


Notes to Consolidated Financial
Statements  (Continued)




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







|                                       |  |             |           |   |                 |   |      |                  |  |   |  |   |       |  |  |   |      | 
|-------------------------------------- |  | ----------- | --------- | - | --------------- | - | ---- | ---------------- |  | - |  | - | ----- |  |  | - | ---- | 
|                                       |  | Options     |           |   | Option Price    |   |      | Weighted Average | 
|                                       |  | Outstanding |           |   | Range per Share |   |      | Exercise Price   | 
|                                       |  |             |           |   |                 |   |      |                  | 
|Options outstanding, December 31, 2002 |  |             | 556,830   |   |                 | $ | 2.40 |                  |  | - |  | $ | 70.00 |  |  | $ | 5.06 | 
|Options granted                        |  |             | 97,046    |   |                 | $ | 2.60 |                  |  | - |  | $ | 7.00  |  |  | $ | 3.64 | 
|Options exercised                      |  |             | (9,060    | ) |                 | $ | 2.60 |                  |  | - |  | $ | 4.50  |  |  | $ | 3.62 | 
|Options forfeited                      |  |             | (68,045   | ) |                 | $ | 2.60 |                  |  | - |  | $ | 25.00 |  |  | $ | 4.39 | 
|                                       |  |             |           |   |                 |   |      |                  |  |   |  |   |       | 
|Options outstanding, December 31, 2003 |  |             | 576,771   |   |                 | $ | 2.50 |                  |  | - |  | $ | 70.00 |  |  | $ | 4.71 | 
|Options granted                        |  |             | 380,445   |   |                 | $ | 4.09 |                  |  | - |  | $ | 8.19  |  |  | $ | 5.79 | 
|Options exercised                      |  |             | (17,600   | ) |                 | $ | 2.60 |                  |  | - |  | $ | 4.50  |  |  | $ | 4.21 | 
|Options forfeited                      |  |             | (72,567   | ) |                 | $ | 2.60 |                  |  | - |  | $ | 51.25 |  |  | $ | 5.89 | 
|                                       |  |             |           |   |                 |   |      |                  |  |   |  |   |       | 
|Options outstanding, December 31, 2004 |  |             | 867,049   |   |                 | $ | 2.50 |                  |  | - |  | $ | 70.00 |  |  | $ | 5.10 | 
|Options granted                        |  |             | 1,550,190 |   |                 | $ | 2.75 |                  |  | - |  | $ | 4.60  |  |  | $ | 4.07 | 
|Options exercised                      |  |             | (2,140    | ) |                 | $ | 2.60 |                  |  | - |  | $ | 3.80  |  |  | $ | 3.72 | 
|Options forfeited                      |  |             | (324,585  | ) |                 | $ | 2.60 |                  |  | - |  | $ | 6.99  |  |  | $ | 4.67 | 
|                                       |  |             |           |   |                 |   |      |                  |  |   |  |   |       | 
|Options outstanding, December 31, 2005 |  |             | 2,090,514 |   |                 | $ | 2.50 |                  |  | - |  | $ | 70.00 |  |  | $ | 4.37 | 
|                                       |  |             |           |   |                 |   |      |                  |  |   |  |   |       | 
|Options exercisable, December 31, 2005 |  |             | 880,009   |   |                 | $ | 2.50 |                  |  | - |  | $ | 70.00 |  |  | $ | 4.81 | 
|                                       |  |             |           |   |                 |   |      |                  |  |   |  |   |       | 

44



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##### Table of Contents



Knova Software, 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 |  | 2005                |           |  | Contractual Life    |  |     | Exercise Price   |  |                   | 2005         |  |  | Exercise Price   |        
|                         |  |                     |           |  |                     |  |     |                  |  |                   |              |  |  |                  |        
|$0.000 - $  2.50         |  |                     | 95,000    |  |                     |  | 3.3 |                  |  | $                 | 2.50         |  |  |                  | 95,000  |  |  | $ | 2.50  | 
|$  2.51 - $  3.50        |  |                     | 271,885   |  |                     |  | 7.8 |                  |  | $                 | 3.09         |  |  |                  | 108,944 |  |  | $ | 2.91  | 
|$  3.51 - $  4.00        |  |                     | 565,354   |  |                     |  | 7.8 |                  |  | $                 | 3.80         |  |  |                  | 172,560 |  |  | $ | 3.96  | 
|$  4.01 - $  5.90        |  |                     | 980,202   |  |                     |  | 8.4 |                  |  | $                 | 4.54         |  |  |                  | 343,331 |  |  | $ | 4.75  | 
|$  5.91 - $  6.00        |  |                     | 140,498   |  |                     |  | 6.2 |                  |  | $                 | 5.99         |  |  |                  | 123,248 |  |  | $ | 5.99  | 
|$  6.01 - $  6.90        |  |                     | 800       |  |                     |  | 6.3 |                  |  | $                 | 6.63         |  |  |                  | 800     |  |  | $ | 6.63  | 
|$  6.91 - $11.00         |  |                     | 17,678    |  |                     |  | 4.1 |                  |  | $                 | 9.91         |  |  |                  | 17,028  |  |  | $ | 9.98  | 
|$11.01 - $28.00          |  |                     | 10,838    |  |                     |  | 3.4 |                  |  | $                 | 19.81        |  |  |                  | 10,838  |  |  | $ | 19.81 | 
|$28.01 - $35.00          |  |                     | 8,000     |  |                     |  | 3.0 |                  |  | $                 | 28.12        |  |  |                  | 8,000   |  |  | $ | 28.12 | 
|$35.01 - $70.00          |  |                     | 259       |  |                     |  | 2.9 |                  |  | $                 | 49.12        |  |  |                  | 260     |  |  | $ | 49.08 | 
|                         |  |                     |           |  |                     |  |     |                  |  |                   |              |  |  |                  |        
|                         |  |                     | 2,090,514 |  |                     |  | 7.7 |                  |  | $                 | 4.37         |  |  |                  | 880,009 |  |  | $ | 4.81  | 
|                         |  |                     |           |  |                     |  |     |                  |  |                   |              |  |  |                  |        

Employee Stock Purchase Plan




45



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##### Table of Contents



Knova Software, Inc.


Notes to Consolidated Financial
Statements  (Continued)




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



|                           |  |             |           |   |                 |   |                | 
|-------------------------- |  | ----------- | --------- | - | --------------- | - | -------------- | 
|                           |  | Warrants    |           |   | Warrant Price   |  
|                           |  | Outstanding |           |   | Range per Share |  
|                           |  |             |           |   |                 |  
|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 granted           |  |             | 432,401   |   |                 | $ | 7.20           | 
|Warrants exercised         |  |             |          |   |                 |   |                | 
|Warrants expired           |  |             |          |   |                 |   |                | 
|                           |  |             |           |   |                 |  
|Balance, December 31, 2005 |  |             | 1,068,285 |   |                 | $ | 7.20 - $37.50  | 
|                           |  |             |           |   |                 |  



|            |           |  |               |   |       |                 |  |  |          | 
|----------- | --------- |  | ------------- | - | ----- | --------------- |  |  | -------- | 
|Warrants    |           |  | Warrant Price |   |       |                
|Outstanding |           |  | per Share     |   |       | Expiration Date | 
|            |           |  |               |   |       |                 | 
|            | 1,047,785 |  |               | $ | 7.20  |                 |  |  | 1/30/09  | 
|            | 8,000     |  |               | $ | 37.50 |                 |  |  | 12/10/06 | 
|            | 12,500    |  |               | $ | 8.40  |                 |  |  | 1/16/07  | 
|            |           |  |               |   |       |                 | 
|            | 1,068,285 |  |               |   |       |                 |  |  |          | 
|            |           |  |               |   |       |                 | 

46



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##### Table of Contents



Knova Software, Inc.


