##### 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, 2004                                                 
|          
|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


ServiceWare Technologies, 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


12 Federal Street, One North Shore, Suite 503,
Pittsburgh, PA 15212


(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)


þ o


o þ


The Wall Street Journal.




DOCUMENTS INCORPORATED BY REFERENCE


o


EXHIBITS INDEX IS LOCATED ON PAGE 70










---










SERVICEWARE TECHNOLOGIES, INC.


ANNUAL REPORT ON FORM 10-K


FOR THE YEAR ENDED DECEMBER 31, 2004


TABLE OF CONTENTS


|             |  |                                                                                                                       |  |                                                       |      |  |    | 
|------------ |  | --------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------- | ---- |  | -- | 
|Item         |  |                                                                                                                       |  |                                                       | Page | 
|             |  |                                                                                                                       |  |                                                       |      | 
|PART I      
|1            |  | Business                                                                                                              |  |                                                       | 2    | 
|             |  |                                                                                                                       |  | Overview                                              |      |  | 2  | 
|             |  |                                                                                                                       |  | Products                                              |      |  | 2  | 
|             |  |                                                                                                                       |  | Strategy                                              |      |  | 4  | 
|             |  |                                                                                                                       |  | Services                                              |      |  | 5  | 
|             |  |                                                                                                                       |  | Customers                                             |      |  | 5  | 
|             |  |                                                                                                                       |  | Sales & Marketing                                     |      |  | 6  | 
|             |  |                                                                                                                       |  | Strategic Alliances                                   |      |  | 6  | 
|             |  |                                                                                                                       |  | Research and Development                              |      |  | 6  | 
|             |  |                                                                                                                       |  | Competition                                           |      |  | 7  | 
|             |  |                                                                                                                       |  | Intellectual Property                                 |      |  | 7  | 
|             |  |                                                                                                                       |  | Employees                                             |      |  | 8  | 
|             |  |                                                                                                                       |  | Forward-looking Statements                            |      |  | 8  | 
|             |  |                                                                                                                       |  | Internet Address and SEC Reports                      |      |  | 8  | 
|             |  |                                                                                                                       |  | Business History                                      |      |  | 8  | 
|             |  |                                                                                                                       |  | Additional Factors that May Affect Future
    Results |      |  | 9  | 
|2            |  | Properties                                                                                                            |  |                                                       | 19   | 
|3            |  | Legal Proceedings                                                                                                     |  |                                                       | 19   | 
|4            |  | Submission of Matters to a Vote of Security
    Holders                                                               |  |                                                       | 20   | 
|            
|PART II     
|5            |  | Market for Registrants Common Equity,
    Related Stockholder Matters, and Issuer Purchases of Equity
    Securities |  |                                                       | 20   | 
|6            |  | Selected Financial Data                                                                                               |  |                                                       | 21   | 
|7            |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                             |  |                                                       | 22   | 
|7A           |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                        |  |                                                       | 31   | 
|8            |  | Financial Statements and Supplementary
    Data                                                                       |  |                                                       | 32   | 
|9            |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                              |  |                                                       | 56   | 
|9A           |  | Controls and Procedures                                                                                               |  |                                                       | 56   | 
|9B           |  | Other Information                                                                                                     |  |                                                       | 56   | 
|            
|PART III    
|10           |  | Directors and Executive Officers of the
    Registrant                                                                |  |                                                       | 56   | 
|11           |  | Executive Compensation                                                                                                |  |                                                       | 59   | 
|12           |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                    |  |                                                       | 62   | 
|13           |  | Certain Relationships and Related
    Transactions                                                                    |  |                                                       | 65   | 
|14           |  | Principal Accountants Fees and
    Services                                                                          |  |                                                       | 65   | 
|            
|PART IV     
|15           |  | Exhibits and Financial Statement
    Schedules                                                                        |  |                                                       | 66   | 
|             |  |                                                                                                                       |  | Signatures                                            |      |  | 69 | 
|Exhibit 3.3 
|Exhibit 4.4 
|Exhibit 23.1
|Exhibit 31.1
|Exhibit 31.2
|Exhibit 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.

2



---



##### Table of Contents





| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                
|
| |  | 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 features
    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 enable customers to discuss and
    collaborate on topics of interest, including an
    enterprises products and services. Knova Forums enable
    customers and employees to assist each other, reducing service
    delivery costs and providing valuable insight to the enterprise.                                                                                                                                                                                                                                                             
|
| |  | Knova Service Deskis a packaged knowledge management
    solution for service desks to resolve questions, author
    knowledge, and manage repositories of intellectual capital.
    Knova Service 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 improves with usage. Knova
    Service 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.
|
| |  | 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.                                                                                                                                                            

3



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| |   |                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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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##### Table of Contents






Services


Professional Services.


Customer Support.





Customers




|                                                   
|---------------------------------------------------
|Technology                                         
|Best Software, Inc.                                
|First Data Corporation                             
|EBay Inc.                                          
|Genesys Telecommunications Laboratory              
|Hewlett Packard                                    
|Intersystems Corporation                           
|Intuit, Inc.                                       
|Invensys Systems, Inc.                             
|McAfee, Inc.                                       
|Mercury Interactive                                
|Novell                                             
|Partech, Inc.                                      
|Scientific Atlanta Inc.                            
|Softbrands                                         
|Texas Instruments, Inc.                            
|Toshiba America                                    
|                                                   
|Services                                           
|C3i, Inc.                                          
|Electronic Data Systems Corporation                
|National Computer Systems                          
|SchlumbergerSema                                   
|SEI Information Technology, Inc.                   
|                                                   
|Telecommunications                                 
|Cingular Wireless LLC                              
|EADS Telecom NA                                    
|Qualcomm, Inc.                                     
|SaskTel                                            
|U.S. Cellular Corporation                          
|                                                   
|Healthcare & Biotech                               
|Allina Hospitals & Clinics                         
|Aventis Pharmaceuticals, Inc.                      
|Duke University & Health Systems                   
|GE Healthcare                                      
|McKesson Information Solutions                     
|Omnicell                                           
|United Health Technologies                         
|University of Utah Vanderbilt                      
|University Medical Center                          
|                                                   
|Government/Public Sector                           
|NCS Pearson/ Immigration and Naturalization Service
|Northeastern University                            
|State of Washington                                
|United States Navy                                 
|U.S. Patent & Trademark Office                     
|                                                   
|Automotive                                         
|Ford Motor Company                                 
|                                                   
|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                                 

5



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##### Table of Contents






Sales & Marketing











Strategic Alliances






| |   |                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Resellers and Distributors: Knova has 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: Knova participates 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: Knova works
    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, Knova maintains technology
    partnerships with Inxight Software Inc., WebMethods, Inc. In
    addition, our software is developed on and tested against
    platform software from providers of database, operating system
    and application server software.        




Research and Development






6



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Competition











Intellectual Property








7



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Employees







Forward-looking Statements








| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | 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.








Internet Address and SEC Reports


www.knova.com





Business History




8



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Additional Factors that May Affect Future Results






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





| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



9



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





| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | Failure of our recent combination with Kanisa to achieve
    its potential benefits could harm our business and operating
    results.





| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | marketing, sales and service and support organizations;                           
|
| |  | information and communications systems;                                           
|
| |  | operating procedures;                                                             
|
| |  | accounting systems and financial controls; and                                    
|
| |  | human resource policies, procedures and practices, including
    benefit programs.





| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | problems with compatibility of business cultures;                                                                                  
|
| |  | customer perception of an adverse change in service standards,
    business focus or product and service offerings;                
|
| |  | costs and inefficiencies in delivering products and services to
    our customers;                                                 
|
| |  | problems in successfully coordinating our research and
    development efforts;                                                    
|
| |  | difficulty in integrating sales, support and product marketing;                                                                    
|
| |  | costs and delays in implementing common systems and procedures,
    including financial accounting systems; and                    
|
| |  | the inability to retain and integrate key management, research
    and development, technical sales and customer support personnel.





10



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| |                                                                             
| | ----------------------------------------------------------------------------
| | The change in management effected by the merger might not
    be successful.





| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | Failure to retain key employees could diminish the
    anticipated benefits of the merger.





| |                                                                                
| | -------------------------------------------------------------------------------
| | The market price of our common stock may decline as a
    result of the merger.





| |   |                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our integration with Kanisa is not as successful as anticipated                                                                                                                           
|
| |  | we do not achieve or are perceived not to have achieved the
    expected benefits of the merger as rapidly or to the extent
    anticipated by financial or industry analysts or investors
|
| |  | the effect of the merger on our financial results is not
    consistent with the expectations of financial or industry
    analysts or investors.                                         





| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | The substantial costs of our combination with Kanisa could
    harm our financial results.





| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | 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.



11



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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 and the merger
    with Kanisa.













| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



12



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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.



13



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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.





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



14



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





| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | 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.





15



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##### Table of Contents







| |                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





16



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





| |                                                                              
| | -----------------------------------------------------------------------------
| | 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.



17



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





| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | 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 2005 and 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.



