SERVICEWARE TECHNOLOGIES INC/ PA - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

OR

[ ] 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
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SERVICEWARE TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 25-1647861
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
ONE NORTH SHORE CENTRE, 12 FEDERAL STREET, SUITE 15212
503 (Zip Code)
PITTSBURGH, PA
(Address of Principal Executive Offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(412) 222-4450

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Act. Yes [ ] No [X]

The aggregate market value of common equity held by non-affiliates of the
registrant as of June 30, 2003, the last business day of the registrant's most
recently completed second quarter, was $7,774,886, computed by reference to the
price at which the common equity was last sold on the Over the Counter Bulletin
Board on June 30, 2003, as reported in The Wall Street Journal. This figure has
been calculated by excluding shares owned beneficially by directors and
executive officers as a group from total outstanding shares solely for the
purpose of this response.

The number of shares of the registrant's Common Stock outstanding as of the
close of business on March 18, 2004 was 52,252,474.

DOCUMENTS INCORPORATED BY REFERENCE

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
EXHIBITS INDEX IS LOCATED ON PAGE 66

SERVICEWARE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003

TABLE OF CONTENTS

1

PART I

ITEM 1. BUSINESS

We were initially incorporated as a Pennsylvania corporation in January
1991 as ServiceWare, Inc. In July 1999, we acquired the Molloy Group, Inc., a
provider of knowledge-empowered software for strengthening customer
relationships. In May 2000, we changed our name to ServiceWare Technologies,
Inc. and reincorporated as a Delaware corporation. In August 2000, we closed our
initial public offering. Prior to July 2001, we had two reportable business
segments: Software and Content. In July 2001, we completed the sale of our
Content business to RightAnswers LLC ("RightAnswers"). Financial information
regarding revenues and long lived assets attributable to the United States
versus international is found in Note 16 to the consolidated financial
statements in Item 8 below. In response to poor financial performance and the
economic downturn, during 2001 we announced strategic corporate restructuring
programs pursuant to which we have significantly reduced costs and we have
focused our business exclusively on revenue growth opportunities in our Software
business. As part of the restructuring plans, approximately 180 employees were
laid off during 2001. In August 2002, we acquired all existing technology assets
and certain customer and vendor contracts of InfoImage, Inc., a privately held
enterprise portal company that filed for bankruptcy protection prior to our
agreement to acquire these assets.

Our primary office is located at One North Shore Centre, 12 Federal Street,
Suite 503, Pittsburgh, Pennsylvania 15212, and our Web site address is
www.serviceware.com. We have not incorporated by reference into this Annual
Report on Form 10-K the information on our Web site, and you should not consider
it to be a part of this document. Our Web site address is included in this
document for reference only. We make available free of charge (other than an
investor's own Internet access charges) through our website our Annual Report on
Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
amendments to these reports, through a link to the EDGAR database, as soon as
reasonably practicable after we electronically file such material with, or
furnish such material to, the Securities and Exchange Commission.

As used in this report, the terms "we", "us", "our", "our company" and
"ServiceWare" means ServiceWare Technologies, Inc. and its subsidiaries.

OVERVIEW

We are a provider of knowledge-powered support solutions that enable
organizations to deliver superior service for customers, employees and partners
by transforming information into knowledge. Our solutions allow customers to
capture enterprise knowledge, solve customer problems, reuse solutions and share
captured knowledge throughout the extended enterprise. Customers use our
knowledge-powered support solutions to achieve some or all of the following
benefits:

- Strengthen relationships with customers, partners, suppliers and
employees

- Decrease operating costs

- Improve creation, dissemination and sharing of enterprise knowledge

- Provide easy access to knowledge online on an enterprise-wide basis

- Integrate seamlessly with existing technology investments

With ServiceWare Enterprise(TM), our core software product line, our
customers can provide personalized, automated Web-based service tailored to the
needs of their applicable users. ServiceWare Enterprise is based on our patented
self-learning search technology called the Cognitive Processor(R). This
technology enables organizations to capture and manage repositories of
intellectual capital, or corporate knowledge, in a manner that can be easily
accessed by way of a browser to effectively answer inquiries made either over
the Web or through the telephone to a customer contact center or help desk.
Through the self-learning features of the Cognitive Processor, our ServiceWare
Enterprise products provide our customers an intelligent solution in that the
solutions have the capability to learn from each interaction and automatically
update themselves accordingly.

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The ServiceWare Enterprise suite is comprised of the following software
products:

ServiceWare This product is a Web-based, self-service product designed
Self-Service(TM): for use by an organization's customers, partners and
employees.
ServiceWare Agent(TM): This product is designed for use by Level 1 agents or for
any company that needs to provide a complete agent
workstation knowledge management center.
ServiceWare This product is designed for use by customer service, sales
Professional(TM): and field service personnel.
ServiceWare Architect(TM): This product is designed for quality assurance managers and
system administrators.

In addition to ServiceWare Enterprise, we have created a solution for
mid-market companies called ServiceWare Express(TM). ServiceWare Express is a
comprehensive product and services package that includes browser-based
applications, technical implementation, training services and customer support.
ServiceWare Express is designed to enable midsize enterprises or call center and
help desk divisions of large enterprises to effectively utilize corporate
knowledge to improve customer satisfaction, enhance service quality and reduce
operating costs.

We target the sale of our products throughout the United States and Europe.
Our customers represent a cross-section of industry leaders in the financial
services, technology, manufacturing, health care, entertainment, education and
government sectors. Our customers include EDS, H&R Block, AT&T Wireless,
Cingular Wireless, Fifth Third Bancorp, Green Mountain Energy, Reuters,
Countrywide Home Loans, Wausau Financial Systems, Raytheon Company, PAR
Technology, and QUALCOMM.

INDUSTRY BACKGROUND

BUSINESS CASE FOR KNOWLEDGE MANAGEMENT

The information age has increased the demand for immediate access to
customer data, product information and corporate knowledge, making the need to
retain intellectual capital greater than ever. At the same time, the loss of
corporate knowledge has been perpetuated by the downsizing and reorganizations
that are common in today's economy. To attain a competitive advantage in this
volatile market, we believe organizations are turning to Knowledge Management
solutions to improve the creation, preservation, dissemination and application
of knowledge throughout the enterprise. Knowledge Management can be used to
achieve a wide range of strategic business objectives from providing a superior
service experience for employees and customers to managing relationships with
partners and suppliers.

REQUIREMENTS OF A COMPREHENSIVE KNOWLEDGE MANAGEMENT SOLUTION

Increasingly, companies need to improve customer loyalty and retention
while also consolidating corporate and customer information into a single
knowledge repository. "Knowledge management" is the development of a formal
process that evaluates a company's organizational processes, people, and
technology and develops a system that uses the relationships between these
components to get the right information to the right people at the right time to
improve productivity. Knowledge management provides companies with a process to
capture, organize and disseminate enterprise knowledge to key audiences.

We believe knowledge management continues to gain acceptance, particularly
due to the growth of electronic commerce. We believe companies understand now
more than ever the need to protect intellectual capital, capture the knowledge
of its workforce and sustain a competitive advantage by focusing on the
effectiveness of employees, customers and partners.

To enable businesses to provide superior service, we believe a
comprehensive knowledge management solution needs to:

- provide the option for a self-service experience

- provide the end-user with the ability to escalate to assisted service and
seamlessly transfer information across all communication channels,
including e-mail, telephone, or chat, at any stage of interaction

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- consolidate the knowledge base and intellectual capital throughout the
organization and make it available throughout the extended enterprise

- learn through cumulative customer feedback and rapidly develop solutions
to allow the enterprise to provide proactive service to its end-users

- offer the flexibility necessary to integrate with existing solutions and
enable enterprises to rapidly deploy the technology

- scale cost-effectively as the organization's service needs grow

CALL CENTERS ARE EVOLVING INTO MULTI-CHANNEL CONTACT CENTERS

For the past several years, many companies have spent heavily to implement
technology based customer relationship management (CRM) software. The strategic
goal is to enhance pre- and post-sales customer relationships, improve customer
satisfaction and influence customer retention.

Traditionally, companies created call centers to handle only voice
interactions. Today, many call centers have evolved into multi-channel contact
centers that handle customer interactions by phone, e-mail, chat, Web, fax, and
instant messaging. Additionally, many companies seek to complement their ability
to offer high-quality human level based service provided by the support
organization with a Web-based self-service capability, also known as customer
service and support. The benefits of customer service and support include 24/7
availability, cost-savings, scalability, consistency, and improved customer
satisfaction and customer retention.