Notes to Consolidated Financial
Statements  (Continued)




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



|                                           |            |                |        |        |                  |   |           |         | 
|------------------------------------------ | ---------- | -------------- | ------ | ------ | ---------------- | - | --------- | ------- | 
|Year Ending December 31,                   |            | Capital Leases |        |        | Operating Leases |  
|                                           |            |                |        |        |                  |  
|                                           | 2006       |                | $      | 42,920 |                  |   | $         | 561,186 | 
|                                           | 2007       |                |        | 18,996 |                  |   |           | 285,975 | 
|                                           | 2008       |                |        | 18,499 |                  |   |           | 241,653 | 
|                                           | 2009       |                |        |       |                  |   |           | 102,137 | 
|                                           | Thereafter |                |        |       |                  |   |           |        | 
|                                           |            |                |        |        |                  |  
|Total minimum lease payments               |            | $              | 80,415 |        |                  | $ | 1,190,951 |        
|                                           |            |                |        |        |                  |  
|Less amount representing interest          |            |                | 5,325  |        |                  |   |           |        
|                                           |            |                |        |        |                  |  
|Present value of capital lease obligations |            |                | 75,090 |        |                  |   |           |        
|Less current maturities                    |            |                | 39,636 |        |                  |   |           |        
|                                           |            |                |        |        |                  |  
|Non current capital lease obligations      |            | $              | 35,454 |        |                  |   |           |        
|                                           |            |                |        |        |                  |  







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



|                                                                 |  |                         |            |   |      |   |          |      |  |   |            |  
|---------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | -------- | ---- |  | - | ---------- | -
|                                                                 |  | Year Ended December 31, |           
|                                                                 |  |                         |           
|                                                                 |  | 2005                    |            |   | 2004 |   |          | 2003 | 
|                                                                 |  |                         |            |   |      |   |          |      | 
|Income tax benefit computed at statutory federal income tax rate |  | $                       | (1,732,239 | ) |      | $ | (576,046 | )    |  | $ | (1,012,964 | )
|State income taxes, net of federal tax benefit                   |  |                         | (302,632   | ) |      |   | (100,639 | )    |  |   | (176,971   | )
|Other (principally meals and entertainment)                      |  |                         | 47,026     |   |      |   | 35,882   |      |  |   | 15,640     |  
|Research tax credit                                              |  |                         | 166,337    |   |      |   | 75,790   |      |  |   | 75,790     |  
|Foreign loss                                                     |  |                         |           |   |      |   |         |      |  |   | 166,952    |  
|Deferred tax asset valuation allowance                           |  |                         | 1,821,508  |   |      |   | 565,013  |      |  |   | 931,553    |  
|                                                                 |  |                         |            |   |      |   |          |      | 
|Total benefit for income taxes                                   |  | $                       |           |   |      | $ |         |      |  | $ |           |  
|                                                                 |  |                         |            |   |      |   |          |      | 

47



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Knova Software, Inc.


Notes to Consolidated Financial
Statements  (Continued)




|                                  |                                   |              |             |            |      |   |             |            |  
|--------------------------------- | --------------------------------- | ------------ | ----------- | ---------- | ---- | - | ----------- | ---------- | -
|                                  |                                   | December 31, |            
|                                  |                                   |              |            
|                                  |                                   | 2005         |             |            | 2004 |  
|                                  |                                   |              |             |            |      |  
|Deferred tax assets (liabilities) |                                   |              |             |            |      |   |             |           
|                                  | Accounts receivable               |              | $           | 50,000     |      |   | $           | 38,000     |  
|                                  | Accrued vacation                  |              |             | 118,000    |      |   |             |           |  
|                                  | Property and equipment            |              |             | 183,000    |      |   |             | 72,000     |  
|                                  | Intangible assets and goodwill    |              |             | (1,790,000 | )    |   |             | 57,000     |  
|                                  | Deferred license revenue          |              |             | (622,000   | )    |   |             | (149,000   | )
|                                  | Stock based compensation          |              |             | 201,000    |      |   |             |           |  
|                                  | Net operating loss carryforwards  |              |             | 35,513,000 |      |   |             | 26,490,000 |  
|                                  | Research tax credit carryforwards |              |             | 1,326,000  |      |   |             | 1,049,000  |  
|                                  |                                   |              |             |            |      |  
|Total net deferred tax assets     |                                   |              | 34,979,000  |            |      |   | 27,557,000  |           
|Valuation allowance               |                                   |              | (34,979,000 | )          |      |   | (27,557,000 | )         
|                                  |                                   |              |             |            |      |  
|Net deferred tax asset            |                                   | $            |            |            |      | $ |            |           
|                                  |                                   |              |             |            |      |  







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



|                                      |                         |      |       |            |      |   |       |            |   |   |       |            |  
|------------------------------------- | ----------------------- | ---- | ----- | ---------- | ---- | - | ----- | ---------- | - | - | ----- | ---------- | -
|                                      |                         | 2005 |       |            | 2004 |   |       | 2003       |  
|                                      |                         |      |       |            |      |   |       |            |  
|Numerator:                            |                         |      |       |            |      |   |       |            |   |   |       |           
|                                      | Net loss                |      | $     | (5,094,821 | )    |   | $     | (1,694,252 | ) |   | $     | (2,979,305 | )
|Denominator:                          |                         |      |       |            |      |   |       |            |   |   |       |           
|                                      | Weighted average shares |      |       | 8,341,426  |      |   |       | 5,140,378  |   |   |       | 2,419,750  |  
|Net loss per share, basic and diluted |                         | $    | (0.61 | )          |      | $ | (0.33 | )          |   | $ | (1.23 | )         





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



48



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Knova Software, Inc.


Notes to Consolidated Financial
Statements  (Continued)




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





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

|              |  |                         |            |            |           |   |         |             |            |   |            |  |  |             |         |  |  |   |            | 
|------------- |  | ----------------------- | ---------- | ---------- | --------- | - | ------- | ----------- | ---------- | - | ---------- |  |  | ----------- | ------- |  |  | - | ---------- | 
|              |  | Year Ended December 31, |           
|              |  |                         |           
|              |  | 2005                    |            |            | 2004      |   |         |            
|              |  |                         |            |            |           |   |         | 2003        |           
|              |  |                         |            | Long-Lived |           |   |         |             | Long-Lived |   |            |  | 
|              |  | Revenues(a)             |            |            | Assets(b) |   |         | Revenues(a) |            |   | Assets(b)  |  |  | Revenues(a) |        
|              |  |                         |            |            |           |   |         |             |            |   |            |  |  |             |        
|United States |  | $                       | 22,686,387 |            |           | $ | 365,099 |             |            | $ | 11,430,354 |  |  | $           | 450,649 |  |  | $ | 10,716,304 | 
|International |  |                         | 908,568    |            |           |   |        |             |            |   | 1,071,773  |  |  |             |        |  |  |   | 795,131    | 
|              |  |                         |            |            |           |   |         |             |            |   |            |  |  |             |        
|Total         |  | $                       | 23,594,955 |            |           | $ | 365,099 |             |            | $ | 12,502,127 |  |  | $           | 450,649 |  |  | $ | 11,511,435 | 
|              |  |                         |            |            |           |   |         |             |            |   |            |  |  |             |        



|    |                                                                                               
|--- | ----------------------------------------------------------------------------------------------
|(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.