18



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








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









| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Without any admission of liability by either party, we and
    Primus agreed to dismiss with prejudice all the claims,
    counterclaims and reply claims in the Lawsuit, and to deliver to
    each other mutual general releases.                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | We agreed to grant to Primus and its affiliates, including ATG,
    a fully paid, irrevocable, nonexclusive, nontransferable (with
    certain exceptions specified in the agreement), worldwide,
    perpetual limited license under the patents at issue in the
    Lawsuit and a covenant not to sue under those patents.                                                                                                                                                                                                                                                                          
|
| |  | Primus agreed to pay us the sum of $800,000 in cash and ATG
    agreed to guarantee this cash payment obligation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Primus agreed to issue to us, immediately prior to the closing
    of ATGs acquisition of Primus, shares of Primus common
    stock having a value of $850,000 based on ART stock price at the
    time of issuance and without taking into account any future
    fluctuations in the stock price. Although we agreed to certain
    restrictions on transfer of the shares of ATG common stock
    issued to us in connection with the acquisition by ATG of
    Primus, we sold all of our shares of ATG common stock in first
    quarter 2005, for an aggregate gross sales price of $1,018,250.





19



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





| |   |                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the election of two directors for a three-year term on our board;                                                                                                                                                                                                  
|
| |  | the approval of an amendment to our Certificate of Incorporation
    to effect a reverse stock split of our common stock and to grant
    our board of directors the authority to set the ratio for the
    reverse split or to not complete the reverse split; and
|
| |  | the approval of an amendment to our Certificate of Incorporation
    to decrease the number of authorized shares of common stock to
    50,000,000 shares subject to completion of the reverse
    stock split.                                                    





|                                                                                                                                                                        |  |           |            |  |               |  |        |                 |  |  |        | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | ---------- |  | ------------- |  | ------ | --------------- |  |  | ------ | 
|                                                                                                                                                                        |  | Votes For |            |  | Votes Against |  |        | Votes Abstained | 
|                                                                                                                                                                        |  |           |            |  |               |  |        |                 | 
|Election of Robert Hemphill, Jr. as a director                                                                                                                          |  |           | 31,882,497 |  |               |  | N/A    |                 |  |  | 10,603 | 
|Election of Thomas Unterberg as a director                                                                                                                              |  |           | 31,843,497 |  |               |  | N/A    |                 |  |  | 49,603 | 
|Approval of an amendment to our Certificate of Incorporation to
    authorize our board to effect a reverse stock split of our
    common stock                         |  |           | 31,828,701 |  |               |  | 51,835 |                 |  |  | 12,564 | 
|Approval of an amendment to our Certificate of Incorporation to
    decrease the number of authorized shares of common stock upon
    implementation of a reverse split |  |           | 31,831,128 |  |               |  | 52,805 |                 |  |  | 9,167  | 




PART II







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

Market for our common stock




|     |                |      |   |      |     |  |   |      | 
|---- | -------------- | ---- | - | ---- | --- |  | - | ---- | 
|     |                | High |   |      | Low | 
|     |                |      |   |      |     | 
|2003 |                |      |   |      |     |  |   |     
|     | First Quarter  |      | $ | 5.60 |     |  | $ | 2.20 | 
|     | Second Quarter |      | $ | 5.10 |     |  | $ | 1.30 | 
|     | Third Quarter  |      | $ | 8.00 |     |  | $ | 4.40 | 
|     | Fourth Quarter |      | $ | 7.10 |     |  | $ | 5.10 | 
|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 | 

20



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##### Table of Contents





Dividend Policy




Recent Sales of Unregistered Securities









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



|                                                      |                         |                                                 |        |       |      |   |        |       |   |   |        |       |   |      |         |        |   |   |         |        |  
|----------------------------------------------------- | ----------------------- | ----------------------------------------------- | ------ | ----- | ---- | - | ------ | ----- | - | - | ------ | ----- | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|                                                      |                         | For the Year Ended December 31,                 |       
|                                                      |                         |                                                 |       
|                                                      |                         | 2004                                            |        |       | 2003 |   |        | 2002  |   |   | 2001   |       |   | 2000 |        
|                                                      |                         |                                                 |        |       |      |   |        |       |   |   |        |       |   |      |        
|                                                      |                         | (In thousands, except share and per share data) |       
|STATEMENT OF OPERATIONS DATA                          |                         |                                                 |        |       |      |   |        |       |   |   |        |       |   |      |         |        |   |   |         |       
|(Prior year amounts reclassified)                     |                         |                                                 |        |       |      |   |        |       |   |   |        |       |   |      |         |        |   |   |         |       
|Total revenues                                        |                         | $                                               | 12,502 |       |      | $ | 11,511 |       |   | $ | 10,158 |       |   | $    | 12,427  |        |   | $ | 17,800  |       
|Net loss from continuing operations                   |                         | $                                               | (1,694 | )     |      | $ | (2,979 | )     |   | $ | (6,825 | )     |   | $    | (31,486 | )      |   | $ | (21,781 | )     
|Net (loss) income per common share, basic and diluted |                         |                                                 |        |       |      |   |        |       |   |   |        |       |   |      |         |        |   |   |         |       
|                                                      | Continuing operations   |                                                 | $      | (0.33 | )    |   | $      | (1.23 | ) |   | $      | (2.85 | ) |      | $       | (13.00 | ) |   | $       | (16.53 | )
|                                                      | Discontinued operations |                                                 |        |      |      |   |        |      |   |   |        |      |   |      |         | 0.73   |   |   |         | 1.52   |  
|                                                      |                         |                                                 |        |       |      |   |        |       |   |   |        |       |   |      |        
|Net loss per share                                    |                         | $                                               | (0.33  | )     |      | $ | (1.23  | )     |   | $ | (2.85  | )     |   | $    | (12.27  | )      |   | $ | (15.01  | )     
|                                                      |                         |                                                 |        |       |      |   |        |       |   |   |        |       |   |      |        

|                    |                |                    |   |        |      |  |   |       |  |  |      |       |  |      |   |        |  |  |   |        | 
|------------------- | -------------- | ------------------ | - | ------ | ---- |  | - | ----- |  |  | ---- | ----- |  | ---- | - | ------ |  |  | - | ------ | 
|                    |                | As of December 31, |  
|                    |                |                    |  
|                    |                | 2004               |   |        | 2003 |  |   | 2002  |  |  | 2001 |       |  | 2000 |  
|                    |                |                    |   |        |      |  |   |       |  |  |      |       |  |      |  
|                    |                | (In thousands)     |  
|Balance Sheet Data: |                |                    |   |        |      |  |   |       |  |  |      |       |  |      |   |        |  |  |   |       
|                    | Total assets   |                    | $ | 16,953 |      |  | $ | 8,084 |  |  | $    | 8,735 |  |      | $ | 13,886 |  |  | $ | 47,072 | 
|                    | Long term debt |                    |   | 384    |      |  |   | 599   |  |  |      | 109   |  |      |   | 443    |  |  |   | 1,478  | 



21



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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



22



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





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



Critical Accounting Policies and Estimates






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





23



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##### Table of Contents







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





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





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



Trends/ Uncertainties that may affect our business and common
stock








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the belief that the merger will better enable us to satisfy
    demand for a single, integrated suite of collaborative support
    applications for agent-assisted service, self-service, and
    peer-service communities that includes functionality for online
    commerce and customer service and covers the full range of
    customer interactions ,including call centers, e-mail and the
    internet;

24



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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the fact that the two product offerings are largely
    complementary, with only limited functional overlap, and utilize
    compatible technology;                                                                                                                                                                                
|
| |  | the opportunity to increase revenues by combining Kanisa
    customers with our customers, and by cross selling each
    companys product set to the customers of the other company;                                                                                                                                              
|
| |  | the belief that enlarging our installed base and adding to our
    stream of maintenance and support revenues would benefit our
    results of operations;                                                                                                                                                                         
|
| |  | the opportunity to achieve expense reduction synergies through
    elimination of duplicative functions and expenses; and                                                                                                                                                                                                          
|
| |  | the belief that the combined experience, research and
    development resources and sales and marketing capabilities of
    the two companies will better enable us to respond quickly and
    effectively to rapid changes in technology, customer
    requirements and competitive landscape which characterize our
    industry.





| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | the challenge of effecting integration while carrying on an
    ongoing business;                             
|
| |  | the necessity of coordinating geographically separate
    organizations;                                      
|
| |  | retaining and integrating personnel with diverse business
    backgrounds;                                    
|
| |  | retaining existing customers and strategic partners of each
    company;                                      
|
| |  | changes in management may impair our relationships with
    employees and customers;                          
|
| |  | implementing and maintaining consistent standards, controls,
    procedures, policies and information systems.