THE SERVICEWARE SOLUTION

ServiceWare provides knowledge-powered service and support solutions that
enable companies to strengthen relationships with their customers, partners,
suppliers and employees. We license software products to enterprises that form
the basis of their knowledge management strategy or function as a component of
their contact center or help desk infrastructure. Our solutions enable
businesses to capture enterprise knowledge, solve customer problems, reuse
solutions and share captured knowledge throughout the extended enterprise. Our
solutions also help the extended enterprise to access this knowledge online. In
addition, through the self-learning capabilities of our patented Cognitive
Processor search technology, the solutions generated by our products are
intelligent in that they are interactive, adaptable and have the capability to
update automatically. We believe our solutions provide our customers with a
number of key benefits, including:

- Decreased Operating Costs. By enabling end-users to access customer
service online and by aiding customer service agents to more effectively
handle user requests, our solutions often provide cost savings and
improve employee productivity. These savings and increased productivity
result from reduced telephone call volume, the ability to process more
end-user interactions per employee and reduced levels of employee
training.

- Strengthened Relationships with End-Users. Our solutions allow
enterprises to provide their customers and other end-users with improved,
timely and accurate service. Enterprises realize that the service
function provides them with their closest contact with their customers,
and, by providing superior self or assisted service, they can create
long-term customer satisfaction and loyalty. We believe that by providing
better and more user-friendly service, our solutions increase the
likelihood that a business' customers will complete specific transactions
and that the enterprise will be able to attract and retain its customers.

- Improved Dissemination of Enterprise Knowledge. ServiceWare Enterprise
enables our customers to develop a common knowledge base of intellectual
capital, which is collected from their business systems and experts
throughout their organization, and makes it available throughout the
extended enterprise. All communications from a business to its customers,
partners, suppliers or employees, whether through telephone support,
self-service, or e-mail, draw from this knowledge base. Additionally, the
patented Cognitive Processor technology contained in our ServiceWare
Enterprise provides a self-learning capability that continually learns
from each interaction. This enables the knowledge base to be up to date
and helps provide end-users with accurate answers to their questions.

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- Seamless Integration with Existing Solutions. Our products are designed
for rapid deployment, typically in eight to twelve weeks. ServiceWare
Enterprise helps our customers to preserve their investments in, and
deployments of, call center and help desk products, CRM solutions,
workflow tools, knowledge bases and other applications. Our solution
enhances these capabilities and integrates them into a cohesive and
automated Internet service infrastructure by integrating with
applications from leading companies such as Hewlett Packard,
Clarify/Amdocs, Remedy, and Siebel Systems. As a result, this supports
our customers' deployment of applications configured to suit their
particular customer service and support needs.

- Consistent Service Across Communication Channels. Our solutions allow
access to knowledge from a wide variety of communication channels. Our
proprietary software enables end-users to transfer inquiries easily from
self-help to e-mail responses to live interaction. Escalation of end-user
inquiries helps ensure that our clients efficiently apply the appropriate
level of resources toward their customers' satisfaction while reducing
the risk of losing a customer because of perceived unresponsiveness.

- Scalability for Large and Growing Enterprises. The architecture of
ServiceWare Enterprise allows both large and growing organizations to
maintain a consistent level of service as the volume of traffic across
their communication channels increases. By deploying in a cluster and
capitalizing on the capabilities of our J2EE architecture, our products
provide consistent responsiveness to end-user interactions despite rising
volumes of traffic.

STRATEGY

Our solutions enable enterprises to provide a Web-based platform by which
customers, partners, suppliers and employees access and manage business critical
knowledge. Our objective is to use this platform to become a leading worldwide
provider of Knowledge Management solutions. To achieve our goal, we intend to:

- Enhance Technology and Product Leadership. 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 design our
products to be highly scalable throughout the extended enterprise, easily
configurable and able to integrate with both front-end applications and
existing enterprise systems. We plan to continue to devote resources to
the development of new and innovative technologies, to increase
efficiencies, offer immediate answers and minimize service response time.
We intend to expand the current offering to incorporate advances in
knowledge acquisition.

- 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. Currently, we have strategic alliances with
Stratacom, M-Tech, Electronic Data Systems Corporation, Clarify/Amdocs,
Remedy, Siebel, Hewlett-Packard, Control F-1, and EPAm Systems. In
addition, in 2003 we joined the Consortium for Service Innovation, a
national, non-profit alliance of customer service organizations that are
working together to address industry-wide challenges. In the future, we
plan to increase our service capabilities by pursuing strategic
relationships with leading systems integrators and consultants.

- Further Develop International Presence. To capitalize on international
opportunities for our knowledge-powered solutions, we have completed the
first stage of our product localization efforts, concentrating on
European markets. The interface is currently available in French,
Spanish, German and Dutch. Furthermore, we intend to expand our
international presence through local distributors, including Merlin
Information Systems in the United Kingdom.

PRODUCTS

Our knowledge-powered service and support solutions enable organizations to
easily provide customers, partners, suppliers and employees with fast, accurate
answers to inquiries across various communication

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channels including the phone, e-mail, chat and the Web. Based on our software
and Cognitive Processor technology, ServiceWare Enterprise software empowers
organizations to deliver superior service and support, while reducing expenses.
ServiceWare Enterprise includes our ServiceWare Self-Service, ServiceWare
Professional and ServiceWare Architect software products.

ServiceWare Self-Service allows our customers to provide Web-based
self-service to their end-users. End-users can access the self-service solution
through the Internet or a corporate Intranet. This Web-based customer service
and support solution allows self-help users to access the knowledge base at any
time, using an easy-to-use, intuitive interface using a natural language query.
ServiceWare Self-Service can be customized to adopt the look and feel of our
customer's Web site.

ServiceWare Agent(TM) is designed for "Level 1" agents or for any company
that needs to provide a complete agent workstation knowledge management center.
The functionality of ServiceWare Agent is similar to ServiceWare's other
agent-facing application, ServiceWare Professional, but with a portal-based user
interface. Agent utilizes a side-by-side search capability, and contributions
are made on the same page as the search results to ensure ease of knowledge
entry. Agent also includes additional portal-like features, including common
links, urgent notices and agent-to-agent collaboration capabilities via e-mail,
instant messenger and expertise location.

ServiceWare Professional provides a Web-based application interface for
customer service professionals to more easily navigate through the knowledge
base, view various components of the knowledge base, capture and revise
additional knowledge, and provide accurate answers to end-user questions.
ServiceWare Professional includes a complete case management system that serves
as a workstation for customer service and support agents. Agents have a visual
queue of cases that can be viewed based on skills based routing. The system also
contains e-mail and chat components that enable agents to easily communicate
with customers and employees without having to pick up the phone. ServiceWare
Professional integrates with many types of customer relationship applications to
provide a seamless interface for a customer service professional.

ServiceWare Architect provides a set of knowledge tools that allows
customers' quality assurance managers and system administrators to design,
manage and maintain knowledge bases. ServiceWare Architect provides quality
assurance and workflow capabilities as well as administrative tools for all
necessary product suite functions.

ServiceWare Express is a comprehensive product and services package that
includes browser-based applications, technical implementation, training services
and customer support. ServiceWare Express is designed to enable midsize
enterprises or call center and help desk divisions of large enterprises to
effectively utilize corporate knowledge to improve customer satisfaction,
enhance service quality and reduce operating costs.

SERVICES

Professional Services. Our professional services team provides our
customers with pre- and post-sales services. Pre-sales consulting services
include our business impact analysis, which applies analytical methodologies and
an understanding of business processes to help organizations make an informed
decision regarding the choice of knowledge management as a technological
solution. Post-sales implementation, integration and knowledge management
consulting services allow our customers to deploy our customer service and
support solutions effectively. In addition, our professional services team
offers education and training to enable our customers' internal teams to
understand how to use our products, support the implementation and maintain our
solutions.

Customer Support. All customers under a maintenance agreement have access
to our technical support engineers by telephone, fax or e-mail. In addition, we
provide self-service support to our customers on a 24/7 basis through our
www.serviceware.com Web site.

TECHNOLOGY AND ARCHITECTURE

We employ industry-standard technologies to create an object-based open
architecture for all of our applications. ServiceWare Enterprise is based on an
"n-tiered" architecture, which permits the use of multiple servers for
scalability and a clear division of responsibility between our software
programs. This division

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provides flexibility and scalability. The architecture is based on the Java 2
Enterprise Edition or "J2EE" framework that includes components specifically
designed to take advantage of each element of the modern Web environment. This
enables a configurable, extensible application to be delivered based on current
Internet standards.

At the core of our technology is the Cognitive Processor, which provides
self-learning capability to ServiceWare Enterprise. The Cognitive Processor uses
patented algorithm technology based on neural network and Bayesian statistical
principles. Through these algorithms, the Cognitive Processor is capable of
learning from past transactions.

We are continually updating our software to run in the most common
environments. ServiceWare now supports Solaris, Windows 2000 and NT operating
environments. We support BEA Weblogic, Macromedia JRUN and IBM Websphere for the
application servers.