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





|                                            |  |            |           |       |            |       |            |  |  |       |         |   |  |   |           | 
|------------------------------------------- |  | ---------- | --------- | ----- | ---------- | ----- | ---------- |  |  | ----- | ------- | - |  | - | --------- | 
|                                            |  |            |           | Gross |            | Gross |            |  | 
|                                            |  | Historical |           |       | Unrealized |       | Unrealized |  |  | Fair  |        
|                                            |  | Cost       |           |       | Gains      |       | Loss       |  |  | Value |        
|                                            |  |            |           |       |            |       |            |  |  |       |        
|Corporate bonds                             |  | $          | 1,210,815 |       |            | $     |           |  |  | $     | (4,936  | ) |  | $ | 1,205,879 | 
|Government bonds                            |  |            | 1,006,389 |       |            |       |           |  |  |       | (7,500  | ) |  |   | 998,889   | 
|Auction rate securities                     |  |            | 3,256,248 |       |            |       |           |  |  |       |        |   |  |   | 3,256,248 | 
|                                            |  |            |           |       |            |       |            |  |  |       |         |  
|Total current available for sale securities |  | $          | 5,473,452 |       |            | $     |           |  |  | $     | (12,436 | ) |  | $ | 5,461,016 | 
|                                            |  |            |           |       |            |       |            |  |  |       |         |  



|                                            |  |            |           |       |            |   |         |            |  |   |            |   |  |   |           | 
|------------------------------------------- |  | ---------- | --------- | ----- | ---------- | - | ------- | ---------- |  | - | ---------- | - |  | - | --------- | 
|                                            |  |            |           | Gross |            |   | Gross   |            |  |  
|                                            |  | Historical |           |       | Unrealized |   |         | Unrealized |  |   |           
|                                            |  | Cost       |           |       | Gains      |   |         | Loss       |  |   | Fair Value |  
|                                            |  |            |           |       |            |   |         |            |  |   |            |  
|Common stock                                |  | $          | 850,000   |       |            | $ | 553,933 |            |  | $ |           |   |  |   | 1,403,933 | 
|Corporate bonds                             |  |            | 815,550   |       |            |   |        |            |  |   | (35,174    | ) |  |   | 780,376   | 
|Government bonds                            |  |            | 1,005,111 |       |            |   |        |            |  |   | (5,000     | ) |  |   | 1,000,111 | 
|Auction rate securities                     |  |            | 6,082,041 |       |            |   |        |            |  |   |           |   |  |   | 6,082,041 | 
|                                            |  |            |           |       |            |   |         |            |  |   |            |  
|Total current available for sale securities |  | $          | 8,752,702 |       |            | $ | 553,933 |            |  | $ | (40,174    | ) |  | $ | 9,266,461 | 
|                                            |  |            |           |       |            |   |         |            |  |   |            |  



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Knova Software, Inc.


Notes to Consolidated Financial
Statements  (Continued)








|         |            
|-------- | -----------
|Note 17. | Acquisition







|                        |  |        
|----------------------- |  | -------
|Volatility              |  | 142.67%
|Risk-free interest rate |  | 3.4%   
|Dividend yield          |  |       
|Expected life           |  | 4 years







50



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Knova Software, Inc.


Notes to Consolidated Financial
Statements  (Continued)




|                                                          |                                              |   |        |        | 
|--------------------------------------------------------- | -------------------------------------------- | - | ------ | ------ | 
|Cash and cash equivalents                                 |                                              | $ | 3,779  |       
|Accounts receivable                                       |                                              |   | 2,032  |       
|Prepaid expenses and other current assets                 |                                              |   | 364    |       
|Equipment                                                 |                                              |   | 87     |       
|Intangible assets:                                        |                                              |   |        |       
|                                                          | Core and developed technologies              |   |        | 3,981  | 
|                                                          | Acquired in-process research and development |   |        | 421    | 
|                                                          | Customer contracts/customer relationships    |   |        | 1,401  | 
|                                                          | Goodwill                                     |   |        | 12,161 | 
|Accounts payable                                          |                                              |   | (1,144 | )     
|Accrued compensation and benefits                         |                                              |   | (614   | )     
|Other current liabilities                                 |                                              |   | (913   | )     
|Deferred revenues                                         |                                              |   | (1,876 | )     
|Capital lease obligations and other long term liabilities |                                              |   | (62    | )     
|                                                          |                                              |   |       
|Net assets acquired                                       |                                              | $ | 19,617 |       
|                                                          |                                              |   |       







Pro forma results




|                                     |  |                                 |            |   |      |   |             |  
|------------------------------------ |  | ------------------------------- | ---------- | - | ---- | - | ----------- | -
|                                     |  | For the Year Ended December 31, |           
|                                     |  |                                 |           
|                                     |  | 2005                            |            |   | 2004 |  
|                                     |  |                                 |            |   |      |  
|Revenues                             |  | $                               | 23,999,224 |   |      | $ | 23,586,097  |  
|Net loss                             |  | $                               | (6,018,372 | ) |      | $ | (12,035,534 | )
|Net loss per share                   |  | $                               | (0.72      | ) |      | $ | (1.38       | )
|Shares used in per share calculation |  |                                 | 8,341,426  |   |      |   | 8,720,094   |  



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Knova Software, Inc.


Notes to Consolidated Financial
Statements  (Continued)




|         |                                     
|-------- | ------------------------------------
|Note 18. | Quarterly Financial Data (unaudited)

|                             |                                             |               |   |            |                |  |   |               |  |  |                |           |   |  |   |           |  
|---------------------------- | ------------------------------------------- | ------------- | - | ---------- | -------------- |  | - | ------------- |  |  | -------------- | --------- | - |  | - | --------- | -
|                             |                                             | First Quarter |   |            | Second Quarter |  |   | Third Quarter |  |  | Fourth Quarter |          
|                             |                                             |               |   |            |                |  |   |               |  |  |                |          
|Year ended December 31, 2005 |                                             |               |   |            |                |  |   |               |  |  |                |           |   |  |   |          
|                             | Revenues                                    |               | $ | 3,699,843  |                |  | $ | 7,341,560     |  |  | $              | 5,719,254 |   |  | $ | 6,834,299 |  
|                             | Gross margin                                |               |   | 1,908,980  |                |  |   | 4,864,260     |  |  |                | 3,306,777 |   |  |   | 3,911,123 |  
|                             | Net (loss) income                           |               |   | (3,508,421 | )              |  |   | 63,757        |  |  |                | (940,190  | ) |  |   | (709,967  | )
|                             | Net (loss) income per common share, basic   |               |   | (0.49      | )              |  |   | 0.01          |  |  |                | (0.11     | ) |  |   | (0.08     | )
|                             | Net (loss) income per common share, diluted |               |   | (0.49      | )              |  |   | 0.01          |  |  |                | (0.11     | ) |  |   | (0.08     | )
|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 (loss) income                           |               |   | (2,709,705 | )              |  |   | 163,450       |  |  |                | 199,991   |   |  |   | 652,012   |  
|                             | Net (loss) income per common share, basic   |               |   | 0.55       |                |  |   | 0.03          |  |  |                | 0.04      |   |  |   | 0.12      |  
|                             | Net (loss) income per common share, diluted |               |   |           |                |  |   | 0.03          |  |  |                | 0.04      |   |  |   | 0.12      |  