25



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##### Table of Contents



Results of Operations




|                           |          |                                 |                                         |                        |            |           |           |      |       |      |            |           |            |           |           |      |       |      |            |           |            |            |           |      |       |       |      | 
|-------------------------- | -------- | ------------------------------- | --------------------------------------- | ---------------------- | ---------- | --------- | --------- | ---- | ----- | ---- | ---------- | --------- | ---------- | --------- | --------- | ---- | ----- | ---- | ---------- | --------- | ---------- | ---------- | --------- | ---- | ----- | ----- | ---- | 
|                           |          | For the Year Ended December 31, |                                        
|                           |          |                                 |                                        
|                           |          | 2004                            |                                         |                        | 2003       |           |           | 2002 |      
|                           |          |                                 |                                         |                        |            |           |           |      |      
|Revenues                   |          |                                 |                                         |                        |            |           |           |      |       |      |            |           |            |           |           |      |       |      |            |           |            |            |           |     
|                           | Licenses |                                 | $                                       | 5,243,910              |            |           |           | 41.9 | %     |      | $          | 4,934,345 |            |           |           | 42.9 | %     |      | $          | 3,781,220 |            |            |           | 37.2 | %    
|                           | Services |                                 |                                         | 7,258,217              |            |           |           | 58.1 |       |      |            | 6,577,090 |            |           |           | 57.1 |       |      |            | 6,377,130 |            |            |           | 62.8 |      
|                           |          |                                 |                                         |                        |            |           |           |      |       |      |            |           |            |           |           |      |       |     
|                           |          | Total revenues                  |                                         |                        | 12,502,127 |           |           |      | 100.0 |      |            |           | 11,511,435 |           |           |      | 100.0 |      |            |           | 10,158,350 |            |           |      | 100.0 |      
|                           |          |                                 |                                         |                        |            |           |           |      |       |      |            |           |            |           |           |      |       |     
|Cost of revenues           |          |                                 |                                         |                        |            |           |           |      |       |      |            |           |            |           |           |      |       |      |            |           |            |            |           |     
|                           |          |                                 | Cost of licenses                        |                        |            | 412,972   |           |      |       | 3.3  |            |           |            | 270,325   |           |      |       | 2.3  |            |           |            | 969,034    |           |      |       | 9.5   |     
|                           |          |                                 | Cost of services                        |                        |            | 4,372,888 |           |      |       | 35.0 |            |           |            | 2,923,355 |           |      |       | 25.4 |            |           |            | 3,664,867  |           |      |       | 36.1  |     
|                           |          |                                 |                                         |                        |            |           |           |      |       |      |            |           |            |           |           |      |       |     
|                           |          |                                 |                                         | Total cost of revenues |            |           | 4,785,860 |      |       |      | 38.3       |           |            |           | 3,193,680 |      |       |      | 27.7       |           |            |            | 4,633,901 |      |       |       | 45.6 | 
|                           |          |                                 |                                         |                        |            |           |           |      |       |      |            |           |            |           |           |      |       |     
|Gross margin               |          |                                 | 7,716,267                               |                        |            |           | 61.7      |      |       |      | 8,317,755  |           |            |           | 72.3      |      |       |      | 5,524,449  |           |            |            | 54.4      |     
|Operating expenses:        |          |                                 |                                         |                        |            |           |           |      |       |      |            |           |            |           |           |      |       |      |            |           |            |            |           |     
|                           |          |                                 | Sales and marketing                     |                        |            | 4,781,641 |           |      |       | 38.2 |            |           |            | 5,116,062 |           |      |       | 44.5 |            |           |            | 5,375,205  |           |      |       | 52.9  |     
|                           |          |                                 | Research and development                |                        |            | 2,197,588 |           |      |       | 17.6 |            |           |            | 1,961,959 |           |      |       | 17.0 |            |           |            | 2,899,142  |           |      |       | 28.5  |     
|                           |          |                                 | General and administrative              |                        |            | 2,402,891 |           |      |       | 19.2 |            |           |            | 2,119,126 |           |      |       | 18.4 |            |           |            | 2,963,919  |           |      |       | 29.2  |     
|                           |          |                                 | Intangible assets amortization          |                        |            |          |           |      |       |     |            |           |            | 146,746   |           |      |       | 1.3  |            |           |            | 346,439    |           |      |       | 3.4   |     
|                           |          |                                 | Restructuring and other special charges |                        |            |          |           |      |       |     |            |           |            | (20,000   | )         |      |       | (0.2 | )          |           |            | (419,173   | )         |      |       | (4.1  | )   
|                           |          |                                 |                                         |                        |            |           |           |      |       |      |            |           |            |           |           |      |       |     
|                           |          |                                 | Total operating expenses                |                        |            | 9,382,120 |           |      |       | 75.0 |            |           |            | 9,323,893 |           |      |       | 81.0 |            |           |            | 11,165,532 |           |      |       | 109.9 |     
|                           |          |                                 |                                         |                        |            |           |           |      |       |      |            |           |            |           |           |      |       |     
|Loss from operations       |          |                                 | (1,665,853                              | )                      |            |           | (13.3     | )    |       |      | (1,006,138 | )         |            |           | (8.7      | )    |       |      | (5,641,083 | )         |            |            | (55.5     | )   
|Other income (expense) net |          |                                 | (28,399                                 | )                      |            |           | (0.2      | )    |       |      | (1,973,167 | )         |            |           | (17.1     | )    |       |      | (1,184,278 | )         |            |            | (11.7     | )   
|                           |          |                                 |                                         |                        |            |           |           |      |       |      |            |           |            |           |           |      |       |     
|Net loss                   |          | $                               | (1,694,252                              | )                      |            |           | (13.5     | )%   |       | $    | (2,979,305 | )         |            |           | (25.8     | )%   |       | $    | (6,825,361 | )         |            |            | (67.2     | )%  
|                           |          |                                 |                                         |                        |            |           |           |      |       |      |            |           |            |           |           |      |       |     



Years Ended December 31, 2004 and 2003




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







26



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##### Table of Contents





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







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

Sales and Marketing.


Research and Development.


General and Administrative.


Intangible Assets Amortization.


Other income (expense), net.


Years Ended December 31, 2003 and 2002




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







27



---



##### Table of Contents





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







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

Sales and Marketing.


Research and Development.


General and Administrative.


Intangible Assets Amortization.


Restructuring and other special charges. ,
t




Other income (expense), net.


28



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##### Table of Contents





Liquidity and Capital Resources


















Contractual Obligations




29



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##### Table of Contents





|                              |  |                        |       |           |        |   |     |       |  |     |       |  |  |   |     | 
|----------------------------- |  | ---------------------- | ----- | --------- | ------ | - | --- | ----- |  | --- | ----- |  |  | - | --- | 
|                              |  | Payments Due by Period |      
|                              |  |                        |      
|                              |  |                        |       | Less Than |        |   | 1-3 |       |  | 4-5 |      
|                              |  | Total                  |       |           | 1 Year |   |     | Years |  |     | Years | 
|                              |  |                        |       |           |        |   |     |       |  |     |       | 
|                              |  | (In thousands)         |      
|Capital lease obligations     |  | $                      | 105   |           |        | $ | 39  |       |  | $   | 47    |  |  | $ | 19  | 
|Operating lease obligations   |  |                        | 980   |           |        |   | 205 |       |  |     | 438   |  |  |   | 337 | 
|                              |  |                        |       |           |        |   |     |       |  |     |       | 
|Total contractual obligations |  | $                      | 1,085 |           |        | $ | 244 |       |  | $   | 485   |  |  | $ | 356 | 
|                              |  |                        |       |           |        |   |     |       |  |     |       | 



Off-Balance Sheet Arrangements




Recent Accounting Pronouncements




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




30



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##### Table of Contents



Forward Looking Statements









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







31



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##### Table of Contents








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



|                                                            |  |        |    | 
|----------------------------------------------------------- |  | ------ | -- | 
|                                                            |  | Page   |   
|                                                            |  | Number |   
|                                                            |  |        |   
|Report of Independent Registered Public
    Accounting Firm |  |        | 33 | 
|Consolidated Balance Sheets                                 |  |        | 34 | 
|Consolidated Statements of Operations                       |  |        | 35 | 
|Consolidated Statements of
    Stockholders Equity         |  |        | 36 | 
|Consolidated Statements of Cash Flows                       |  |        | 37 | 
|Notes to Consolidated Financial
    Statements              |  |        | 38 | 

32



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Report of Independent Registered Public Accounting Firm










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





33



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ServiceWare Technologies, Inc.