We provide an extensive set of integration Application Programming
Interfaces or "APIs" that allow us to integrate with a broad range of
applications using industry standard protocols. ServiceWare Enterprise is also
available as a Web service through ServiceWare's Simple Object Access Protocol
or "SOAP" adapter. The SOAP adapter provides the mechanism by which ServiceWare
Enterprise is available as a Web service within the enterprise. Any application
will be able to utilize the Web service to add and retrieve from a knowledge
base and take advantage of our self-learning and self-organizing search
technology.

CUSTOMERS

We have traditionally marketed our products and services to Global 2000
call centers and help desks in a wide range of vertical industries. Cingular
Wireless accounted for 12% of our 2003 revenues. The following is a partial list
of our other new and follow-on customers during 2003.

Allegheny Energy Hughes Supply
Allina Health Systems InterSystems Corporation
Amgen Made2Manage Systems
AT&T Wireless Nestle Waters North America, Inc.
Aventis PAR Technology
C3I, Inc. Prudential Insurance Company of America
Cingular Wireless Qualcomm
Concord EFS Raytheon Company
Countrywide Home Loans Respironics
EATON/Cutler-Hammer Schlumberger Information Solutions Ltd.
EDS Scientific Atlanta
Fifth Third Bancorp Texas Instruments
Wachovia United Health Technologies
Fourth Shift, a SoftBrands Company US Cellular
Gelco Government Services U.S. Navy
H&R Block U.S. Patent & Trademark Office
Hewlett-Packard Wausau Financial Systems
HRC Alexandria

SALES AND MARKETING

We sell our solutions primarily through our direct sales force. We have
sales personnel throughout North America and a distributor in the United
Kingdom.

To increase the effectiveness of our direct selling efforts and our
penetration of the knowledge management solutions market, we build brand
awareness of ServiceWare and our solutions through marketing programs. These
programs include print and Web advertisements, direct mailings, public relations
activities, seminars and other major industry/partner events, market research
and our Web site.

Our marketing organization creates materials to support the sales process,
including brochures, data sheets, case studies, presentations, white papers and
demonstrations. In addition, our marketing group helps identify and develop key
strategic alliance opportunities and channel distribution relationships.

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STRATEGIC ALLIANCES

We have established strategic alliances with leading providers of
e-business software technologies. These alliances augment our sales and
marketing initiatives by enabling us to increase market awareness, distribution
and market penetration of our solutions and services, as well as to extend the
technical and functional application of our knowledge management solutions.

Historically, we have had several categories of alliances, including
distribution, software and services alliances. We have established distribution
alliances with leading providers of complementary e-business and CRM
technologies who resell or co-market our solutions. We benefit from the lead
generation and established marketing capabilities of these firms. In turn, our
alliance partners benefit from being able to offer more comprehensive solutions
in their product offerings and thereby increase their customers' satisfaction.
We currently have alliances with several vendors, including Hewlett Packard,
Clarify/Amdocs, Remedy, M-Tech, and Siebel Systems.

We have established service alliances with leading systems integrators,
including Electronic Data Systems Corporation (EDS) and Stratacom to increase
our breadth of implementation services both nationally and around the globe.
These service alliance partners complete a rigorous training program to become
fully certified to implement our solutions, and we continue to work with our
service alliance partners as a team to seek a fast, effective path to the
deployment of our knowledge management solution to enable our customers to reap
the benefits of our knowledge management solution immediately.

In addition, in 2003 we joined the Consortium for Service Innovation, a
national, non-profit alliance of customer service organizations that are working
together to address industry-wide challenges.

We intend to continue to build and refine our strategies in selecting
leading alliance partners. We believe that building key relationships with
market leaders increases our opportunities in global expansion, enhanced
solutions, and continued product innovations.

RESEARCH AND DEVELOPMENT

Our internal research and development team together with our outside
development resources develop our product and service offerings. In conjunction
with our outside development resources, we continue to enhance the features and
performance of our existing products and services. In addition, we are
continuing to develop our products and services to meet our customers'
expectations of ongoing innovation and enhancement within our suite of products
and services. In 2001, we entered into an agreement with EPAm Systems, of
Princeton, New Jersey, and Minsk, Belarus, to augment our research and
development capabilities. This relationship gives us access to approximately 500
developers in what we believe to be a cost effective offshore model. EPAm
Systems is ISO 9001 certified and has completed complicated projects for major
international corporations including Fortune 500 companies. This relationship
has allowed us to streamline operating costs and increase productivity. Research
and development is conducted by way of a clearly defined process that is a
subset of industry standard Rational Unified Process.

We renewed our agreement with EPAm Systems on April 1, 2002. This agreement
states that consulting services will be provided in accordance with specific
work orders. Payment for these services is billed as the work is incurred or at
a fixed fee agreed upon for the work order. As of December 31, 2003 the
agreement remains in effect.

Our ability to meet our customers' expectations depends on a number of
factors, including our ability to identify and respond to emerging technological
trends in our target markets, develop and maintain competitive products, enhance
our existing products and services by adding features and functionality that
differentiate them from those of our competitors and bring products and services
to market on a timely basis and at competitive prices. Consequently, we have
made, and we intend to continue to make, investments in research and
development.

For a description of our research and development related expenses, see the
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 of this Form 10-K.

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COMPETITION

Competition in our marketplace is rapidly evolving and intense, and we
expect competition to intensify further in the future as current competitors
expand their product offerings and new competitors enter the market. Current
competitors include in-house developed applications and providers of
commercially available knowledge management solutions, including Kana, Inc.,
eGain Communications Corporation, Kanisa, Inc., and Primus Knowledge Solutions,
Inc.

We believe that the principal competitive factors affecting our market
include referenceable customers, the breadth and depth of a given solution,
product quality and performance, core technology, product scalability and
reliability, product features and the ability to implement solutions and respond
quickly to customer needs.

Although we believe that we currently compete favorably with respect to the
principal competitive factors in our market, we may not be able to maintain our
competitive position against current and potential competitors, especially those
with significantly greater financial, marketing, service, support, technical and
other resources. It is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. We also
expect that competition will increase as a result of industry consolidation.

INTELLECTUAL PROPERTY

Our success and ability to compete effectively depends, in part, upon our
proprietary rights. We rely on a combination of patent, copyright, trade secret
and trademark laws, confidentiality procedures and contractual provisions to
establish and protect our proprietary rights in our software, documentation and
other written materials. These legal protections afford only limited protections
for our proprietary rights and may not prevent misappropriation of our
technology or deter third parties from developing similar or competing
technologies.

We seek to avoid disclosure of our intellectual property by generally
entering into confidentiality or license agreements with our employees,
consultants and companies with which we have alliances, and we generally control
access to, and distribution of, our software, documentation and other
proprietary information. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology or to develop products with the same functionality as our
products.

Policing unauthorized use of our proprietary information is difficult, and
we may be unable to determine the extent of unauthorized copying or use of our
products or technology. Further, third parties who have been granted certain
limited contractual rights to use our proprietary information may improperly use
or disclose such proprietary information. In addition, certain components of our
product suite require us to have licenses from third parties for use. These
licenses may be subject to cancellation or non-renewal. In this event, we will
be required to obtain new licenses for use of these products, which may not be
available on commercially reasonable terms, if at all, and could result in
product shipment delays and unanticipated product development costs.

EMPLOYEES

As of December 31, 2003, we had 51 employees consisting of 17 in sales, 15
in professional services and support, five in research and development, five in
marketing, and nine in general and administration. In spite of the difficult
economic environment, we continue to believe that one of our strengths is the
quality and dedication of our people and the shared sense of being part of a
team. We strive to maintain a work environment that fosters professionalism,
excellence, and cooperation among our employees.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this annual report on Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different than any expressed or implied by these forward-looking statements. In
some cases, you can identify forward-looking statements by terminology

9

such as "may", "will", "should", "expects", "plans", "anticipates", "believes",
"estimates", "predicts", "potential", "continue", or the negative of these terms
or other comparable terminology.

We often use these types of statements when discussing:

- 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.

We caution you these forward-looking statements are only predictions and
estimates regarding future events and circumstances. Actual results could differ
materially from those anticipated as a result of factors described in "Risk
Factors" or as a result of other factors. We cannot assure you we will achieve
the future results reflected in these statements. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. In light of these risks and
uncertainties, the forward-looking events and circumstances discussed in this
report might not transpire.

Although we believe that the expectations in the forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity,
performance or achievements.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

Set forth below and elsewhere in this Form 10-K and in other documents we
file with the Securities and Exchange Commission are risks and uncertainties
that could cause actual results to differ materially from the results
contemplated by the forward-looking statements contained in this Form 10-K or
the results indicated or projected by our historical results.

WE HAVE A HISTORY OF LOSSES AND MAY NEVER ACHIEVE PROFITABILITY.

Our limited operating history in our current line of business and the
uncertain nature of the markets in which we compete make it difficult or
impossible to predict future results of operations. As of December 31, 2003, we
had an accumulated deficit of $76.5 million. We have not achieved profitability
on a quarterly or annual basis to date and incurred a net loss of $3.0 million
in 2003. If revenues do not significantly increase, our losses will continue. In
addition, our history of losses may cause some of our potential customers to
question our viability, which might hamper our ability to make sales.