52



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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








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

Evaluation of disclosure controls and
procedures. 13a-15(e) 15d-15(e)


Changes in internal controls.







|         |                  
|-------- | -----------------
|Item 9B. | Other Information



PART III







|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant



|                 |  |     |    |  |                            |                                                
|---------------- |  | --- | -- |  | -------------------------- | -----------------------------------------------
|Name             |  | Age |    |  | Capacities in which Served
|                 |  |     |    |  |                           
|Bruce Armstrong  |  |     | 44 |  |                            | President, Chief Executive Officer and Director
|Kent Heyman      |  |     | 50 |  |                            | Director (Chairman of the Board)               
|David Schwab     |  |     | 48 |  |                            | Director                                       
|Thomas Shanahan  |  |     | 59 |  |                            | Director                                       
|Thomas Unterberg |  |     | 75 |  |                            | Director                                       
|Timothy Wallace  |  |     | 48 |  |                            | Director                                       
|Mark Angel       |  |     | 47 |  |                            | Chief Technology Officer                       
|Thomas Muise     |  |     | 46 |  |                            | Chief Financial Officer and Treasurer          
|Frank Lauletta   |  |     | 36 |  |                            | General Counsel and Secretary                  

Bruce Armstrong


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Kent Heyman


David Schwab


Thomas P. Shanahan


Thomas Unterberg


Timothy Wallace business-to


54



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Mark Angel


Thomas Muise


Frank Lauletta








Section 16(a) Beneficial Ownership Reporting
Compliance






Code of Ethics




55



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|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation



|                                                                                     |  |      |      |                     |     |              |                     |     |            |              |         |  |       |            |         |  |             |  |         |  |  |  |         | 
|------------------------------------------------------------------------------------ |  | ---- | ---- | ------------------- | --- | ------------ | ------------------- | --- | ---------- | ------------ | ------- |  | ----- | ---------- | ------- |  | ----------- |  | ------- |  |  |  | ------- | 
|                                                                                     |  |      |      |                     |     | Long Term    |                    
|                                                                                     |  |      |      | Annual Compensation |     |              | Compensation Awards |    
|                                                                                     |  |      |      |                     |     |              |                     |    
|                                                                                     |  |      |      |                     |     | Other Annual |                     |     | Restricted |              |         | 
|                                                                                     |  |      |      | Salary              |     |              | Bonus               |     |            | Compensation |         |  | Stock |            |         | 
|Name and Principal Position                                                          |  | Year |      |                     | ($) |              |                     | ($) |            |              | ($)     |  |       | Awards ($) |         |  | Options (#) | 
|                                                                                     |  |      |      |                     |     |              |                     |     |            |              |         |  |       |            |         |  |             | 
|Bruce Armstrong, president and
    chief executive officer(1)                        |  |      | 2005 |                     |     |              | 223,958             |     |            |              | 86,844  |  |       |            |        |  |             |  |        |  |  |  | 445,000 | 
|                                                                                     |  |      |      |                     |     |              |                     |     |            |              |         |  |       |            |         |  |             | 
|Thomas Muise, chief financial officer and treasurer(2)                               |  |      | 2005 |                     |     |              | 91,538              |     |            |              |        |  |       |            |        |  |             |  |        |  |  |  | 88,000  | 
|                                                                                     |  |      |      |                     |     |              |                     |     |            |              |         |  |       |            |         |  |             | 
|Mark Angel, chief technology officer(3)                                              |  |      | 2005 |                     |     |              | 156,771             |     |            |              | 26,857  |  |       |            |        |  |             |  |        |  |  |  | 220,000 | 
|                                                                                     |  |      |      |                     |     |              |                     |     |            |              |         |  |       |            |         |  |             | 
|Frank Lauletta, general counsel and secretary(4)                                     |  |      | 2005 |                     |     |              | 120,000             |     |            |              | 156,910 |  |       |            |        |  |             |  |        |  |  |  |        | 
|                                                                                     |  |      |      |                     |     |              |                     |     |            |              |         |  |       |            |         |  |             | 
|                                                                                     |  |      | 2004 |                     |     |              |                     |     |            |              |         |  |       |            |        |  |             |  |        |  |  |  | 13,000  | 
|                                                                                     |  |      |      |                     |     |              |                     |     |            |              |         |  |       |            |         |  |             | 
|                                                                                     |  |      | 2003 |                     |     |              |                     |     |            |              |         |  |       |            |        |  |             |  |        |  |  |  | 9,000   | 
|                                                                                     |  |      |      |                     |     |              |                     |     |            |              |         |  |       |            |         |  |             | 
|Kent Heyman, president and chief executive officer (5) and
    chairman of the board |  |      | 2005 |                     |     |              | 23,438              |     |            |              |        |  |       |            | 214,763 |  |             |  |        |  |  |  |        | 
|                                                                                     |  |      |      |                     |     |              |                     |     |            |              |         |  |       |            |         |  |             | 
|                                                                                     |  |      | 2004 |                     |     |              | 225,000             |     |            |              | 42,500  |  |       |            | 16,450  |  |             |  | 147,115 |  |  |  | 800,000 | 
|                                                                                     |  |      |      |                     |     |              |                     |     |            |              |         |  |       |            |         |  |             | 
|                                                                                     |  |      | 2003 |                     |     |              | 226,173             |     |            |              |        |  |       |            | 14,606  |  |             |  |        |  |  |  |        | 
|                                                                                     |  |      |      |                     |     |              |                     |     |            |              |         |  |       |            |         |  |             | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As Mr. Armstrong was first employed by us as of the merger
    with Kanisa on February 8, 2005, the compensation shown for
    him is for the period from and after February 8, 2005.                                                                                                                                                                                                                                                        
|   
|(2) | As Mr. Muise was first employed by us as of June 23,
    2005, the compensation shown for him is for the period from and
    after June 23, 2005.                                                                                                                                                                                                                                                                                            
|   
|(3) | As Mr. Angel was first employed by us as of the merger with
    Kanisa on February 8, 2005, the compensation shown for him
    is for the period from and after February 8, 2005.                                                                                                                                                                                                                                                            
|   
|(4) | Mr. Laulettas bonus was related to the successful
    settlement of a patent infringement lawsuit.                                                                                                                                                                                                                                                                                                                                          
|   
|(5) | Mr. Heyman served as our chief executive officer until the
    merger with Kanisa on February 8, 2005 and now serves as
    non-executive chairman of the board effective February 2005. All
    compensation paid after February 8, 2005 is listed as Other
    Annual Compensation, which represents compensation earned under
    his consulting agreement disclosed under Employment
    Agreements and Change of Control Arrangements.