Consolidated Balance Sheets


|                                                                  |                                                                                                                                                                                              |                                                         |                                            |             |            |            |           |             |            |           | 
|----------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------------ | ----------- | ---------- | ---------- | --------- | ----------- | ---------- | --------- | 
|                                                                  |                                                                                                                                                                                              | December 31,                                            |                                           
|                                                                  |                                                                                                                                                                                              |                                                         |                                           
|                                                                  |                                                                                                                                                                                              | 2004                                                    |                                            |             | 2003       |           
|                                                                  |                                                                                                                                                                                              |                                                         |                                            |             |            |           
|ASSETS                                                           
|Current assets                                                    |                                                                                                                                                                                              |                                                         |                                            |             |            |            |           |            
|                                                                  | Cash and cash equivalents                                                                                                                                                                    |                                                         | $                                          | 2,522,305   |            |            | $         | 1,437,721   |           
|                                                                  | Marketable securities, available for sale                                                                                                                                                    |                                                         |                                            | 8,416,461   |            |            |           |            |           
|                                                                  | Accounts receivable, less allowance for doubtful accounts of
    $94,588 in 2004 and $100,000 in 2003                                                                                        |                                                         |                                            | 2,529,081   |            |            |           | 3,348,279   |           
|                                                                  | Prepaid expenses and other current assets                                                                                                                                                    |                                                         |                                            | 513,072     |            |            |           | 419,551     |           
|                                                                  |                                                                                                                                                                                              |                                                         |                                            |             |            |           
|                                                                  |                                                                                                                                                                                              |                                                         | Total current assets                       |             |            | 13,980,919 |           |             |            | 5,205,551 | 
|Non current assets                                                |                                                                                                                                                                                              |                                                         |                                            |             |            |            |           |            
|                                                                  | Property and equipment                                                                                                                                                                       |                                                         |                                            |             |            |            |           |             |           
|                                                                  |                                                                                                                                                                                              | Office furniture, equipment, and leasehold improvements |                                            |             | 1,510,616  |            |           |             | 1,509,819  |          
|                                                                  |                                                                                                                                                                                              | Computer equipment and software                         |                                            |             | 4,830,356  |            |           |             | 5,013,363  |          
|                                                                  |                                                                                                                                                                                              |                                                         |                                            |             |            |           
|                                                                  |                                                                                                                                                                                              |                                                         | Total property and equipment               |             |            | 6,340,972  |           |             |            | 6,523,182 | 
|                                                                  |                                                                                                                                                                                              | Less accumulated depreciation                           |                                            |             | (5,890,323 | )          |           |             | (6,001,671 | )        
|                                                                  |                                                                                                                                                                                              |                                                         |                                            |             |            |           
|                                                                  |                                                                                                                                                                                              |                                                         | 450,649                                    |             |            |            | 521,511   |            
|                                                                  | Purchased technology, net                                                                                                                                                                    |                                                         |                                            |            |            |            |           | 33,337      |           
|                                                                  | Goodwill                                                                                                                                                                                     |                                                         |                                            | 2,323,791   |            |            |           | 2,323,791   |           
|                                                                  | Other non current assets                                                                                                                                                                     |                                                         |                                            | 197,611     |            |            |           |            |           
|                                                                  |                                                                                                                                                                                              |                                                         |                                            |             |            |           
|                                                                  |                                                                                                                                                                                              |                                                         | Total long term assets                     |             |            | 2,972,051  |           |             |            | 2,878,639 | 
|                                                                  |                                                                                                                                                                                              |                                                         |                                            |             |            |           
|                                                                  |                                                                                                                                                                                              |                                                         | Total assets                               |             | $          | 16,952,970 |           |             | $          | 8,084,190 | 
|                                                                  |                                                                                                                                                                                              |                                                         |                                            |             |            |           
|                                                                 
|LIABILITIES AND STOCKHOLDERS EQUITY                             
|Current liabilities                                               |                                                                                                                                                                                              |                                                         |                                            |             |            |            |           |            
|                                                                  | Revolving line of credit                                                                                                                                                                     |                                                         | $                                          |            |            |            | $         | 250,000     |           
|                                                                  | Accounts payable                                                                                                                                                                             |                                                         |                                            | 1,693,333   |            |            |           | 1,098,978   |           
|                                                                  | Accrued compensation and benefits                                                                                                                                                            |                                                         |                                            | 407,014     |            |            |           | 274,438     |           
|                                                                  | Deferred revenue  licenses                                                                                                                                                                  |                                                         |                                            | 378,885     |            |            |           | 22,548      |           
|                                                                  | Deferred revenue  services                                                                                                                                                                  |                                                         |                                            | 2,720,380   |            |            |           | 2,457,931   |           
|                                                                  | Current portion of capital lease obligations                                                                                                                                                 |                                                         |                                            | 34,211      |            |            |           | 41,698      |           
|                                                                  | Other current liabilities                                                                                                                                                                    |                                                         |                                            | 571,919     |            |            |           | 478,583     |           
|                                                                  |                                                                                                                                                                                              |                                                         |                                            |             |            |           
|                                                                  |                                                                                                                                                                                              |                                                         | Total current liabilities                  |             |            | 5,805,742  |           |             |            | 4,624,176 | 
|Convertible debt, net of unamortized discount of $979,680 in 2003 |                                                                                                                                                                                              |                                                         |                                           |             |            |            | 2,753,033 |            
|Non current deferred revenue                                      |                                                                                                                                                                                              |                                                         | 322,676                                    |             |            |            | 545,618   |            
|Capital lease obligations                                         |                                                                                                                                                                                              |                                                         | 60,961                                     |             |            |            | 54,117    |            
|                                                                  |                                                                                                                                                                                              |                                                         |                                            |             |            |           
|                                                                  |                                                                                                                                                                                              |                                                         | Total liabilities                          |             |            | 6,189,379  |           |             |            | 7,976,944 | 
|Commitments and Contingencies                                     |                                                                                                                                                                                              |                                                         |                                            |             |            |            |           |            
|Stockholders equity                                              |                                                                                                                                                                                              |                                                         |                                            |             |            |            |           |            
|                                                                  | Common stock, $0.01 par value; 50,000,000 shares
    authorized, 5,268,899 and 2,468,454 shares issued and
    5,252,241 and 2,432,501 shares outstanding in 2004 and
    2003, respectively |                                                         |                                            | 526,890     |            |            |           | 246,845     |           
|                                                                  | Additional paid-in capital                                                                                                                                                                   |                                                         |                                            | 83,360,602  |            |            |           | 76,432,608  |           
|                                                                  | Treasury stock, at cost, 16,655 and 35,952 shares in 2004
    and 2003, respectively                                                                                                         |                                                         |                                            | (62,166     | )          |            |           | (133,568    | )         
|                                                                  | Deferred compensation                                                                                                                                                                        |                                                         |                                            | (161,682    | )          |            |           |            |           
|                                                                  | Warrants                                                                                                                                                                                     |                                                         |                                            | 4,765,479   |            |            |           | 46,400      |           
|                                                                  | Accumulated other comprehensive income                                                                                                                                                       |                                                         |                                            | 513,759     |            |            |           |            |           
|                                                                  | Accumulated deficit                                                                                                                                                                          |                                                         |                                            | (78,179,291 | )          |            |           | (76,485,039 | )         
|                                                                  |                                                                                                                                                                                              |                                                         |                                            |             |            |           
|                                                                  |                                                                                                                                                                                              |                                                         | Total stockholders equity                 |             |            | 10,763,591 |           |             |            | 107,246   | 
|                                                                  |                                                                                                                                                                                              |                                                         |                                            |             |            |           
|                                                                  |                                                                                                                                                                                              |                                                         | Total liabilities and stockholders equity |             | $          | 16,952,970 |           |             | $          | 8,084,190 | 
|                                                                  |                                                                                                                                                                                              |                                                         |                                            |             |            |           



34



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##### Table of Contents



ServiceWare Technologies, Inc.





Consolidated Statements of Operations


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



35



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##### Table of Contents



ServiceWare Technologies, 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)   |          |   | Deficit |           |            | Equity |  
|                             |                                                                          |              |           |           |            |   |         |                |  |   |            |           |   |        |               |             |              |   |             |          |  |               |          |          |   |         |           |            |        |  
|Balance at December 31, 2001 |                                                                          |              | 2,382,816 |           |            | $ | 246,549 |                |  | $ | 71,774,297 |           |   |        | 82,675        |             |              | $ | (307,160    | )        |  | $             | (113,896 | )        |   | $       | 1,414,564 |            |        | $ | (24,263 | )       |   | $ | (66,680,373 | )          |   | $ | 6,309,718  |           
|                             | Exercise of stock options                                                |              |           | 16,000    |            |   |         |               |  |   |            | (13,144   | ) |        |               | (16,000     | )            |   |             | 59,444   |  |               |          |         |   |         |           |           |        |   |         |        |   |   |             |           |   |   |            | 46,300     |  
|                             | Issuance of stock for Employee Stock Purchase Plan                       |              |           | 9,520     |            |   |         | 296            |  |   |            | 6,161     |   |        |               | (6,558      | )            |   |             | 24,365   |  |               |          |         |   |         |           |           |        |   |         |        |   |   |             |           |   |   |            | 30,822     |  
|                             | Stock based compensation                                                 |              |           |          |            |   |         |               |  |   |            | 78,344    |   |        |               |            |              |   |             |         |  |               |          |         |   |         |           |           |        |   |         |        |   |   |             |           |   |   |            | 78,344     |  
|                             | Amortization of warrants                                                 |              |           |          |            |   |         |               |  |   |            |          |   |        |               |            |              |   |             |         |  |               |          | 104,348  |   |         |           |           |        |   |         |        |   |   |             |           |   |   |            | 104,348    |  
|                             | Beneficial conversion feature of convertible notes                       |              |           |          |            |   |         |               |  |   |            | 2,338,068 |   |        |               |            |              |   |             |         |  |               |          |         |   |         |           |           |        |   |         |        |   |   |             |           |   |   |            | 2,338,068  |  
|                             | Other comprehensive income (loss):                                       |              |           |           |            |   |         |                |  |   |            |           |   |        |               |             |              |   |             |          |  |               |          |          |   |         |           |            |        |   |         |         |   |   |             |            |   |   |            |            |  
|                             | Currency translation adjustment                                          |              |           |          |            |   |         |               |  |   |            |          |   |        |               |            |              |   |             |         |  |               |          |         |   |         |           |           |        |   |         | (12,556 | ) |   |             |           |   |   |            | (12,556    | )
|                             | Net loss                                                                 |              |           |          |            |   |         |               |  |   |            |          |   |        |               |            |              |   |             |         |  |               |          |         |   |         |           |           |        |   |         |        |   |   |             | (6,825,361 | ) |   |            | (6,825,361 | )
|                             |                                                                          |              |           |           |            |   |         |                |  |   |            |           |   |        |               |             |              |   |             |          |  |               |          |          |   |         |           |            |        |  
|                             | Total other comprehensive loss                                           |              |           |          |            |   |         |               |  |   |            |          |   |        |               |            |              |   |             |         |  |               |          |         |   |         |           |           |        |   |         |        |   |   |             |           |   |   |            | (6,837,917 | )
|                             |                                                                          |              |           |           |            |   |         |                |  |   |            |           |   |        |               |             |              |   |             |          |  |               |          |          |   |         |           |            |        |  
|Balance at December 31, 2002 |                                                                          |              | 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     |   |   |            |            |  
|                             | Issuance of stock for Employee Stock Purchase Plan                       |              |           | 15,105    |            |   |         |               |  |   |            | (17,602   | ) |        |               | (15,105     | )            |   |             | 56,123   |  |               |          |         |   |         |           |           |        |   |         |        |   |   |             | 38,521     |   |   |            |            |  
|                             | 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      |  
|                             | Other comprehensive income (loss):                                       |              |           |           |            |   |         |                |  |   |            |           |   |        |               |             |              |   |             |          |  |               |          |          |   |         |           |            |        |   |         |         |   |   |             |            |   |   |            |            |  
|                             | Currency translation adjustment                                          |              |           |          |            |   |         |               |  |   |            |          |   |        |               |            |              |   |             |         |  |               |          |         |   |         |           |           |        |   |         | 36,819  |   |   |             |           |   |   |            | 36,819     |  
|                             | Net loss                                                                 |              |           |          |            |   |         |               |  |   |            |          |   |        |               |            |              |   |             |         |  |               |          |         |   |         |           |           |        |   |         |        |   |   |             | (2,979,305 | ) |   |            | (2,979,305 | )
|                             |                                                                          |              |           |           |            |   |         |                |  |   |            |           |   |        |               |             |              |   |             |          |  |               |          |          |   |         |           |            |        |  
|                             | Total other comprehensive loss                                           |              |           |          |            |   |         |               |  |   |            |          |   |        |               |            |              |   |             |         |  |               |          |         |   |         |           |           |        |   |         |        |   |   |             |           |   |   |            | (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   |   |        |               |            |              |   |             |         |  |               |          |         |   |         |           |           |        |   |         |        |   |   |             |           |   |   |            | 8,351      |  
|                             | Issuance of stock under Employee Stock Purchase Plan                     |              |           | 1,697     |            |   |         |               |  |   |            | 2,069     |   |        |               | (1,697      | )            |   |             | 6,282    |  |               |          |         |   |         |           |           |        |   |         |        |   |   |             |           |   |   |            | 232,672    |  
|                             | Issuance of common stock and warrants, net of $574 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    |  
|                             | Other comprehensive income (loss):                                       |              |           |           |            |   |         |                |  |   |            |           |   |        |               |             |              |   |             |          |  |               |          |          |   |         |           |            |        |   |         |         |   |   |             |            |   |   |            |            |  
|                             | Unrealized gain on short term investments                                |              |           |          |            |   |         |               |  |   |            |          |   |        |               |            |              |   |             |         |  |               |          |         |   |         |           |           |        |   |         | 513,759 |   |   |             |           |   |   |            | 513,759    |  
|                             | Net loss                                                                 |              |           |          |            |   |         |               |  |   |            |          |   |        |               |            |              |   |             |         |  |               |          |         |   |         |           |           |        |   |         |        |   |   |             | (1,694,252 | ) |   |            | (1,694,252 | )
|                             |                                                                          |              |           |           |            |   |         |                |  |   |            |           |   |        |               |             |              |   |             |          |  |               |          |          |   |         |           |            |        |  
|                             | Total comprehensive loss                                                 |              |           |          |            |   |         |               |  |   |            |          |   |        |               |            |              |   |             |         |  |               |          |         |   |         |           |           |        |   |         |        |   |   |             |           |   |   |            | (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 |           
|                             |                                                                          |              |           |           |            |   |         |                |  |   |            |           |   |        |               |             |              |   |             |          |  |               |          |          |   |         |           |            |        |  