WE MAY NEED ADDITIONAL CAPITAL TO FUND CONTINUED BUSINESS OPERATIONS AND WE
CANNOT BE SURE THAT ADDITIONAL FINANCING WILL BE AVAILABLE.

We have historically required substantial amounts of capital to fund our
business operations. Despite efforts to reduce our cost structure, we have
continued to experience negative cash flows from operations in 2003. We cannot
assure investors that we will attain break-even cash flows from operations at
any particular time in the future, or at all.

Our ability to continue as a business in our present form is largely
dependent on our ability to generate additional revenues, achieve profitability
and positive cash flows or to obtain additional debt or equity financing. From
time to time, we have considered and discussed various financing alternatives
and expect to continue such efforts to raise additional funds to support our
operational plan as needed. However, we cannot be certain that additional
financing will be available to us on favorable terms when required, or at all.

IF WE ARE NOT ABLE TO OBTAIN NEEDED CAPITAL, WE MAY NEED TO DRAMATICALLY CHANGE
OUR BUSINESS STRATEGY AND DIRECTION, INCLUDING PURSUING OPTIONS TO SELL OR
MERGE OUR BUSINESS, OR LIQUIDATE.

In the past, we have funded our operating losses and capital expenditures
through proceeds from equity offerings and debt. If we are required to raise
additional funds through the issuance of equity, equity-linked or debt
securities, those securities may have rights, preferences or privileges senior
to those of the rights of our

10

common stock and, in light of our current market capitalization, our
stockholders may experience substantial dilution. Further, the issuance of debt
securities could increase the risk or perceived risk of our company. If we do
not have, and are not able to obtain, necessary capital, we may need to
dramatically change our business strategy and direction, including pursuing
options to sell or merge our business, or liquidate.

OUR CASH FLOW MAY NOT BE SUFFICIENT TO PERMIT REPAYMENT OF FUTURE DEBT WHEN
DUE.

At December 31, 2003, we had borrowings outstanding under our line of
credit of $250,000 and convertible debt with a face value of approximately
$3,733,000. In January 2004, we repaid the borrowings outstanding under the line
and on January 30, 2004, the line of credit expired. On February 10, 2004, all
of our outstanding convertible debt was converted into equity in connection with
a private placement equity offering, which raised $7.5 million, net of expenses.

As such, as of February 10, 2004, we had no outstanding debt other than
trade debt incurred in the normal course of business. However, we may need to,
in the future raise additional money to satisfy our continuing operations
through bank financing or debt investments. Our ability to retire or to
refinance any such indebtedness will depend on our ability to generate cash
flows in the future. Our cash flows from operations may be insufficient to repay
this indebtedness at scheduled maturity and some or all of our indebtedness may
have to be refinanced. If we are unable to refinance our debt or if additional
financing is not available on acceptable terms, or at all, we could be forced to
dispose of assets under circumstances that might not be favorable to realizing
the highest price for the assets or to default on our obligations with respect
to this indebtedness.

WE MAY NOT SUCCEED IN ATTRACTING AND RETAINING THE PERSONNEL WE NEED FOR OUR
BUSINESS AND WE HAVE A SMALL SENIOR MANAGEMENT TEAM.

Our business requires the employment of highly skilled personnel,
especially experienced software developers. The inability to recruit and retain
experienced software developers in the future could result in delays in
developing new versions of our software products or could result in the release
of deficient software products. Any such delays or defective products would
likely result in lower sales. We may also experience difficulty in hiring and
retaining sales personnel, product managers and professional services employees.
Our senior management team consists of only two individuals. The loss of either
of these officers could have an adverse effect on our operations, business, and
prospects and our ability to carry out our business plan. We do not maintain key
man life insurance on our officers.

A SIGNIFICANT PERCENTAGE OF OUR PRODUCT DEVELOPMENT IS PERFORMED BY A THIRD
PARTY INTERNATIONALLY, THE LOSS OF WHICH COULD SUBSTANTIALLY HARM OUR PRODUCT
DEVELOPMENT EFFORTS.

A significant percentage of our product development work, and some of our
implementation services, are performed by a third-party development organization
located in Minsk, Belarus. Unpredictable developments in the political, economic
and social conditions in Belarus, or our failure to maintain or renew our
business relationship with this organization on terms similar to those which
exist currently, could reduce or eliminate product development and
implementation services. If access to these services were to be unexpectedly
eliminated or significantly reduced, our ability to meet development objectives
vital to our ongoing strategy would be hindered, and our business could be
seriously harmed.

IT IS DIFFICULT TO DRAW CONCLUSIONS ABOUT OUR FUTURE PERFORMANCE BASED ON OUR
PAST PERFORMANCE DUE TO SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING
RESULTS.

We manage our expense levels based on our expectations regarding future
revenues and our expenses are relatively fixed in the short term. Therefore, if
revenue levels are below expectations in a particular quarter, operating results
and net income are likely to be disproportionately adversely affected because
our expenses are relatively fixed. In addition, a significant percentage of our
revenues is typically derived from large orders from a limited number of
customers, so it is difficult to estimate accurately the timing of future
revenues. Our revenues are unpredictable and in our last eight quarters have
fluctuated up and down from a low of $2.1 million in first quarter 2003 to a
high of $3.6 million in fourth quarter 2003.

11

Our quarterly results are also impacted by our revenue recognition
policies. Because we generally recognize license revenues upon installation and
training, sales orders from new customers in a quarter might not be recognized
during that quarter. Delays in the implementation and installation of our
software near the end of a quarter could also cause recognized quarterly
revenues and, to a greater degree, results of operations to fall substantially
short of anticipated levels. We often recognize revenues for existing customers
in a shorter time frame because installation and training can generally be
completed in significantly less time than for new customers. However, we may not
be able to recognize expected revenues at the end of a quarter due to delays in
the receipt of expected orders from existing customers.

Revenues in any one quarter are not indicative of revenues in any future
period because of these and other factors and, accordingly, we believe that
certain period-to-period comparisons of our results of operations are not
necessarily meaningful and should not be relied upon as indicators of future
performance.

THE KNOWLEDGE MANAGEMENT MARKET IS EVOLVING AND, IF IT DOES NOT GROW RAPIDLY,
OUR BUSINESS WILL BE ADVERSELY AFFECTED.

The knowledge management solutions market is an emerging industry, and it
is difficult to predict how large or how quickly it will grow, if at all.
Customer service historically has been provided primarily in person or over the
telephone with limited reference materials available for the customer service
representative. Our business model assumes that companies which provide customer
service over the telephone will find value in aggregating institutional
knowledge by using our software and will be willing to access our content over
the Internet. Our business model also assumes that companies will find value in
providing some of their customer service over the Internet rather than by
telephone. Our success will depend on the broad commercial acceptance of, and
demand for, these knowledge management solutions.

WE CURRENTLY HAVE ONE CORE PRODUCT FAMILY. IF THE DEMAND FOR THIS LINE OF
PRODUCTS DECLINES, OUR BUSINESS WILL BE ADVERSELY AFFECTED.

ServiceWare's knowledge management solutions, ServiceWare Enterprise and
ServiceWare Express, include our ServiceWare Self-Service, ServiceWare Agent,
ServiceWare Professional and ServiceWare Architect software products. Our past
and expected future revenues consist primarily of license fees for these
software solutions and fees for related services. Factors adversely affecting
the demand for these products and our products in general, such as competition,
pricing or technological change, could materially adversely affect our business,
financial condition, operating results and the value of our stock price. Our
future financial performance will substantially depend on our ability to sell
current versions of our entire suite of products and our ability to develop and
sell enhanced versions of our products.

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.

Our products and services are typically intended for use in applications
that may be critical to a customer's business. In certain instances, the
purchase of our products and services involves a significant commitment of
resources by prospective customers. As a result, our sales process is often
subject to delays associated with lengthy approval processes that accompany the
commitment of significant resources. These delays may worsen in the future, as a
greater proportion of our total revenues will be derived from our ServiceWare
Enterprise solutions, for which contracts have a higher average dollar value.
For these and other reasons, the sales cycle associated with the licensing of
our products and subscription for our services typically ranges between six and
eighteen months and is subject to a number of significant delays over which we
have little or no control. While our customers are evaluating whether our
products and services suit their needs, we may incur substantial sales and
marketing expenses and expend significant management effort. We may not realize
forecasted revenues from a specific customer in the quarter in which we expend
these significant resources, or at all, because of the lengthy sales cycle for
our products and services.

12

WE MAY NOT BE ABLE TO EXPAND OUR BUSINESS INTERNATIONALLY, AND, IF WE DO, WE
FACE RISKS RELATING TO INTERNATIONAL OPERATIONS.