56



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Compensation Committee Interlocks and Insider
Participation




Employment Agreements and Change of Control Arrangements


Bruce Armstrong


Thomas Muise


Mark Angel


Kent Heyman


57



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Option Grants in Last Fiscal Year




|                |  |            |         |  |              |  |      |          |  |                 |               |                       |  |            |      |  |  |  |           |  |  |   |         |  |  |   |           | 
|--------------- |  | ---------- | ------- |  | ------------ |  | ---- | -------- |  | --------------- | ------------- | --------------------- |  | ---------- | ---- |  |  |  | --------- |  |  | - | ------- |  |  | - | --------- | 
|                |  | Number of  |         |  | % of Total   |  |      |          |  |                 |               |                       |  |            |      | 
|                |  | Securities |         |  | Options      |  |      |          |  |                 |               |                       |  |            |      | 
|                |  | Underlying |         |  | Granted to   |  |      |          |  | Market Price or |               |                       |  |            |      |  | 
|                |  | Options    |         |  | Employees in |  |      | Exercise |  |                 | Fair Value on |                       |  | Expiration |      |  |  |  |          
|                |  | Granted    |         |  | Fiscal Year  |  |      | Price    |  |                 | Date of Grant |                       |  | Date       |      |  |  |  |          
|                |  |            |         |  |              |  |      |          |  |                 |               |                       |  |            |      |  |  |  |          
|                |  |            |         |  |              |  |      |          |  |                 |               | )                     | 
|                |  |            |         |  |              |  |      |          |  |                 |               | Potential Realized    | 
|                |  |            |         |  |              |  |      |          |  |                 |               | Value at Assumed      | 
|                |  |            |         |  |              |  |      |          |  |                 |               | Annual Rates of Stock | 
|                |  |            |         |  |              |  |      |          |  |                 |               | Price Appreciation(1  | 
|Bruce Armstrong |  |            | 270,000 |  |              |  | 17.4 | %        |  | $               | 4.60          |                       |  | $          | 4.60 |  |  |  | 2/15/2015 |  |  | $ | 781,087 |  |  | $ | 1,979,428 | 
|Bruce Armstrong |  |            | 175,000 |  |              |  | 11.3 | %        |  | $               | 3.70          |                       |  | $          | 3.70 |  |  |  | 4/14/2015 |  |  | $ | 407,209 |  |  | $ | 1,031,948 | 
|Thomas Muise    |  |            | 88,000  |  |              |  | 5.7  | %        |  | $               | 3.70          |                       |  | $          | 3.70 |  |  |  | 6/23/2015 |  |  | $ | 204,768 |  |  | $ | 518,923   | 
|Mark Angel      |  |            | 170,000 |  |              |  | 11.0 | %        |  | $               | 4.60          |                       |  | $          | 4.60 |  |  |  | 2/15/2015 |  |  | $ | 491,796 |  |  | $ | 1,246,307 | 
|Mark Angel      |  |            | 50,000  |  |              |  | 3.2  | %        |  | $               | 3.70          |                       |  | $          | 3.70 |  |  |  | 4/14/2015 |  |  | $ | 116,346 |  |  | $ | 294,842   | 
|Frank Lauletta  |  |            |        |  |              |  | N/A  |          |  |                 | N/A           |                       |  |            | N/A  |  |  |  | N/A       |  |  |   | N/A     |  |  |   | N/A       | 
|Kent Heyman     |  |            |        |  |              |  | N/A  |          |  |                 | N/A           |                       |  |            | N/A  |  |  |  | N/A       |  |  |   | N/A     |  |  |   | N/A       | 






|    |                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The dollar amounts under these columns are the result of
    calculations at the 5% and 10% rates set by the Securities and
    Exchange Commission and therefore are not intended to forecast
    possible future appreciation, if any, of the price of our stock.

Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year End Option Values




|                |  |                    |   |  |                |                     |                  |                   |                      |                  |                   |  |  |   |         | 
|--------------- |  | ------------------ | - |  | -------------- | ------------------- | ---------------- | ----------------- | -------------------- | ---------------- | ----------------- |  |  | - | ------- | 
|                |  |                    |   |  |                | Number of           |                  |                   | Value of Unexercised |                 
|                |  |                    |   |  |                | Unexercised Options |                  |                   | In-The-Money Options |                 
|                |  |                    |   |  |                | December 31, 2005   |                  |                   | December 31, 2005    |                 
|                |  | Shares Acquired on |   |  |                |                     | Exercisable (E)/ |                   |                      | Exercisable (E)/ |                  
|                |  | Exercise           |   |  | Value Realized |                     |                  | Unexercisable (U) |                      |                  | Unexercisable (U) | 
|                |  |                    |   |  |                |                     |                  |                   |                      |                  |                   | 
|Bruce Armstrong |  |                    |  |  |                |                     |                 |                   |                      |                  | 112,500 E         |  |  | $ |  E     | 
|                |  |                    |   |  |                |                     |                  |                   |                      |                  | 332,500 U         |  |  | $ |  U     | 
|Thomas Muise    |  |                    |  |  |                |                     |                 |                   |                      |                  |  E               |  |  | $ |  E     | 
|                |  |                    |   |  |                |                     |                  |                   |                      |                  | 88,000 U          |  |  | $ |  U     | 
|Mark Angel      |  |                    |  |  |                |                     |                 |                   |                      |                  | 70,833 E          |  |  | $ |  E     | 
|                |  |                    |   |  |                |                     |                  |                   |                      |                  | 149,167 U         |  |  | $ |  U     | 
|Frank Lauletta  |  |                    |  |  |                |                     |                 |                   |                      |                  | 12,250 E          |  |  | $ |  E     | 
|                |  |                    |   |  |                |                     |                  |                   |                      |                  | 9,750 U           |  |  | $ |  U     | 
|Kent Heyman     |  |                    |  |  |                |                     |                 |                   |                      |                  | 210,000 E         |  |  | $ | 2,500 E | 
|                |  |                    |   |  |                |                     |                  |                   |                      |                  |  U               |  |  |   | U       | 






|    |                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------
|(1) | Amounts shown are based upon the closing sale price for our
    common stock on December 31, 2005, which was $2.55 per
    share.

Compensation of Directors




58



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##### Table of Contents










|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters



|                                                                              |                                                         |                       |           |      |                   |  |      |   | 
|----------------------------------------------------------------------------- | ------------------------------------------------------- | --------------------- | --------- | ---- | ----------------- |  | ---- | - | 
|                                                                              |                                                         | Number of Shares      |           |      | Percent of Shares | 
|Name and Address of Beneficial Owner                                          |                                                         | Beneficially Owned(1) |           |      | Outstanding(2)    | 
|                                                                              |                                                         |                       |           |      |                   | 
|(i) Certain Beneficial Owners:                                                |                                                         |                       |           |      |                   |  |      |  
|C.E. Unterberg Towbin Holdings, Inc.                                          |                                                         |                       | 1,966,918 | (3)  |                   |  | 22.4 | %
|                                                                              | 350 Madison Avenue
    New York, NY 10017               |                       |           |      |                   |  |      |   | 
|Needham Capital Management, LLC                                               |                                                         |                       | 1,859,927 | (4)  |                   |  | 20.8 | %
|                                                                              | 445 Park Avenue
    New York, NY 10022                  |                       |           |      |                   |  |      |   | 
|Meritech Capital Partners II, L.P.                                            |                                                         |                       | 565,149   | (5)  |                   |  | 6.4  | %
|                                                                              | 285 Hamilton Avenue, Suite 200
    Palo Alto, CA 94301  |                       |           |      |                   |  |      |   | 
|Sierra Ventures                                                               |                                                         |                       | 475,842   | (6)  |                   |  | 5.4  | %
|                                                                              | 2884 Sand Hill Road, Suite 100
    Menlo Park, CA 94025 |                       |           |      |                   |  |      |   | 
|(ii) Directors and executive officers:                                        |                                                         |                       |           |      |                   |  |      |  
|Bruce Armstrong, president, chief executive officer and director              |                                                         |                       | 186,978   | (7)  |                   |  | 2.1  | %
|Kent Heyman, chairman of the board                                            |                                                         |                       | 228,379   | (8)  |                   |  | 2.6  | %
|David Schwab, director                                                        |                                                         |                       |          | (9)  |                   |  |     |  
|Thomas Shanahan, director                                                     |                                                         |                       |          | (10) |                   |  |     |  
|Thomas Unterberg, director                                                    |                                                         |                       | 332,603   | (11) |                   |  | 3.8  | %
|Timothy Wallace, director                                                     |                                                         |                       | 71,903    | (12) |                   |  | *    |  
|Thomas Muise, chief financial officer and secretary                           |                                                         |                       |          | (13) |                   |  |     |  
|Mark Angel, chief technology officer                                          |                                                         |                       | 106,249   | (14) |                   |  | 1.2  | %
|Frank Lauletta, general counsel                                               |                                                         |                       | 18,750    | (15) |                   |  | *    |  
|(iii) All directors and current executive officers as a group
    (9 persons) |                                                         |                       | 944,862   | (16) |                   |  | 10.1 | %