36



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##### Table of Contents



ServiceWare Technologies, Inc.





Consolidated Statements of Cash Flows


|                                                                                    |                                                                                     |                                                                                |                                   |           |           |          |            |           |           |            |            |           |           |            |  
|----------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------- | --------- | --------- | -------- | ---------- | --------- | --------- | ---------- | ---------- | --------- | --------- | ---------- | -
|                                                                                    |                                                                                     | Year Ended December 31,                                                        |                                  
|                                                                                    |                                                                                     |                                                                                |                                  
|                                                                                    |                                                                                     | 2004                                                                           |                                   |           | 2003      |          |            | 2002      |          
|                                                                                    |                                                                                     |                                                                                |                                   |           |           |          |            |           |          
|Cash flows from operating activities                                                |                                                                                     |                                                                                |                                   |           |           |          |            |           |           |            |            |          
|Net loss                                                                            |                                                                                     | $                                                                              | (1,694,252                        | )         |           | $        | (2,979,305 | )         |           | $          | (6,825,361 | )        
|Adjustments to reconcile net loss to net cash provided by (used
    in) operations: |                                                                                     |                                                                                |                                   |           |           |          |            |           |           |            |            |          
|                                                                                    | Non cash items:                                                                     |                                                                                |                                   |           |           |          |            |           |           |            |            |           |          
|                                                                                    |                                                                                     | Depreciation                                                                   |                                   |           | 316,267   |          |            |           | 801,195   |            |            |           | 1,654,655 |           
|                                                                                    |                                                                                     | Amortization of intangible assets and warrants                                 |                                   |           | 33,337    |          |            |           | 206,297   |            |            |           | 800,710   |           
|                                                                                    |                                                                                     | Warrants issued in connection with settlement of lawsuit                       |                                   |           | 104,925   |          |            |           |          |            |            |           |          |           
|                                                                                    |                                                                                     | Amortization of beneficial conversion feature related to
    convertible notes |                                   |           | 1,162,150 |          |            |           | 1,429,603 |            |            |           | 885,948   |           
|                                                                                    |                                                                                     | Amortization of discount on convertible notes                                  |                                   |           | 50,196    |          |            |           | 115,341   |            |            |           | 109,456   |           
|                                                                                    |                                                                                     | Interest expense paid by issuing convertible notes                             |                                   |           | 105,760   |          |            |           | 347,032   |            |            |           | 135,681   |           
|                                                                                    |                                                                                     | Provision for doubtful accounts                                                |                                   |           |          |          |            |           | 25,000    |            |            |           | (70,000   | )         
|                                                                                    |                                                                                     | Stock based compensation                                                       |                                   |           | 136,270   |          |            |           |          |            |            |           | 78,344    |           
|                                                                                    |                                                                                     | Non cash portion of legal settlement                                           |                                   |           | (850,000  | )        |            |           |          |            |            |           |          |           
|                                                                                    |                                                                                     | Other non cash items                                                           |                                   |           | (7,362    | )        |            |           | 32,905    |            |            |           | (17,885   | )         
|                                                                                    |                                                                                     | Changes in operating assets and liabilities:                                   |                                   |           |           |          |            |           |           |            |            |           |           |           
|                                                                                    |                                                                                     |                                                                                | Accounts receivable               |           |           | 819,198  |            |           |           | (1,839,021 | )          |           |           | 517,094    |  
|                                                                                    |                                                                                     |                                                                                | Other assets                      |           |           | (230,132 | )          |           |           | (7,354     | )          |           |           | 635,543    |  
|                                                                                    |                                                                                     |                                                                                | Accounts payable                  |           |           | 594,355  |            |           |           | (53,995    | )          |           |           | 515,662    |  
|                                                                                    |                                                                                     |                                                                                | Accrued compensation and benefits |           |           | 132,576  |            |           |           | 114,440    |            |           |           | (640,776   | )
|                                                                                    |                                                                                     |                                                                                | Deferred revenue                  |           |           | 395,844  |            |           |           | 870,830    |            |           |           | (1,861,824 | )
|                                                                                    |                                                                                     |                                                                                | Other liabilities                 |           |           | 116,156  |            |           |           | (15,923    | )          |           |           | (1,175,685 | )
|                                                                                    |                                                                                     |                                                                                |                                   |           |           |          |            |           |          
|Net cash provided by (used in) operating activities                                 |                                                                                     |                                                                                | 1,185,288                         |           |           |          | (952,955   | )         |           |            | (5,258,438 | )        
|                                                                                    |                                                                                     |                                                                                |                                   |           |           |          |            |           |          
|Cash flows from investing activities                                                |                                                                                     |                                                                                |                                   |           |           |          |            |           |           |            |            |          
|Purchase of short term investments                                                  |                                                                                     |                                                                                | (7,052,702                        | )         |           |          |           |           |           |            | (3,004,882 | )        
|Sales of short term investments                                                     |                                                                                     |                                                                                |                                  |           |           |          | 500,080    |           |           |            | 2,491,003  |          
|Property and equipment acquisitions                                                 |                                                                                     |                                                                                | (207,814                          | )         |           |          | (94,558    | )         |           |            | (13,602    | )        
|Payments for purchase of InfoImage assets                                           |                                                                                     |                                                                                |                                  |           |           |          |           |           |           |            | (100,000   | )        
|Increase in restricted cash                                                         |                                                                                     |                                                                                | (61,000                           | )         |           |          |           |           |           |            |           |          
|Proceeds from sale of equipment                                                     |                                                                                     |                                                                                | 1,460                             |           |           |          | 12,153     |           |           |            | 15,620     |          
|                                                                                    |                                                                                     |                                                                                |                                   |           |           |          |            |           |          
|Net cash (used in) provided by investing activities                                 |                                                                                     |                                                                                | (7,320,056                        | )         |           |          | 417,675    |           |           |            | (611,861   | )        
|                                                                                    |                                                                                     |                                                                                |                                   |           |           |          |            |           |          
|Cash flows from financing activities                                                |                                                                                     |                                                                                |                                   |           |           |          |            |           |           |            |            |          
|Repayments of principal of capital lease obligation                                 |                                                                                     |                                                                                | (32,332                           | )         |           |          | (38,500    | )         |           |            | (37,310    | )        
|Repayments of principal of term loan                                                |                                                                                     |                                                                                |                                  |           |           |          |           |           |           |            | (258,197   | )        
|Repayments of borrowings under revolving line of credit                             |                                                                                     |                                                                                | (250,000                          | )         |           |          | (800,000   | )         |           |            |           |          
|Proceeds from borrowings under revolving line of credit                             |                                                                                     |                                                                                |                                  |           |           |          | 250,000    |           |           |            | 800,000    |          
|Proceeds from issuance of convertible notes, net of debt
    issuance costs         |                                                                                     |                                                                                |                                  |           |           |          |           |           |           |            | 2,975,000  |          
|Proceeds from equity funding, net of issuance costs                                 |                                                                                     |                                                                                | 7,419,096                         |           |           |          |           |           |           |            |           |          
|Proceeds from stock option and employee stock purchase plan
    issuances           |                                                                                     |                                                                                | 82,588                            |           |           |          | 63,702     |           |           |            | 76,960     |          
|                                                                                    |                                                                                     |                                                                                |                                   |           |           |          |            |           |          
|Net cash provided by (used in) financing activities                                 |                                                                                     |                                                                                | 7,219,352                         |           |           |          | (524,798   | )         |           |            | 3,556,453  |          
|                                                                                    |                                                                                     |                                                                                |                                   |           |           |          |            |           |          
|Effect of exchange rate changes on cash                                             |                                                                                     |                                                                                |                                  |           |           |          | 36,598     |           |           |            | (14,873    | )        
|Increase (decrease) in cash and cash equivalents                                    |                                                                                     |                                                                                | 1,084,584                         |           |           |          | (1,023,480 | )         |           |            | (2,328,719 | )        
|Cash and cash equivalents at beginning of year                                      |                                                                                     |                                                                                | 1,437,721                         |           |           |          | 2,461,201  |           |           |            | 4,789,920  |          
|                                                                                    |                                                                                     |                                                                                |                                   |           |           |          |            |           |          
|Cash and cash equivalents at end of year                                            |                                                                                     | $                                                                              | 2,522,305                         |           |           | $        | 1,437,721  |           |           | $          | 2,461,201  |          
|                                                                                    |                                                                                     |                                                                                |                                   |           |           |          |            |           |          
|Supplemental disclosures of cash flow information                                   |                                                                                     |                                                                                |                                   |           |           |          |            |           |           |            |            |          
|Cash paid during the year for:                                                      |                                                                                     |                                                                                |                                   |           |           |          |            |           |           |            |            |          
|                                                                                    | Interest                                                                            |                                                                                | $                                 | 9,765     |           |          | $          | 14,613    |           |            | $          | 21,444    |          
|Supplemental disclosures of non-cash transactions                                   |                                                                                     |                                                                                |                                   |           |           |          |            |           |           |            |            |          
|                                                                                    | Conversion of convertible debt and accrued interest to common
    stock             |                                                                                | $                                 | 3,838,467 |           |          | $          |          |           |            | $          |          |          
|                                                                                    | Expiration of warrants at no consideration                                          |                                                                                | $                                 |          |           |          | $          | 1,368,164 |           |            | $          |          |          
|                                                                                    | Exercise of warrants by bank                                                        |                                                                                | $                                 | 22,820    |           |          | $          |          |           |            | $          |          |          
|                                                                                    | Unrealized gain on short term investments                                           |                                                                                | $                                 | 513,759   |           |          | $          |          |           |            | $          |          |          
|                                                                                    | Property, plant, and equipment acquired under capital leases                        |                                                                                | $                                 | 31,689    |           |          | $          |          |           |            | $          | 92,000    |          
|                                                                                    | Increase in Additional Paid-In Capital related to beneficial
    conversion feature |                                                                                | $                                 | 232,672   |           |          | $          | 906,799   |           |            | $          | 2,338,068 |          
|                                                                                    | Non cash portion of legal settlement                                                |                                                                                | $                                 | 850,000   |           |          | $          |          |           |            | $          |          |          