Our business strategy includes efforts to attract more international
customers. By doing business in international markets we face risks, such as
unexpected changes in tariffs and other trade barriers, fluctuations in currency
exchange rates, political instability, reduced protection for intellectual
property rights in some countries, seasonal reductions in business activity
during the summer months in Europe and certain other parts of the world, and
potentially adverse tax consequences, any of which could adversely impact our
international operations.

IF WE ARE NOT ABLE TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE, SALES OF OUR
PRODUCTS MAY DECREASE.

The software industry is characterized by rapid technological change,
including changes in customer requirements, frequent new product and service
introductions and enhancements and evolving industry standards. If we fail to
keep pace with the technological progress of our competitors, 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.

We rely, in part, on technology that we license from a small number of
software providers for use with our products. After the expiration of these
licenses, this technology may not continue to be available on commercially
reasonable terms, if at all, and may be difficult to replace. The loss of any of
these technology licenses could result in delays in introducing or maintaining
our products until equivalent technology, if available, is identified, licensed
and integrated. In addition, any defects in the technology we may license in the
future could prevent the implementation or impair the functionality of our
products, delay new product introductions or injure our reputation. If we are
required to enter into license agreements with third parties for replacement
technology, we could be subject to higher royalty payments.

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.

Our customers generally use our products together with products from other
companies. As a result, when problems occur in a customer's systems, it may be
difficult to identify the source of the problem. Even when these problems are
not caused by our products, they may cause us to incur significant warranty and
repair costs, divert the attention of our technical personnel from our product
development efforts and cause significant customer relations problems.

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 WILL DECREASE THE ATTRACTIVENESS OF OUR PRODUCTS.

Our ability to compete successfully also depends on the continued
compatibility and interoperability of our products with products and systems
sold by various third parties, specifically including CRM software sold by
Clarify/Amdocs, Remedy, and Siebel Systems. Currently, these vendors have open
applications program interfaces, which facilitate our ability to integrate with
their systems. If any one of them should close their programs' interface or if
they should acquire one of our competitors, our ability to provide a close
integration of our products could become more difficult, or impossible, and
could delay or prevent our products' integration with future systems. Inadequate
integration with other vendors' products would make our products less desirable
and could lead to lower sales.

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 MARKET FOR KNOWLEDGE MANAGEMENT SOLUTIONS.

We compete in the emerging market for knowledge management solutions and
changes in the knowledge management solutions market could adversely affect our
revenues and profitability. We face competition from many firms offering a
variety of products and services. In the future, because there are relatively
low barriers to

13

entry in the software industry, we expect to experience additional competition
from new entrants into the knowledge management solutions market. It is also
possible that alliances or mergers may occur among our competitors and that
these newly consolidated companies could rapidly acquire significant market
share. Greater competition may result in price erosion for our products and
services, which may significantly affect our future operating margins.

IF OUR SOFTWARE PRODUCTS CONTAIN ERRORS OR FAILURES, SALES OF THESE PRODUCTS
COULD DECREASE.

Software products frequently contain errors or failures, especially when
first introduced or when new versions are released. In the past, we have
released products that contained defects, including software errors in some new
versions of existing products and in new products after their introduction. In
the event the information contained in our products is inaccurate or perceived
to be incomplete or out-of-date, our customers could purchase our competitors'
products or decide they do not need knowledge management solutions at all. In
either case, our sales would decrease. Our products are typically intended for
use in applications that may be critical to a customer's business. As a result,
we believe that our customers and potential customers have a great sensitivity
to product defects.

WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF PRODUCT LIABILITY CLAIMS
BECAUSE OUR PRODUCTS ARE CRITICAL TO THE OPERATIONS OF OUR CUSTOMERS'
BUSINESSES.

Our products are critical to the operations of our customers' businesses.
Any defects or alleged defects in our products entail the risk of product
liability claims for substantial damages, regardless of our responsibility for
the failure. Although our license agreements with our customers typically
contain provisions designed to limit our exposure to potential product liability
claims, these provisions may not be effective under the laws of some
jurisdictions. In addition, product liability claims, even if unsuccessful, may
be costly and divert management's attention from our operations. Software
defects and product liability claims may result in a loss of future revenue, a
delay in market acceptance, the diversion of development resources, damage to
our reputation or increased service and warranty costs.

IF OUR CUSTOMERS' SYSTEM SECURITY IS BREACHED AND CONFIDENTIAL INFORMATION IS
STOLEN, OUR BUSINESS AND REPUTATION COULD SUFFER.

Users of our products transmit their and their customers' confidential
information, such as names, addresses, social security numbers and credit card
information, over the Internet. In our license agreements with our customers, we
typically disclaim responsibility for the security of confidential data and have
contractual indemnities for any damages claimed against us. However, if
unauthorized third parties are successful in illegally obtaining confidential
information from users of our products, our reputation and business may be
damaged, and if our contractual disclaimers and indemnities are not enforceable,
we may be subject to liability.

WE MAY ACQUIRE OR MAKE INVESTMENTS IN COMPANIES OR TECHNOLOGIES THAT COULD
CAUSE DISRUPTIONS TO OUR BUSINESS.

We intend to explore opportunities to acquire companies or technologies in
the future. Entering into an acquisition entails many risks, any of which could
adversely affect our business, including:

- 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

14

- 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 EROSION IN THE VALUE OF OUR
BRANDS AND PRODUCTS.

Our business is dependent on proprietary technology and the value of our
brands. We rely primarily on patent, copyright, trade secret and trademark laws
to protect our technology and brands. Our patents may not survive a legal
challenge to their validity or provide meaningful protection to us. Litigation
to protect our patents would be expensive and the loss of our patents would
decrease the value of our products. Defending against claims of patent
infringement would also be expensive and, if successful, we could be forced to
redesign our products, pay royalties, or cease selling them. In addition,
effective trademark protection may not be available for our trademarks. The use
by other parties of our trademarks would dilute the value of our brands.

Notwithstanding the precautions we have taken, a third party may copy or
otherwise obtain and use our software or other proprietary information without
authorization or may develop similar software independently. In addition,
employees, consultants and others who participate in the development of our
products may breach their agreements with us regarding our intellectual
property. Policing unauthorized use of our technology is difficult, particularly
because the global nature of the Internet makes it difficult to control the
ultimate destination or security of software or other transmitted data. Further,
we have granted third parties limited contractual rights to use proprietary
information, which they may improperly use or disclose. The laws of other
countries may afford us little or no effective protection of our intellectual
property. The steps we have taken may not prevent misappropriation of our
technology, and the agreements entered into for that purpose might not be
enforceable. The unauthorized use of our proprietary technologies could also
decrease the value of our products.

WE HAVE INITIATED A PATENT INFRINGEMENT LAWSUIT AGAINST ONE OF OUR COMPETITORS,
PRIMUS KNOWLEDGE SOLUTIONS, INC., AND WE MAY INITIATE ADDITIONAL LAWSUITS TO
PROTECT OR ENFORCE OUR PATENTS, WHICH MAY BE EXPENSIVE AND, IF WE LOSE, MAY
CAUSE US TO LOSE SOME, IF NOT ALL, OF OUR INTELLECTUAL PROPERTY RIGHTS, AND
THEREBY IMPAIR OUR ABILITY TO COMPETE IN THE MARKET.

On October 1, 2003, we filed suit against Primus Knowledge Solutions, Inc.
in the United States District Court for the Western District of Pennsylvania. It
is our position that Primus has infringed, contributed to the infringement of
and induced infringement of our patents. Primus has denied our allegations and
has asserted counterclaims against us. We also believe that other companies,
including direct and indirect competitors, may be infringing our patents. In
order to protect or enforce our patent rights, we may initiate additional patent
litigation suits against third parties, such as infringement suits or
interference proceedings. The suit against Primus and any other lawsuits that we
may file are likely to be expensive, take significant time and divert
management's attention from other business concerns. Litigation also places our
patents at risk of being invalidated or interpreted narrowly. We may also
provoke these third parties to assert claims against us. Patent law relating to
the scope of claims in the technology fields in which we operate is still
evolving and, consequently, patent positions in our industry are generally
uncertain. We may not prevail in any of these suits, the damages or other
remedies that may be, awarded to us may not be commercially valuable and we
could be held liable for damages as a result of counterclaims.

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.

The effectiveness of our ServiceWare Enterprise product depends in part on
widespread adoption and use of our software by our customers' customer service
personnel and on the quality of the solutions they generate. Resistance to our
software by customer service personnel and an inadequate development of the
knowledge base may make it more difficult to attract new customers and retain
old ones.

Some of our customers have found that customer service personnel
productivity initially drops while customer service personnel become accustomed
to using our software. If an enterprise deploying our software

15

has not adequately planned for and communicated its expectations regarding that
initial productivity decline, customer service personnel may resist adoption of
our software.