| |   |              
| | - | -------------
| | * | Less than 1%.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Except as set forth in the footnotes to this table and subject
    to applicable community property law, the person and entities
    named in the table have sole voting and investment power with
    respect to all shares.                                                                                                                                                                                                   
|
| | (2) | Applicable percentage of ownership for each holder is based on
    8,744,116 shares of common stock outstanding on
    March 17, 2006, plus any common stock equivalents and
    presently exercisable stock options or warrants held by each
    such holder, and options or warrants held by each such holder
    which will become exercisable within 60 days after the date
    of this report.                             
|
| | (3) | Information is based on information provided by the beneficial
    owner as of December 31, 2004, and assuming no changes in
    beneficial ownership since that time other than the purchase of
    shares of our common stock on the open market by C.E. Unterberg,
    Towbin, LLC as a market maker of our common stock. Includes
    warrants exercisable for 35,000 shares of our common stock
    and other shares of our

59



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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | common stock owned by this beneficial owner or its affiliates.
    The warrants and shares referred to in the preceding sentence
    are held variously by the following entities with which C.E.
    Unterberg, Towbin Holdings, Inc. is affiliated: C.E. Unterberg,
    Towbin, LLC, C. E. Unterberg, Towbin Capital Partners, I,
    L.P.; C.E. Unterberg, Towbin Private Equity Partners II,
    L.P.; C.E. Unterberg, Towbin Private Equity Partners II-Q,
    L.P.; UT Technology Partners I, LP, UT Technology
    Partners II, LP and UT Technology Fund Ltd. C.E.
    Unterberg Towbin Holdings, Inc. disclaims beneficial ownership
    of shares of common stock and warrants owned by Mr. Thomas
    Unterberg.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (4) | Information is based on a Schedule 13D filed with the
    Securities and Exchange Commission on February 18, 2005, by
    Needham Capital Management, L.L.C. (NCM), Needham
    Capital Management (Bermuda), L.L.C. (NCMB), Needham
    Capital Management II, L.P. (NCMII), Needham
    Capital Partners III, L.P (NCPIII), Needham Capital
    Partners IIIA, L.P, (NCPIIIA), Needham Capital
    Partners III (Bermuda), L.P. (NCPIIIB), Needham
    Capital SBIC III, L.P. (NCSBICIII), George A.
    Needham, Thomas P. Shanahan, John C. Michaelson and John J.
    Prior, Jr. As of the date of the filing, these persons may
    be deemed to beneficially own 1,659,060 shares of common
    stock and warrants exercisable for 200,867 shares of common
    stock. The shares and warrants are owned directly as follows:
    908,370 shares and warrants to
    purchase 109,979 shares (for a total of
    1,018,349 shares) by NCPIII, 367,526 shares and
    warrants to purchase 44,497 shares (for a total of
    412,023 shares) by NCSBICIII, 131,327 shares and
    warrants to purchase 15,900 shares (for a total of
    147,227 shares) by NCPIIIB and 251,837 shares and
    warrants to purchase 30,491 shares (for a total of
    282,328 shares) by NCPIIIA. NCMII may be deemed to own
    beneficially the shares of common stock owned by NCSBICIII by
    virtue of its position as general partner of NCSBICIII. NCMII
    disclaims beneficial ownership of all of the reported shares of
    common stock owned by NCSBICIII. Each of George A. Needham,
    Thomas P. Shanahan, John C. Michaelson and John C.
    Prior, Jr. may be deemed to beneficially own and have
    shared power to direct the vote and disposition of (i) the
    common stock and warrants owned by NCPIII and NCPIIIA by virtue
    of his position as a manager of NCM, the general partner of
    NCPIII and NCPIIIA, (ii) the common stock and warrants
    owned by NCPIIIB by virtue of his position as a manager of NCMB,
    and (iii) the common stock and warrants owned by NCSBICIII
    by virtue of his position as a manager of NCMII.
    Messrs. Needham, Shanahan, Michaelson and Prior disclaim
    beneficial ownership of the shares of common stock and warrants
    owned by NCPIII, NCPIIIA, NCPIIIB and NCSBICIII. NCM may be
    deemed to own beneficially the common stock and warrants owned
    by NCPIII and NCPIIIA by virtue of its position as general
    partner of those persons. NCM disclaims beneficial ownership of
    all of the reported shares of common stock and warrants owned by
    NCPIII and NCPIIIA. NCMB may be deemed to own beneficially the
    common stock and warrants owned by NCPIIIB by virtue of its
    position as general partner of NCPIIIB. NCMB disclaims
    beneficial ownership of all of the common stock and warrants
    owned by NCPIIIB. NCM, the general partner of NCPIIIA, and
    NCPIIIA have shared power to direct the vote of the shares owned
    by NCPIIIA. NCMB, the general partner of NCPIIIB, and NCPIIIB
    have shared power to direct the vote and disposition of the
    shares owned by NCPIIIB. NCM, the general partner of NCPIII, and
    NCPIII have shared power to direct the vote and disposition of
    the shares owned by NCPIII. NCMII, the general partner of
    NCSBICIII, and NCSBICIII have shared power to direct the vote
    and disposition of the shares owned by NCSBICIII.
|
| | (5) | Information is based on a Schedule 13G filed with the
    Securities and Exchange Commission on February 24, 2005, by
    Meritech Capital Partners II L.P.
    (MCP II), MeriTech Capital Affiliates II
    L.P. (MC AFF II), MCP Entrepreneur
    Partners II L.P. (MEP II), MeriTech
    Capital Associates II L.L.C. (MCA II),
    MeriTech Management Associates II L.L.C.
    (MMA II), Paul Madera (Madera) and
    Michael Gordon (Gordon). MCA II is the general
    partner of MCP II, MC AFF II and MEP II, and may
    be deemed to have indirect beneficial ownership of shares
    directly owned by MCP II, MC AFF II and MEP II.
    MMA II is a managing member of MCA II and may be
    deemed to have indirect beneficial ownership of shares directly
    owned by MCP II, MC AFF II and MEP II. Madera and
    Gordon are managing members of MMA II and may be deemed to
    have indirect beneficial ownership of shares directly owned by
    MCP II, MC AFF II and MEP II. The shares and
    warrants are owned directly as follows: 487,832 shares and
    warrants to purchase 59,063 shares (for a total of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 546,895 shares) by MCP II, 12,552 shares and warrants
    to purchase 1,520 shares (for a total of
    14,072 shares) by MC AFF II and 3,730 shares and
    warrants to purchase 452 shares (for a total of
    4,182 shares) by MEP II. MCA II and MMA II
    may each be deemed to have sole power to direct the vote and
    disposition of the shares owned by MCP II, MC AFF II
    and MEP II. Each of Madera and Gordon may be deemed to have
    shared power to direct the vote and disposition of the shares
    owned by MCP II, MC AFF II and MEP II.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (6) | Information is based on a Schedule 13G filed with the
    Securities and Exchange Commission on February 14, 2006, by
    Sierra Ventures VI, L.P., SV Associates VI, L.P., Sierra
    Ventures VII, L.P. and Sierra Ventures Associates VII, LLC.
    Sierra Ventures VI, L.P. holds 131,642 shares of common
    stock and warrants to purchase an additional 15,938 shares.
    SV Associates VI, L.P. is the general partner of Sierra
    Ventures, VI, L.P. Sierra Ventures VII, L.P. holds
    292,811 shares of common stock and warrants to purchase an
    additional 35,451 shares. Sierra Ventures Associates VII,
    LLC is the general partner of Sierra Ventures VII, L.P.                                                                                                                                                                                                                                                                                                                                                      
|
| | (7) | Mr. Armstrongs shares consist of 186,978 shares
    of our common stock underlying options which are presently
    exercisable or which will become exercisable within 60 days
    after the day of this report.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | (8) | Mr. Heymans shares include 210,000 shares of our
    common stock underlying options which are presently exercisable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (9) | Mr. Schwab is a general partner of SV Associates VI, L.P.,
    which is the sole general partner of Sierra Ventures VI, L.P.
    Sierra Ventures VI, L.P. holds 131,642 shares of common
    stock and warrants to purchase an additional 15,938 shares.
    Mr. Schwab disclaims beneficial ownership of the shares of
    common stock held by Sierra Ventures VI, L.P. (and deemed
    beneficially owned by SV Associates VI, L.P.), except to the
    extent of any pecuniary interest therein. Mr. Schwab is a
    general partner of Sierra Ventures Associates VII, L.L.C., which
    is the sole general partner of Sierra Ventures VII, L.P. Sierra
    Ventures VII, L.P. holds 292,811 shares of common stock and
    warrants to purchase an additional 35,451 shares.
    Mr. Schwab disclaims beneficial ownership of the shares of
    common stock held by Sierra Ventures VII, L.P. (and deemed
    beneficially owned by Sierra Ventures Associates VII, L.L.C.),
    except to the extent of any pecuniary interest therein.