37



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##### Table of Contents



ServiceWare Technologies, Inc.





Notes to Consolidated Financial Statements


December 31, 2004




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









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







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

Principles of Consolidation




Revenue Recognition




38



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)






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





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







Cost of revenues






Cash and Cash Equivalents




Restricted Cash




Marketable securities, available for sale




39



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)






Accounts receivable and allowance for doubtful accounts




Property and Equipment




Impairment of long-lived assets




Internal Use Computer Software




40



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)


Intangible Assets and Goodwill






Goodwill and
Other Intangible Assets


Concentration of Credit Risk/ Major Customers






Capitalized Software




41



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)


Advertising Costs




Foreign Currency Translation




Stock Based Compensation






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



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

42



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




Use of Estimates




Net Loss Per Share




Other Comprehensive Income (Loss)




Impact of Recently Issued Accounting Standards




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




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ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)






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





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



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



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

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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




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



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





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

Credit Facilities




Convertible Notes








45



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)














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





46



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




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



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





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

Common Stock and Preferred Stock








Stock Split




47



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)


Stock offering








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





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

48



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##### Table of Contents



ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




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



Employee Stock Purchase Plan




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ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




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



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



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



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ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




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



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











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



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

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ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




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







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



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





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



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ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




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





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

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






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



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



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





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





|                                            |  |            |           |       |            |   |         |            |  |   |         |   |  |   |           | 
|------------------------------------------- |  | ---------- | --------- | ----- | ---------- | - | ------- | ---------- |  | - | ------- | - |  | - | --------- | 
|                                            |  |            |           | Gross |            |   | Gross   |            |  |  
|                                            |  | Historical |           |       | Unrealized |   |         | Unrealized |  |   | Fair    |  
|                                            |  | Cost       |           |       | Gain       |   |         | Loss       |  |   | 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 preferred stock                |  |            | 5,232,041 |       |            |   |        |            |  |   |        |   |  |   | 5,232,041 | 
|                                            |  |            |           |       |            |   |         |            |  |   |         |  
|Total current available for sale securities |  | $          | 7,902,702 |       |            | $ | 553,933 |            |  | $ | (40,174 | ) |  | $ | 8,416,461 | 
|                                            |  |            |           |       |            |   |         |            |  |   |         |  





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ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)






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

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



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









| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Without any admission of liability by either party, the Company
    and Primus agreed to dismiss with prejudice all the claims,
    counterclaims and reply claims in the Lawsuit and to deliver to
    each other mutual general releases.                                                                                                                                                                                        
|
| |  | The Company agreed to grant to Primus and its affiliates,
    including ATG, a fully paid, irrevocable, nonexclusive,
    nontransferable (with certain exceptions specified in the
    agreement), worldwide, perpetual limited license under the
    patents at issue in the Lawsuit and a covenant not to sue under
    those patents.                                                                                          
|
| |  | Primus agreed to pay the Company the sum of $800,000 in cash and
    ATG agreed to guarantee this cash payment obligation.                                                                                                                                                                                                                                                                                                         
|
| |  | Primus agreed to issue to the Company, immediately prior to the
    closing of ATGs acquisition of Primus, shares of Primus
    common stock having a value of $850,000 based on ATGs
    stock price at the time of issuance and without taking into
    account any future fluctuations in the stock price. Although the
    Company agreed to certain restrictions on transfer of the shares
    of ATG common stock issued to

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ServiceWare Technologies, Inc.


Notes to Consolidated Financial
Statements  (Continued)




| |  |                                                                                                                                                                                                         
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Company in connection with the acquisition by ATG of Primus,
    the Company sold all of its shares of ATG common stock in first
    quarter 2005, for an aggregate gross sales price of $1,018,250.







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









55



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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.


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   |  |     | 43 |  |                            | President, Chief Executive Officer and Director               
|Kent Heyman       |  |     | 49 |  |                            | Director (Chairman of the Board)                              
|David Schwab      |  |     | 47 |  |                            | Director                                                      
|Thomas Shanahan   |  |     | 58 |  |                            | Director                                                      
|Thomas Unterberg  |  |     | 74 |  |                            | Director                                                      
|Timothy Wallace   |  |     | 47 |  |                            | Director                                                      
|Mark Angel        |  |     | 46 |  |                            | Chief Technology Officer                                      
|Scott Schwartzman |  |     | 42 |  |                            | Chief Operating Officer, Chief Financial Officer and Treasurer
|Frank Lauletta    |  |     | 35 |  |                            | General Counsel and Secretary                                 