The knowledge base depends in part on solutions generated by customer
service personnel and, sometimes, on the importation of our customers' legacy
solutions. If customer service personnel do not adopt and use our products
effectively, necessary solutions will not be added to the knowledge base, and
the knowledge base will not adequately address service needs. In addition, if
less-than-adequate solutions are created and left uncorrected by a user's
quality-assurance processes or if the legacy solutions are inadequate, the
knowledge base will similarly be inadequate, and the value of our solutions to
end-users will be impaired. Thus, successful deployment and broad acceptance of
our ServiceWare Enterprise product will depend in part on whether our customers
effectively roll-out and use our software products and the quality of the
customers' existing knowledge base of solutions.

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.

If we fail to grow our customer base or generate repeat and expanded
business from our current and future customers, our business and operating
results will be seriously harmed. Some of our customers initially make a limited
purchase of our products and services for pilot programs. If these customers do
not successfully develop and deploy such initial applications, they may choose
not to purchase complete deployment or development licenses. Some of our
customers who have made initial purchases of our software have deferred or
suspended implementation of our products due to slower than expected rates of
internal adoption by customer service personnel. If more customers decide to
defer or suspend implementation of our products in the future, we will be unable
to increase our revenue from these customers from additional licenses or
maintenance agreements, and our financial position will be seriously harmed.

In addition, as we introduce new versions of our products or new products,
our current customers may not need our new products and may not ultimately
license these products. Any downturn in our software licenses revenues would
negatively impact our future service revenues because the total amount of
maintenance and service fees we receive in any period depends in large part on
the size and number of licenses that we have previously sold. In addition, if
customers elect not to renew their maintenance agreements, our service revenues
could be significantly adversely affected.

A DECLINE IN INFORMATION TECHNOLOGY SPENDING COULD REDUCE THE SALE OF OUR
PRODUCTS.

The license fees for our products often represent a significant expenditure
of information technology ("IT") capital for our customers. As a result of
general economic conditions and global economy and the uncertainties resulting
from recent acts of terrorism and the war in Iraq, we believe that many existing
and potential customers are reducing or reassessing their planned IT
expenditures. Such reductions in or eliminations of IT spending could cause us
to be unable to maintain or increase our sales volumes, and therefore, have a
material adverse effect on our revenues, operating results, ability to generate
positive cash flow and stock price.

INCREASING GOVERNMENT REGULATION OF THE INTERNET COULD HARM OUR BUSINESS.

As knowledge management and the Internet continue to evolve, we expect that
federal, state and foreign governments will adopt laws and regulations tailored
to the Internet covering issues like user privacy, taxation of goods and
services provided over the Internet, pricing, content and quality of products
and services. If enacted, these laws and regulations could limit the market for
knowledge management services and, therefore, the market for our products and
services. Additionally, Internet security issues could deter customers from
using the Internet for certain transactions or from implementing customer
support websites.

The Telecommunications Act of 1996 prohibits certain types of information
and content from being transmitted over the Internet. The prohibition's scope
and the liability associated with a violation of the Telecommunications Act's
information and content provisions are currently unsettled. The imposition upon
us and other software and service providers of potential liability for
information carried on or disseminated through our applications could require us
to implement measures to reduce our exposure to this liability. These measures
could require us to expend substantial resources or discontinue certain
services. In addition,

16

although substantial portions of the Communications Decency Act, the act through
which the Telecommunications Act of 1996 imposes criminal penalties, were held
to be unconstitutional, similar legislation may be enacted and upheld in the
future. It is possible that this new legislation and the Communications Decency
Act could expose companies involved in Internet liability, which could limit the
growth of Internet usage and, therefore, the demand for knowledge management
solutions. In addition, similar or more restrictive laws in other countries
could have a similar effect and hamper our plans to expand overseas.

WE MAY BECOME INVOLVED IN SECURITIES CLASS ACTION LITIGATION, WHICH COULD
DIVERT MANAGEMENT'S ATTENTION AND HARM OUR BUSINESS.

In recent years, the common stocks of technology companies have experienced
significant price and volume fluctuations. These broad market fluctuations may
cause the market price of our common stock to decline. In the past, following
periods of volatility in the market price of a particular company's securities,
securities class action litigation has often been brought against that company.
We may become involved in that type of litigation in the future. Litigation is
often expensive and diverts management's attention and resources, which could
harm our business and operating results.

OUR COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ STOCK MARKET.

As of May 5, 2003, our common stock was delisted from The Nasdaq Stock
Market and began trading on the OTC Bulletin Board.

As a result of our trading on the OTC Bulletin Board, investors may find it
more difficult to dispose of or obtain accurate quotations as to the market
value of the securities. In addition, we are subject to a Rule promulgated by
the Securities and Exchange Commission that, if we fail to meet criteria set
forth in such Rule, various practice requirements are imposed on broker-dealers
who sell securities governed by the Rule to persons other than established
customers and accredited investors. For these types of transactions, the broker-
dealer must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transactions prior to sale.
Consequently, the Rule may deter broker-dealers from recommending or selling our
common stock, which may further affect the liquidity of our common stock.

Delisting from Nasdaq makes trading our shares more difficult for
investors, potentially leading to further declines in our share price. It may
also make it more difficult for us to raise additional capital. Further, we may
also incur additional costs under state blue-sky laws in connection with any
sales of our securities.

OUR MANAGEMENT OWNS A SIGNIFICANT PERCENTAGE OF OUR COMPANY AND WILL BE ABLE TO
EXERCISE SIGNIFICANT INFLUENCE OVER OUR ACTIONS.

We are controlled by our officers and directors, who in the aggregate
directly or indirectly control more than 40% of our outstanding common stock and
voting power. These stockholders collectively will likely be able to control our
management policy, decide all fundamental corporate actions, including mergers,
substantial acquisitions and dispositions, and elect our board of directors.

TERRORIST ATTACKS SUCH AS THE ATTACKS THAT OCCURRED IN NEW YORK AND WASHINGTON,
D.C. ON SEPTEMBER 11, 2001 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.

On September 11, 2001, the United States was the target of terrorist
attacks of unprecedented scope. In March 2003, the United States and allied
nations commenced a war in Iraq. These attacks and the war in Iraq have caused
instability in the United States and other financial markets. There could be
further acts of terrorism in the United States or elsewhere that could have a
similar impact. Armed hostilities or further acts of terrorism could cause
further instability in financial markets and could directly impact our financial
condition, our results of operations and our stock price.

ITEM 2. PROPERTIES

We own no real property. We terminated the lease for our corporate
headquarters located in Oakmont, Pennsylvania as of December 31, 2003 pursuant
to a mutual written agreement entered into between us and

17

the owner of such facility. Our new corporate headquarters of approximately
10,400 square feet is located in Pittsburgh, Pennsylvania and leased pursuant to
a lease that expires in 2009. We believe that our current office is adequate to
support our existing operations. If necessary, however, we believe that we will
be able to obtain suitable additional facilities on commercially reasonable
terms when needed.

ITEM 3. LEGAL PROCEEDINGS

On October 1, 2003, we filed a lawsuit against Primus Knowledge Solutions,
Inc. ("Primus") in the United States District Court for the Western District of
Pennsylvania. It is our position that Primus has infringed, contributed to the
infringement of and induced infringement of our patents. We are seeking the
following damages: (1) a judgment that Primus has infringed our patents; (2)
preliminary and permanent injunctions enjoining and restraining Primus, its
officers, directors, agents, servants, employees, attorneys and all others in
active concert or participation with them from directly infringing or inducing
or contributing to the infringement of our patents; and (3) a judgment and order
requiring Primus to pay damages, together with interest, costs, and reasonable
attorneys' fees. In February 2004, Primus filed an answer to our complaint
denying our allegations that they infringed our patents. Along with its answer,
Primus filed a counterclaim against us claiming, among other things, that our
patents are invalid and unenforceable. In addition, Primus's counterclaim
asserts claims against us alleging that we, and/or certain of our employees,
performed acts constituting unfair competition, tortious interference, breach of
non-disclosure promises, misappropriation of trade secrets, disparagement,
defamation, a consumer protection act violation, and a Lanham Act violation. We
believe that the counterclaim is without merit, we deny any liability to Primus
and we intend to vigorously defend against their counterclaims. We are not able
to predict the outcome of this lawsuit.

On January 16, 2004, we entered into a release agreement with our prior
landlord, Sibro Enterprises, LP ("Sibro"), pursuant to which we settled all
outstanding disputes under the lawsuit Sibro had filed in the Court of Common
Pleas of Allegheny County, Pennsylvania. Pursuant to the release agreement, we
paid Sibro Enterprises an agreed upon amount representing rent due through
December 31, 2003, which was recorded in our 2003 consolidated financial
statements and issued Sibro Enterprises a warrant to purchase 125,000 shares of
common stock at a purchase price of $0.84 per share. In exchange, we mutually
agreed to terminate the lease as of December 31, 2003, dismiss the lawsuit with
prejudice, and release each other from any and all claims as of the date of the
release agreement.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET FOR THE COMPANY'S COMMON STOCK

Our common stock was quoted on the Nasdaq National Market from August 25,
2000 until April 24, 2002 and on the Nasdaq SmallCap Market from April 25, 2002
until May 4, 2003. Since May 5, 2003, our common stock has been traded on the
over the counter bulletin board. On March 18, 2004, the last sale price of our
common stock was $0.70 per share. The following table sets forth the range of
high and low sale prices for our common stock for the periods indicated.