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | See footnote (4) above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    
|(11) | Information is based on information provided by the beneficial
    owner as of December 31, 2004, and assumes no changes in
    beneficial ownership since that time. Includes
    117,028 shares (including warrants exercisable for
    12,500 shares of our common stock) owned by the following
    entities with respect to which Mr. Unterberg has or shares
    voting power: Marjorie and Clarence E. Unterberg Foundation,
    Inc., Bella and Israel Unterberg Foundation, Inc., Ellen U.
    Celli Family Trust and Emily U. Satloff Family Trust.
    Mr. Unterberg disclaims beneficial ownership of shares of
    common stock and warrants owned by C.E. Unterberg Towbin,
    Holdings, Inc., other entities in which he is a member or
    partner and their affiliates except as to his proportionate
    interest in such entities. Includes options to
    purchase 40,162 shares owned by Mr. Unterberg.
    Excludes 1,250 shares of our common stock owned by
    Mr. Unterbergs wife, as to which Mr. Unterberg
    disclaims beneficial ownership.
|    
|(12) | Mr. Wallaces shares include 71,833 shares of our
    common stock underlying options which are presently exercisable
    or which will become exercisable within 60 days after the
    day of this report.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(13) | Mr. Muise will not have any vested interest in his options
    until June 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    
|(14) | Mr. Angels ownership includes 106,249 shares of
    our common stock underlying options which are presently
    exercisable or which will become exercisable within 60 days
    after the day of this report.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    
|(15) | Mr. Laulettas shares include 18,750 shares of
    our common stock underlying options which are presently
    exercisable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(16) | See Notes 7 through 15.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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##### Table of Contents



Securities Authorized for Issuance under Equity Compensation
Plans




|                                                           |  |                               |           |  |                      |                      |        |                         |  |  |         | 
|---------------------------------------------------------- |  | ----------------------------- | --------- |  | -------------------- | -------------------- | ------ | ----------------------- |  |  | ------- | 
|                                                           |  |                               |           |  |                      | Number of Securities |       
|                                                           |  | Number of Securities to be    |           |  | Weighted-Average     |                      |        | Remaining Available for | 
|                                                           |  | Issued upon Exercise of       |           |  | Exercise Price of    |                      |        | Future Issuance under   | 
|                                                           |  | Outstanding Options, Warrants |           |  | Outstanding Options, |                      |        | Equity Compensation     | 
|                                                           |  | and Rights                    |           |  | Warrants and Rights  |                      |        | Plans                   | 
|                                                           |  |                               |           |  |                      |                      |        |                         | 
|Equity compensation plans approved by security holders     |  |                               | 2,090,514 |  |                      | $                    | 4.3747 |                         |  |  | 341,612 | 
|Equity compensation plans not approved by security holders |  |                               | 1,068,285 |  |                      | $                    | 7.4351 |                         |  |  | N/A     | 
|Total                                                      |  |                               | 3,158,799 |  |                      | $                    | 5.4097 |                         |  |  | 341,612 | 








|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions








|         |                                             
|-------- | --------------------------------------------
|Item 14. | Principal Accountants Fees and
    Services



| |           
| | ----------
| | Audit Fees

10-Q




| |                   
| | ------------------
| | Audit-Related Fees

8-K S-1




| |         
| | --------
| | Tax Fees





| |               
| | --------------
| | All Other Fees





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##### Table of Contents



PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

Financial Statements and Supplementary Data.


|                                                        |  |             |    | 
|------------------------------------------------------- |  | ----------- | -- | 
|                                                        |  | Page Number |   
|                                                        |  |             |   
|Report of Independent Registered Public Accounting Firm |  |             | 30 | 
|Consolidated Balance Sheets                             |  |             | 31 | 
|Consolidated Statements of Operations                   |  |             | 32 | 
|Consolidated Statements of Stockholders Equity         |  |             | 33 | 
|Consolidated Statements of Cash Flows                   |  |             | 34 | 
|Notes to Consolidated Financial Statements              |  |             | 35 | 

Financial Statement Schedules.