Bruce Armstrong


56



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Kent Heyman


David Schwab


Thomas P. Shanahan


Thomas Unterberg


Timothy Wallace


Mark Angel


57



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Scott Schwartzman


Frank Lauletta








Section 16(a) Beneficial Ownership Reporting
Compliance






Code of Ethics


www.knova.com


58



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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 (#) | 
|                                                                           |  |      |      |                     |     |              |                     |     |            |              |        |  |       |            |        |     |             | 
|Kent Heyman, president and chief executive officer(1)                      |  |      | 2004 |                     |     |              | 225,000             |     |            |              | 42,500 |  |       |            | 16,450 |     |             |  | 147,115 |  |  |  | 800,000 | 
|                                                                           |  |      |      |                     |     |              |                     |     |            |              |        |  |       |            |        |     |             | 
|                                                                           |  |      | 2003 |                     |     |              | 226,173             |     |            |              |       |  |       |            | 14,606 |     |             |  |        |  |  |  |        | 
|                                                                           |  |      |      |                     |     |              |                     |     |            |              |        |  |       |            |        |     |             | 
|                                                                           |  |      | 2002 |                     |     |              | 225,000             |     |            |              |       |  |       |            | 5,500  | (2) |             |  |        |  |  |  | 800,000 | 
|                                                                           |  |      |      |                     |     |              |                     |     |            |              |        |  |       |            |        |     |             | 
|Scott Schwartzman, chief operating officer and chief financial
    officer |  |      | 2004 |                     |     |              | 195,000             |     |            |              | 31,875 |  |       |            |       |     |             |  | 110,337 |  |  |  | 500,000 | 
|                                                                           |  |      |      |                     |     |              |                     |     |            |              |        |  |       |            |        |     |             | 
|                                                                           |  |      | 2003 |                     |     |              | 175,000             |     |            |              | 7,500  |  |       |            |       |     |             |  |        |  |  |  | 250,000 | 
|                                                                           |  |      |      |                     |     |              |                     |     |            |              |        |  |       |            |        |     |             | 
|                                                                           |  |      | 2002 |                     |     |              | 175,000             |     |            |              | 10,000 |  |       |            |       |     |             |  |        |  |  |  | 250,000 | 
|                                                                           |  |      |      |                     |     |              |                     |     |            |              |        |  |       |            |        |     |             | 
|Lokesh Seth, chief technology officer(3)                                   |  |      | 2004 |                     |     |              | 143,750             |     |            |              | 9,000  |  |       |            | 3,250  | (2) |             |  |        |  |  |  | 550,000 | 
|                                                                           |  |      |      |                     |     |              |                     |     |            |              |        |  |       |            |        |     |             | 
|                                                                           |  |      | 2003 |                     |     |              | 140,000             |     |            |              | 4,100  |  |       |            |       |     |             |  |        |  |  |  | 75,000  | 
|                                                                           |  |      |      |                     |     |              |                     |     |            |              |        |  |       |            |        |     |             | 
|                                                                           |  |      | 2002 |                     |     |              | 135,567             |     |            |              | 10,000 |  |       |            |       |     |             |  |        |  |  |  | 65,000  | 
|                                                                           |  |      |      |                     |     |              |                     |     |            |              |        |  |       |            |        |     |             | 






|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|(1) | Mr. Heyman now serves as non-executive chairman of the
    board effective February 2005.
|   
|(2) | Includes contributions by us under our 401(k) Plan.                                      
|   
|(3) | As of April 2005, Mr. Seth will be leaving employment with
    us.                       



Compensation Committee Interlocks and Insider
Participation




Employment Agreements and Change of Control Arrangements




59



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##### Table of Contents









Option Grants in Last Fiscal Year




|                  |  |            |        |            |            |  |      |          |  |               |            |  |  |            |                          |  |                      |  |          |  |  |   |         |  |  |   |         | 
|----------------- |  | ---------- | ------ | ---------- | ---------- |  | ---- | -------- |  | ------------- | ---------- |  |  | ---------- | ------------------------ |  | -------------------- |  | -------- |  |  | - | ------- |  |  | - | ------- | 
|                  |  |            |        | % of Total |            |  |      |          |  |               |            |  |  |            |                         
|                  |  | Number of  |        |            | Options    |  |      |          |  |               |            |  |  |           
|                  |  | Securities |        |            | Granted to |  |      |          |  | Market Price  |            |  |  |            | Potential Realized Value | 
|                  |  | Underlying |        |            | Employees  |  |      |          |  | or Fair Value |            |  |  |            | at Assumed Annual        | 
|                  |  | Options    |        |            | in Fiscal  |  |      | Exercise |  |               | on Date of |  |  | Expiration |                          |  | Rates of Stock Price | 
|                  |  | Granted    |        |            | Year       |  |      | Price    |  |               | Grant      |  |  | Date       |                          |  | Appreciation(1)      | 
|                  |  |            |        |            |            |  |      |          |  |               |            |  |  |            |                          |  |                      | 
|Kent Heyman       |  |            | 80,000 |            |            |  | 21.0 | %        |  | $             | 6.00       |  |  | $          | 6.00                     |  |                      |  | 4/6/2014 |  |  | $ | 301,869 |  |  | $ | 764,996 | 
|Scott Schwartzman |  |            | 50,000 |            |            |  | 13.1 | %        |  | $             | 6.00       |  |  | $          | 6.00                     |  |                      |  | 4/6/2014 |  |  | $ | 188,668 |  |  | $ | 478,123 | 
|Lokesh Seth       |  |            | 35,000 |            |            |  | 9.2  | %        |  | $             | 6.00       |  |  | $          | 6.00                     |  |                      |  | 7/1/2005 |  |  | $ | 132,068 |  |  | $ | 334,686 | 
|Lokesh Seth       |  |            | 20,000 |            |            |  | 5.3  | %        |  | $             | 5.90       |  |  | $          | 5.90                     |  |                      |  | 7/1/2005 |  |  | $ | 74,210  |  |  | $ | 188,062 | 






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

60



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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, 2004   |                  |                   | December 31, 2004(1) |                 
|                  |  | Shares Acquired on |   |  |                |                     | Exercisable (E)/ |                   |                      | Exercisable (E)/ |                  
|Name              |  | Exercise           |   |  | Value Realized |                     |                  | Unexercisable (U) |                      |                  | Unexercisable (U) | 
|                  |  |                    |   |  |                |                     |                  |                   |                      |                  |                   | 
|                  |  |                    |   |  |                |                     |                  |                   |                      |                  | 130,000 E         |  |  | $ | 294,000 E | 
|Kent Heyman       |  |                    |  |  |                |                     |                 |                   |                      |                  | 80,000 U          |  |  | $ | 0 U       | 
|                  |  |                    |   |  |                |                     |                  |                   |                      |                  | 87,500 E          |  |  | $ | 208,500 E | 
|Scott Schwartzman |  |                    |  |  |                |                     |                 |                   |                      |                  | 57,500 U          |  |  | $ | 21,000 U  | 
|                  |  |                    |   |  |                |                     |                  |                   |                      |                  | 16,250 E          |  |  | $ | 5,050 E   | 
|Lokesh Seth       |  |                    |  |  |                |                     |                 |                   |                      |                  | 58,750 U          |  |  | $ | 0 U       | 






|    |                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------
|(1) | Amounts shown are based upon the closing sale price for our
    common stock on December 31, 2004, which was $5.40 per
    share.

Compensation of Directors






61



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|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|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            |                       |           |      |                   |  |      |   | 
|(ii) Directors and executive officers:                                         |                                |                       |           |      |                   |  |      |  
|Bruce Armstrong, president, chief executive officer and director               |                                |                       | 33,750    | (6)  |                   |  | *    |  
|Kent Heyman, chairman of the board                                             |                                |                       | 228,379   | (7)  |                   |  | 2.5  | %
|David Schwab, director                                                         |                                |                       |          | (8)  |                   |  |     |  
|Thomas Shanahan, director                                                      |                                |                       |          | (9)  |                   |  |     |  
|Thomas Unterberg, director                                                     |                                |                       | 321,353   | (10) |                   |  | 3.7  | %
|Timothy Wallace, director                                                      |                                |                       | 51,000    | (11) |                   |  | *    |  
|Mark Angel, chief technology officer                                           |                                |                       | 21,250    | (12) |                   |  | *    |  
|Scott Schwartzman, chief operating officer and chief financial
    officer     |                                |                       | 118,125   | (13) |                   |  | 1.3  | %
|Lokesh Seth, former chief technology officer                                   |                                |                       | 25,020    | (14) |                   |  | *    |  
|Frank Lauletta, general counsel                                                |                                |                       | 7,750     | (15) |                   |  | *    |  
|(iii) All directors and current executive officers as a group
    (9 persons): |                                |                       | 781,677   | (16) |                   |  | 8.5  | %






| |   |              
| | - | -------------
| | * | 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
    8,754,900 shares of common stock outstanding on
    March 24, 2005, 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 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

62



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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | 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
    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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | 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) | Mr. Armstrongs shares consist of 33,750 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | (7) | Mr. Heymans shares include 210,000 shares of our
    common stock underlying options which are presently exercisable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (8) | 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.
|
| | (9) | See footnote (4) above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | 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 28,912 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.
|    
|(11) | Mr. Wallaces shares include 51,000 shares of our
    common stock underlying options which are presently exercisable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    
|(12) | Mr. Angels ownership includes 21,250 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. Schwartzmans shares include 107,500 shares
    of our common stock underlying options which are presently
    exercisable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    
|(14) | Mr. Seths shares include 25,000 shares of our
    common stock underlying options which are presently exercisable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    
|(15) | Mr. Laulettas shares include 7,750 shares of our
    commons stock underlying options which are presently exercisable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    
|(16) | See Notes 6 through 13 and Note 15.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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Securities Authorized for Issuance under Equity Compensation
Plans




|                                                           |  |                               |           |  |                           |                      |        |                         |  |  |         | 
|---------------------------------------------------------- |  | ----------------------------- | --------- |  | ------------------------- | -------------------- | ------ | ----------------------- |  |  | ------- | 
|                                                           |  |                               |           |  |                           | Number of Securities |       
|                                                           |  | Number of Securities to be    |           |  | Weighted-Average Exercise |                      |        | Remaining Available for | 
|                                                           |  | Issued upon Exercise of       |           |  | Price of Outstanding      |                      |        | Future Issuance under   | 
|                                                           |  | Outstanding Options, Warrants |           |  | Options, Warrants         |                      |        | Equity Compensation     | 
|                                                           |  | and Rights                    |           |  | and Rights                |                      |        | Plans                   | 
|                                                           |  |                               |           |  |                           |                      |        |                         | 
|Equity compensation plans approved by security holders     |  |                               | 867,047   |  |                           | $                    | 5.0951 |                         |  |  | 254,627 | 
|Equity compensation plans not approved by security holders |  |                               | 635,884   |  |                           | $                    | 7.5949 |                         |  |  | N/A     | 
|Total                                                      |  |                               | 1,502,931 |  |                           | $                    | 6.1527 |                         |  |  | 254,627 | 






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












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



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



65



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##### Table of Contents





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





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





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








PART IV







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

Financial Statements and Supplementary Data.


|                                                            |  |             |    | 
|----------------------------------------------------------- |  | ----------- | -- | 
|                                                            |  | Page Number |   
|                                                            |  |             |   
|Report of Independent Registered Public
    Accounting Firm |  |             | 33 | 
|Consolidated Balance Sheets                                 |  |             | 34 | 
|Consolidated Statements of Operations                       |  |             | 35 | 
|Consolidated Statements of
    Stockholders Equity         |  |             | 36 | 
|Consolidated Statements of Cash Flows                       |  |             | 37 | 
|Notes to Consolidated Financial
    Statements              |  |             | 38 | 

Financial Statement Schedules.