As of March 18, 2004, there were approximately 400 holders of record of our
common stock. We believe that a substantially larger number of beneficial owners
hold shares of our common stock in depository or nominee form.

DIVIDEND POLICY

We do not anticipate paying any cash dividends in the foreseeable future.
We currently intend to retain any future earnings to finance the expansion of
our business.

RECENT SALES OF UNREGISTERED SECURITIES

As of October 31, 2003, we issued convertible notes ("Additional Notes") in
an aggregate principal amount of $177,748 to the twelve holders of our
previously issued convertible notes in payment of accrued interest on the
outstanding notes. The Additional Notes contain the same terms and conditions as
the convertible notes with respect to which the Additional Notes were issued and
are convertible into common stock at a conversion price of $.25 per share. The
Additional Notes are exempt from registration under Section 4(2) of the
Securities Act of 1933. All of the convertible notes, including the Additional
Notes, have been converted into common stock as of February 10, 2004.

ITEM 6. SELECTED FINANCIAL DATA

The following financial information for the five years ended December 31,
2003 has been derived from our consolidated financial statements. You should
read the selected consolidated financial data set forth below along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes.

19

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes.

OVERVIEW

We are a provider of knowledge-powered support solutions that enable
organizations to deliver superior service for customers, employees and partners
by transforming information into knowledge. Our solutions allow customers to
capture enterprise knowledge, solve customer problems, reuse solutions and share
captured knowledge throughout the extended enterprise. Customers use our
knowledge-powered support solutions to achieve some or all of the following
benefits:

- Strengthen relationships with customers, partners, suppliers and
employees

- Decrease operating costs

- Improve creation, dissemination and sharing of enterprise knowledge

- Provide easy access to knowledge online on an enterprise-wide basis

- Integrate seamlessly with existing technology investments

With ServiceWare Enterprise(TM), our core software product line, our
customers can provide personalized, automated Web-based service tailored to the
needs of their applicable users. ServiceWare Enterprise is based on our patented
self-learning search technology called the Cognitive Processor(R). This
technology enables organizations to capture and manage repositories of
intellectual capital, or corporate knowledge, in a manner that can be easily
accessed by way of a browser to effectively answer inquiries made either over
the Web or through the telephone to a customer contact center or help desk.
Through the self-learning features of the Cognitive Processor, our ServiceWare
Enterprise products provide our customers an intelligent solution in that the
solutions have the capability to learn from each interaction and automatically
update themselves accordingly.

20

The ServiceWare Enterprise suite is comprised of the following software
products:

ServiceWare This product is a Web-based, self-service product designed
Self-Service(TM): for use by an organization's customers, partners and
employees.
ServiceWare Agent(TM): This produce is designed for use by Level 1 agents or for
any company that needs to provide a complete agent
workstation knowledge management center.
ServiceWare This product is designed for use by customer service,
Professional(TM): sales and field service personnel.
ServiceWare Architect(TM): This product is designed for quality assurance managers
and system administrators.

In 2001, we incurred other special charges, which consisted of severance
costs for senior executives, forgiveness of loans in connection with repurchases
of common stock, and income tax gross-ups related to the loan forgiveness in the
amount of $1,750,000.

DISCONTINUED OPERATIONS

We sold our Content business segment in July 2001. As a result, all
financial data for the Content business has been presented separately as
discontinued operations in our 2001 consolidated statement of operations. Net
income from discontinued operations in the 2001 consolidated statement of
operations represents the net results of operations of the Content business
through July 20, 2001, the date of sale.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to allowance for doubtful accounts and intangible assets. We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. We believe the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements.

REVENUE RECOGNITION

We recognize revenues on license fees after a non-cancelable license
agreement is signed, the product is delivered, the fee is fixed or determinable
and collectible, and there is vendor-specific objective evidence to support the
allocation of the total fee to elements of a multiple-element arrangement using
the residual method. We recognize revenues on installation, training and
consulting on a time-and-material basis. Customer support and maintenance
contracts are recognized over the life of the contract.

Our revenue recognition policy is governed by Statement of Position (SOP)
97-2, "Software Revenue Recognition", issued by the American Institute of
Certified Public Accountants (AICPA), as amended by

23

SOP 98-9 "Modification of SOP 97-2, Software Revenue Recognition, With Respect
to Certain Transactions". These statements provide guidance on applying
generally accepted accounting principles in recognizing revenue on software and
services transactions. In addition, the AICPA and its Software Revenue
Recognition Task Force continue to issue interpretations and guidance for
applying the relevant standards to a wide range of sales contract terms and
business arrangements that are prevalent in the software industry. Also, the
Securities and Exchange Commission (SEC) has issued Staff Accounting Bulletin
No. 104 "Revenue Recognition in Financial Statements," which provides guidance
related to revenue recognition based on interpretations and practices followed
by the SEC, and the Emerging Issues Task Force of the Financial Accounting
Standards Board continues to issue additional guidance on revenue recognition.
Future interpretations of existing accounting standards or changes in our
business practices could result in future changes in our revenue accounting
policies that could have a material effect on our financial condition and
results of operations.

ACCOUNTS RECEIVABLE

We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of customers to make required payments. If the
financial condition of these customers were to deteriorate, resulting in an
impairment of their ability to make payments, we may be required to increase our
allowance of doubtful accounts or to defer revenue until we determine that
collectibility is probable. We perform a quarterly analysis to determine the
appropriate allowance for doubtful accounts. This analysis includes a review of
specific individual balances in our accounts receivable, our history of
collections, as well as the overall economic environment.

INTANGIBLE ASSETS AND GOODWILL

Since adoption of SFAS No. 142, goodwill is no longer amortized but instead
is assessed for impairment at least as often as annually and as triggering
events occur. In making this assessment, we rely on a number of factors
including operating results, business plans, economic projections, anticipated
future cash flows, transactions and our current market value. There are inherent
uncertainties related to these factors and management's judgment in applying
them to the analysis of goodwill impairment. Since our judgment is involved in
performing goodwill valuation analyses, there is risk that the carrying value of
our goodwill may be misstated. As a result of implementing SFAS No. 142, expense
of $2.3 million was not recognized during 2002 that would have otherwise fully
amortized the balance of goodwill. During 2003, we performed the required
impairment tests of goodwill and indefinite lived intangible assets as of
January 1, 2003 and determined that we did not have an impairment loss.

24

TRENDS/UNCERTAINTIES THAT MAY AFFECT OUR BUSINESS AND COMMON STOCK

Please refer to the Risk Factors discussed elsewhere in this report.

RESULTS OF OPERATIONS

The following table sets forth consolidated statement of operations data as
a percentage of revenues for the periods indicated:

YEARS ENDED DECEMBER 31, 2003 AND 2002

REVENUES

Total revenues increased 13.3% to $11.5 million in 2003 from $10.2 million
in 2002. The increase was primarily attributable to a 40% increase in revenue
recognized per new contract.

License revenues increased 30.5% to $4.9 million in 2003 from $3.8 million
in 2002. The average amount of revenue recognized per new contract increased to
$167,000 in 2003 from $119,000 in 2002, which was the primary reason for the
overall increase in license revenues.

Service revenues increased 3.1% to $6.6 million in 2003 from $6.4 million
in 2002. The primary reason for the increase was the increase in the average
contract price from 2002 to 2003. Although the number of

25

services contracts from existing customers remained the same from 2002 to 2003,
the average contract price increased from $33,000 to $51,000 in 2003.

COST OF REVENUES

Cost of revenues decreased to $3.2 million in 2003 from $4.6 million in
2002. Cost of revenues as a percentage of revenues decreased to 27.7% from
45.6%. Cost of license revenues decreased to $0.3 million in 2003 from $1.0
million in 2002. As a percentage of revenues, the cost of license revenues
decreased to 2.3% from 9.5%. The decrease in the cost of license revenues was
primarily attributable to a decrease in product royalties payable to third
parties, and a decrease in amortization of purchased technology.

Cost of service revenues decreased to $2.9 million in 2003 from $3.7
million in 2002. As a percentage of revenues, the cost of service revenues
decreased to 25.4% from 36.1%. The decrease in the cost of service revenues was
principally the result of an 18.9% decrease in customer support and services
personnel to an average of 16 in 2003 from an average of 19 in 2002. In
addition, allocated overhead expenses were significantly less as a result of an
overall reduction in overhead spending across the board.