Exhibits. 10-K.


|        |    |             |  |                                                                                                                                                    
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1          |  | Amended Agreement and Plan of Merger, dated as of
    February 8, 2005, by and among the Company, Kanisa Inc. and
    SVCW Acquisition, Inc.(2)    
|        | 3  | .1*         |  | Third Amended and Restated Certificate of Incorporation of the
    Company.                                                                        
|        | 3  | .2          |  | Amended and Restated Bylaws of the Company.(2)                                                                                                     
|        | 3  | .3          |  | Certificate of Amendment of Third Amended and Restated
    Certificate of Incorporation. (reverse split)(3)                                        
|        | 3  | .4          |  | Certificate of Amendment of Third Amended and Restated
    Certificate of Incorporation. (name change)(4)                                          
|        | 4  | .1          |  | Amended and Restated Registration Rights Agreement dated
    June 2, 2000.(5)                                                                      
|        | 4  | .2          |  | Registration Rights Agreement dated as of May 6, 2002
    between the Company and the purchasers of the 10% Convertible
    Notes.(6)              
|        | 4  | .3          |  | Form of Warrant issued to equity investors as of
    January 30, 2004.(7)                                                                          
|        | 4  | .4          |  | Form of Warrant issued to Kanisa stockholders as of
    February 8, 2005.(3)                                                                       
|        | 4  | .5          |  | Registration Rights Agreement, dated as of February 8,
    2005, by and among ServiceWare Technologies, Inc. and
    stockholders of Kanisa Inc.(2)
|        | 10 | .1          |  | Restatement and Amendment of 2000 Stock Incentive Plan of the
    Company.(1)(8)                                                                   
|        | 10 | .2          |  | Employee Stock Purchase Plan of the Company.(9)                                                                                                    
|        | 10 | .3          |  | Amended and Restated Stock Option Plan of the Company. (10)                                                                                        
|        | 10 | .4          |  | License Agreement and Assignment, each dated July 23, 1999,
    between the Company and Bruce Molloy.(10)                                          
|        | 10 | .5I         |  | Master Alliance Agreement, dated June 30, 2000, between the
    Company and Electronic Data Systems Corporation.(11)                               
|        | 10 | .6I         |  | Master Software License Agreement, dated June 30, 2000,
    between the Company and Electronic Data Systems Corporation.(11)                       
|        | 10 | .7          |  | Common Stock Purchase Warrant of the Company in favor of
    Electronic Data Systems Inc.(11)                                                      
|        | 10 | .8          |  | Warrant Purchase Agreement, dated June 2, 2000 between the
    Company and Electronic Data Systems.(11)                                            
|        | 10 | .9          |  | ServiceWare Technologies, Inc. Change of Control Benefit
    Plan.(12)                                                                             

63



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##### Table of Contents



|        |     |             |  |                                                                                                                              
|------- | --- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|        | 10  | .10I        |  | Software License and Maintenance Agreement dated
    December 13, 2001 between the Company and Cingular Wireless
    LLC.(13)
|        | 10  | .11         |  | Restricted Stock Agreement dated January 26, 2004, between
    Kent Heyman and the Company.(1)(7)                            
|        | 10  | .12         |  | Employment Agreement, effective as of February 8, 2005, by
    and between Kanisa Inc. and Bruce Armstrong.(1)(2)            
|        | 10  | .13         |  | Employment Agreement, effective as of February 8, 2005, by
    and between Kanisa Inc. and Mark Angel.(1)(2)                 
|        | 10  | .14         |  | Agreement, effective as of February 8, 2005, by and between
    the Company and Kent Heyman.(1)(2)                           
|        | 10  | .15         |  | Restricted Stock Agreement dated March 29, 2004, between
    Kent Heyman and the Company.(1)(14)                             
|        | 10  | .16         |  | Employment Agreement dated June 23, 2005 between Thomas J.
    Muise and the Company.(1)(4)                                  
|        | 23  | .1*         |  | Consent of PricewaterhouseCoopers LLP.                                                                                       
|        | 24  | .1*         |  | Power of Attorney (included on signature page hereto).                                                                       
|        | 31  | .1*         |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer.                                                       
|        | 31  | .2*         |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer.                                                       
|        | 32* |             |  | Section 1350 Certifications.                                                                                                 






| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | I | Portions of these exhibits have been omitted based on a grant of
    confidential treatment by the Commission. The omitted portions
    of the exhibits have been filed separately with the Commission.



| |     |                                                                                                                                                                  
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Management contract or compensation plan or agreement required
    to be filed as an Exhibit to this Report on Form 10-K
    pursuant to Item 15(c) of Form 10-K.
|
| | (2) | Incorporated by reference to our Current Report on Form 8-K
    dated February 8, 2005.                                                                          
|
| | (3) | Incorporated by reference to Annual Report on Form 10-K for
    the year ended December 31, 2004.                                                                
|
| | (4) | Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2005.                                                          
|
| | (5) | Incorporated by reference to our Registration Statement on
    Form S-1, as amended, filed on August 18, 2000.                                                   
|
| | (6) | Incorporated by reference to our Registration Statement on
    Form S-3 filed on June 19, 2002.                                                                  
|
| | (7) | Incorporated by reference to our Annual Report on Form 10-K
    for the year ended December 31, 2003.                                                            
|
| | (8) | Incorporated by reference to definitive proxy statement filed
    with the Commission on May 5, 2005.                                                            
|
| | (9) | Incorporated by reference to our Registration Statement on
    Form S-1 filed on March 31, 2000.                                                                 



|     |                                                                                                                          
|---- | -------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to our Registration Statement on
    Form S-1, as amended, filed on April 7, 2000.             
|    
|(11) | Incorporated by reference to our Registration Statement on
    Form S-1, as amended, filed on July 13, 2000.             
|    
|(12) | Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2001.                 
|    
|(13) | Incorporated by reference to our Annual Report on Form 10-K
    for the fiscal year ended December 31, 2001.             
|    
|(14) | Incorporated by reference to Pre-Effective Amendment to our
    Registration Statement on From S-1 filed on June 8, 2004.



64



---



##### Table of Contents



Signatures






| |                     
| | --------------------
| | KNOVA SOFTWARE, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ Bruce Armstrong

| |                        
| | -----------------------
| |                        
| | BRUCE ARMSTRONG        
| | Chief Executive Officer

attorneys-in 10-K, attorneys-in attorneys-in




|                                   |  |                                                             |  |      |                |  |  | 
|---------------------------------- |  | ----------------------------------------------------------- |  | ---- | -------------- |  |  | 
|Signature                          |  | Capacity                                                    |  | Date |               
|                                   |  |                                                             |  |      |               
|                                  
|/s/ Bruce ArmstrongBruce Armstrong |  | President, Principal Executive Officer and Director         |  |      | March 31, 2006 | 
|                                  
|/s/ Thomas MuiseThomas Muise       |  | Chief Financial Officer and
    Principal Financial Officer |  |      | March 31, 2006 | 
|                                  
|/s/ Kelly BarefootKelly Barefoot   |  | Controller and
    Principal Accounting Officer             |  |      | March 31, 2006 | 
|                                  
|/s/ Kent HeymanKent Heyman         |  | Director                                                    |  |      | March 31, 2006 | 
|                                  
|David Schwab                       |  | Director                                                    |  |      | March   , 2006 | 
|                                  
|/s/ Thomas ShanahanThomas Shanahan |  | Director                                                    |  |      | March 31, 2006 | 
|                                  
|Thomas Unterberg                   |  | Director                                                    |  |      | March   , 2006 | 
|                                  
|/s/ Timothy WallaceTimothy Wallace |  | Director                                                    |  |      | March 31, 2006 | 

65



---



##### Table of Contents



INDEX TO EXHIBITS




|        |    |             |  |                                                                      
|------- | -- | ----------- |  | ---------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1          |  | Third Amended and Restated Certificate of Incorporation              
|        | 23 | .1          |  | Consent of PricewaterhouseCoopers LLP                                
|        | 24 | .1          |  | Power of Attorney (included on signature page hereto).               
|        | 31 | .1          |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer
|        | 31 | .2          |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer
|        | 32 |             |  | Section 1350 Certifications                                          

66