Exhibits.


|        |   |             |  |                                                                                                                                                 
|------- | - | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|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.(16)
|       
|        | 3 | .1          |  | Third Amended and Restated Certificate of Incorporation of the
    Company(1)                                                                   
|       
|        | 3 | .2          |  | Amended and Restated Bylaws of the Company(16)                                                                                                  
|       
|        | 3 | .3*         |  | Certificate of Amendment of Third Amended and Restated
    Certificate of Incorporation                                                         
|       
|        | 4 | .1          |  | Amended and Restated Registration Rights Agreement dated
    June 2, 2000.(2)                                                                   
|        | 4 | .2          |  | Registration Rights Agreement dated as of May 6, 2002
    between the Company and the purchasers of the
    10% Convertible Notes.(3)           
|       
|        | 4 | .3          |  | Form of Warrant issued to equity investors as of
    January 30, 2004(15)                                                                       

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##### Table of Contents



|        |    |      |             |                                                                                                                                                     
|------- | -- | ---- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |            
|Number  |    |      | Description
|        |    |      |            
|       
|        | 4  | .4*  |             | Form of Warrant issued to Kanisa stockholders as of
    February 8, 2005                                                                            
|        | 4  | .5   |             | Registration Rights Agreement, dated as of February 8,
    2005, by and among ServiceWare Technologies, Inc. and
    stockholders of Kanisa Inc.(16)
|       
|        | 10 | .1   |             | 2000 Stock Incentive Plan of the Company.(4)                                                                                                        
|       
|        | 10 | .2   |             | Employee Stock Purchase Plan of the Company.(4)                                                                                                     
|       
|        | 10 | .3   |             | Amended and Restated Stock Option Plan of the Company.(5)                                                                                           
|       
|        | 10 | .4   |             | Loan Agreements between the Company and certain of its officers
    during the first quarter of 2000.(5)                                            
|       
|        | 10 | .5   |             | License Agreement and Assignment, each dated July 23, 1999,
    between the Company and Bruce Molloy.(5)                                            
|       
|        | 10 | .6I  |             | Master Alliance Agreement, dated June 30, 2000, between the
    Company and Electronic Data Systems Corporation.(6)                                 
|       
|        | 10 | .7I  |             | Master Software License Agreement, dated June 30, 2000,
    between the Company and Electronic Data Systems Corporation.(6)                         
|       
|        | 10 | .8   |             | Common Stock Purchase Warrant of the Company in favor of
    Electronic Data Systems Inc.(6)                                                        
|       
|        | 10 | .9   |             | Warrant Purchase Agreement, dated June 2, 2000 between the
    Company and Electronic Data Systems.(6)                                              
|       
|        | 10 | .10  |             | ServiceWare Technologies, Inc. Change of Control Benefit Plan.(7)                                                                                   
|       
|        | 10 | .11I |             | Software License and Maintenance Agreement dated
    December 13, 2001 between the Company and Cingular Wireless
    LLC.(8)                        
|       
|        | 10 | .12  |             | Note Purchase Agreement dated as of May 6, 2002 between the
    Company and the purchasers identified therein.(9)                                   
|       
|        | 10 | .13  |             | Securities Purchase Agreement dated January 30, 2004.(12)                                                                                           
|       
|        | 10 | .14  |             | Employment Agreement dated January 26, 2004, between Scott
    Schwartzman and the Company.(14)(15)                                                 
|       
|        | 10 | .15  |             | Restricted Stock Agreement dated January 26, 2004, between
    Kent Heyman and the Company. (14)(15)                                                
|       
|        | 10 | .16  |             | Restricted Stock Agreement dated January 26, 2004, between
    Scott Schwartzman and the Company.(14)(15)                                           
|       
|        | 10 | .17  |             | 2004 Executive Compensation Plan for Kent Heyman.(14)(15)                                                                                           
|       
|        | 10 | .18  |             | 2004 Executive Compensation Plan for Scott Schwartzman.(14)(15)                                                                                     
|       
|        | 10 | .19  |             | Employment Agreement, effective as of February 8, 2005, by
    and between Kanisa Inc. and Bruce Armstrong.(14)(16)                                 
|       
|        | 10 | .20  |             | Employment Agreement, effective as of February 8, 2005, by
    and between Kanisa Inc. and Mark Angel.(14)(16)                                      
|       
|        | 10 | .21  |             | Agreement, effective as of February 8, 2005, by and between
    the Company and Kent Heyman.(14)(16)                                                
|       
|        | 10 | .22  |             | Restricted Stock Agreement dated March 29, 2004, between
    Kent Heyman and the Company(14)(17)                                                    
|       
|        | 10 | .23  |             | Restricted Stock Agreement dated March 29, 2004, between
    Scott Schwartzman and the Company(14)(17)                                              
|       
|        | 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                                                                               

67



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##### Table of Contents



|        |     |     |             |                                                                      
|------- | --- | --- | ----------- | ---------------------------------------------------------------------
|Exhibit |     |     |            
|Number  |     |     | Description
|        |     |     |            
|       
|        | 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) | Incorporated by reference to our Annual Report on Form 10-K
    for the fiscal year ended December 31, 2000.  
|
| | (2) | Incorporated by reference to our Registration Statement on
    Form S-1, as amended, filed on August 18, 2000.
|
| | (3) | Incorporated by reference to our Registration Statement on
    Form S-3 filed on June 19, 2002.               
|
| | (4) | Incorporated by reference to our Registration Statement on
    Form S-1 filed on March 31, 2000.              
|
| | (5) | Incorporated by reference to our Registration Statement on
    Form S-1, as amended, filed on April 7, 2000.  
|
| | (6) | Incorporated by reference to our Registration Statement on
    Form S-1, as amended, filed on July 13, 2000.  
|
| | (7) | Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2001.      
|
| | (8) | Incorporated by reference to our Annual Report on Form 10-K
    for the fiscal year ended December 31, 2001.  
|
| | (9) | Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2002.      



|     |                                                                                                                                                                  
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2002.                                                     
|    
|(11) | Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2003.                                                         
|    
|(12) | Incorporated by reference to our Current Report on Form 8-K
    filed on February 2, 2004.                                                                       
|    
|(13) | Incorporated by reference to our Annual Report on Form 10-K
    for the year ended December 31, 2002.                                                            
|    
|(14) | 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.
|    
|(15) | Incorporated by reference to our Annual Report on Form 10-K
    for the year ended December 31, 2003.                                                            
|    
|(16) | Incorporated by reference to our Current Report on Form 8-K
    dated February 8, 2005.                                                                          
|    
|(17) | Incorporated by reference to Pre-Effective Amendment to our
    Registration Statement on Form S-1 filed on June 8,
    2004.                                    



| |   |                
| | - | ---------------
| | * | Filed herewith.



68



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##### Table of Contents






Signatures






| |                               
| | ------------------------------
| | SERVICEWARE TECHNOLOGIES, INC.



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

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





|                                           |  |                                                         |  |                |  | 
|------------------------------------------ |  | ------------------------------------------------------- |  | -------------- |  | 
|Signature                                  |  | Capacity                                                |  | Date          
|                                           |  |                                                         |  |               
|                                          
|/s/ Bruce ArmstrongBruce
    Armstrong     |  | President, Principal Executive Officer and Director     |  | March 31, 2005
|                                          
|/s/ Scott SchwartzmanScott
    Schwartzman |  | Chief Financial Officer and Principal Financial Officer |  | March 31, 2005
|                                          
|/s/ Kelly BarefootKelly
    Barefoot       |  | Controller and Principal Accounting Officer             |  | March 31, 2005
|                                          
|/s/ Kent HeymanKent
    Heyman             |  | Director                                                |  | March 31, 2005
|                                          
|David
    Schwab                           |  | Director                                                |  | March   , 2005
|                                          
|Thomas
    Shanahan                        |  | Director                                                |  | March   , 2005
|                                          
|/s/ Thomas UnterbergThomas
    Unterberg   |  | Director                                                |  | March 31, 2005
|                                          
|/s/ Timothy WallaceTimothy
    Wallace     |  | Director                                                |  | March 31, 2005

69



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##### Table of Contents



INDEX TO EXHIBITS




|        |    |             |  |                                                                                        
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .3          |  | Certificate of Amendment of Third Amended and Restated
    Certificate of Incorporation
|       
|        | 4  | .4          |  | Form of Warrant issued to Kanisa stockholders as of
    February 8, 2005               
|       
|        | 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                                                            

70