OPERATING EXPENSES

Sales and Marketing. Sales and marketing expenses decreased to $5.1
million, or 44.4% of revenues, in 2003 from $5.4 million, or 52.9% of revenues,
in 2002. The decrease is primarily attributable to the closing of our United
Kingdom sales office in July 2003. In addition, allocated overhead expenses were
significantly less as a result of an overall reduction in overhead spending
across the board.

Research and Development. Research and development expenses decreased to
$2.0 million, or 17.0% of revenues, in 2003 from $2.9 million, or 28.5% of
revenues, in 2002. The decrease is primarily attributable to the reduced use of
a third party for development as a major product release was completed and
issued in February 2003. The development resources have been redeployed as
services contractors whose cost is now included in cost of services. In
addition, allocated overhead expenses were significantly less as a result of an
overall reduction in overhead spending across the board.

General and Administrative. General and administrative expenses decreased
to $2.1 million, or 18.4% of revenues in 2003 from $3.0 million, or 29.2% of
revenues in 2002. The decrease resulted primarily from a reduction of
depreciation expense due to a reduction in capital spending as well as a
reduction in legal expense as we hired an in-house counsel in third quarter
2003. In addition, allocated overhead expenses were significantly less as a
result of an overall reduction in overhead spending across the board.

Intangible Assets Amortization. Intangible assets amortization decreased
to $0.1 million, 1.3% of revenues in 2003 from $0.3 million, or 3.4% of revenues
in 2002. Intangible assets amortization consists of the amortization expense for
the intangible assets resulting from our acquisition of the Molloy Group in
1999. The decrease is primarily due to components of our intangible assets
becoming fully amortized.

Restructuring and other special charges. During 2003, There were no
restructuring or other special charges, but there was a reversal of a previous
accrual in the amount of $20,000. In 2001, we recognized a restructuring charge
primarily representing excess facilities costs and severance benefits resulting
from reductions in force of approximately 180 employees. A portion of these
restructuring charges related to potential costs for terminating certain real
estate leases. In 2002, we reduced this accrual by $0.4 million to reflect
changes in assumptions made for the initial charge. Additionally, a credit of
$0.1 million to restructuring expense was recorded in 2002 representing a change
in the estimate of termination costs for certain service contracts.

Other special charges in 2002 of $112,000 consisted of adjustments to a tax
gross-up related to forgiveness of stockholder loans and a reserve for accrued
interest related to outstanding stockholder loans.

Other income (expense), net. Other income (expense), net consists
primarily of interest income received from short-term investments, interest
expense and amortization expense related to our convertible notes entered into
in second quarter 2002 and bank borrowings. Other expense, net increased to $2.0
million in

26

2003 from $1.2 million in 2002. The increase was primarily the result of
increased interest expense incurred in conjunction with our convertible notes as
well as a decrease in interest earned on investments. The interest expense
primarily represents amortization of the beneficial conversion feature
recognized in conjunction with the issuance of the convertible notes, in
addition to the 10% interest, amortization of the discount, and debt issue costs
on the convertible notes.

YEARS ENDED DECEMBER 31, 2002 AND 2001

REVENUES

Total revenues decreased 18.3% to $10.2 million in 2002 from $12.4 million
in 2001 caused by a variety of factors. The biggest factor was and continues to
be the poor economic climate. This has translated into significant cuts in
enterprise software purchases and stagnant IT purchasing for our principal
target market, Fortune 1000 companies.

License revenues decreased 36.0% to $3.8 million in 2002 from $5.9 million
in 2001. Although the number of contracts with new customers increased to 21 in
2002 from 14 in 2001, the average amount recognized per contract decreased to
$119,000 in 2002 from $357,000 in 2001, which was the primary reason for the
overall decrease in license revenues. The decrease in license revenues from
contracts with new customers was offset in part by an increase in license
revenues from contracts with existing customers. In 2002, there were 31
contracts with existing customers averaging $41,000 per contract, which was an
increase from 2001 where there were 26 contracts averaging $25,000 per contract.

Service revenues decreased 2.1% to $6.4 million in 2002 from $6.5 million
in 2001. A $0.1 million increase in the amount of software maintenance revenue
was offset by a $0.2 million decrease in the amount of professional service
revenues. Professional services revenues decreased as a result of a 9.6%
decrease in billable hours rendered.

COST OF REVENUES

Cost of revenues decreased to $4.6 million in 2002 from $11.4 million in
2001. Cost of revenues as a percentage of revenues decreased to 45.6% from
92.0%. Cost of license revenues decreased to $1.0 million in 2002 from $2.7
million in 2001. As a percentage of revenues, cost of license revenues decreased
to 9.5% from 21.6%. The decrease in the cost of license revenues was primarily
attributable to a decrease in product royalties payable to third parties, costs
incurred only in 2001 for equipment for specific implementations, and a decrease
in amortization of purchased technology, which was fully amortized in July 2002.

Cost of service revenues decreased to $3.7 million in 2002 from $8.7
million in 2001. As a percentage of revenues, cost of service revenues decreased
to 36.1% from 70.4%. The decrease in the cost of service revenues was
principally the result of a 42.4% decrease in customer support and services
personnel to an average of 19 in 2002 from an average of 33 in 2001 primarily
attributable to the 2001 restructurings. In addition, there was a decrease in
the use of third parties to perform services and a decrease in travel and
recruiting expenses.

OPERATING EXPENSES

Sales and Marketing. Sales and marketing expenses decreased to $5.4
million, or 52.9% of revenues, in 2002 from $13.6 million, or 109.2% of
revenues, in 2001. The decrease is attributable to a reduction in sales and
marketing staff of 53.4% to an average of 24 in 2002 from an average of 52 in
2001 primarily attributable to the 2001 restructurings and a decrease in
expenses for marketing programs of 87.4% to $0.3 million in 2002 from $2.5
million in 2001. Additionally, significant decreases in commission expense,
travel and recruiting costs contributed to the decrease in sales and marketing
expenses.

Research and Development. Research and development expenses decreased to
$2.9 million, or 28.5% of revenues, in 2002 from $6.3 million, or 51.1% of
revenues, in 2001. The decrease is principally the result of a 61.8% reduction
in software development staffing levels to an average of seven in 2002 from an
average of 18 in 2001 primarily attributable to the 2001 restructurings.

27

General and Administrative. General and administrative expenses decreased
to $3.0 million, or 29.2% of revenues in 2002 from $3.6 million, or 29.2% of
revenues in 2001. The decrease was primarily attributable to a 50.0% reduction
in general and administrative staffing levels to an average of 11 in 2002 from
an average of 22 in 2001 and reductions of bad debt, third party contractor and
legal and accounting expenses.

Intangible Assets Amortization. Intangible assets amortization decreased
to $0.3 million, or 3.4% of revenues in 2002 from $4.8 million, or 38.9% of
revenues in 2001. Intangible assets amortization consists of the amortization
expense for intangible assets resulting from our acquisition of the Molloy Group
in 1999. The decrease is primarily the result of the implementation of new
accounting rules that discontinue the amortization of goodwill.

Restructuring and other special charges. During 2002, there were no
restructuring or other special charges, but there was a reversal of a previous
accrual. Restructuring and other special charges decreased to $(0.4) million in
2002 from $4.5 million, or 36.6% of revenues, in 2001. In 2001, restructuring
charges totaling $2.6 million primarily represent excess facilities costs and
severance benefits resulting from reductions in force of approximately 180
employees in 2001. A portion of these restructuring charges related to potential
costs for terminating certain real estate leases. However, in 2002, we were able
to sublease a significant portion of our unused space and decided not to
terminate the lease. Consequently, we reduced this accrual by $0.4 million in
2002 to reflect changes in assumptions made for the initial charge.
Additionally, a credit of $0.1 million to restructuring expense was recorded in
2002 representing a change in the estimate of termination costs for certain
service contracts.

Other special charges in 2002 of $112,000 consist of adjustments to a tax
gross-up related to forgiveness of stockholder loans and a reserve for accrued
interest related to outstanding stockholder loans. Other special charges in 2001
consist of $1.1 million in costs recognized in conjunction with forgiveness of
stockholder loans to certain executives in connection with their severance
agreements and the related taxes as well as severance costs for senior
executives of $0.6 million and a reserve for stockholder loans of $0.3 million.

Other income (expense), net. Other income (expense), net consists
primarily of interest expense and amortization expense related to our
convertible notes entered into in second quarter 2002 and bank borrowings offset
by interest income received from short-term investments. Other income (expense),
net decreased to $(1.2) million in 2002 from $449,000. The decrease was
primarily the result of increased interest expense incurred in conjunction with
our convertible notes as well as a decrease in interest earned on investments.
The interest expense primarily represents amortization of the beneficial
conversion feature recognized in conjunction with the issuance of the
convertible notes, in addition to the 10% interest, amortization of the
discount, and debt issue costs on the convertible notes.

LIQUIDITY AND CAPITAL RESOURCES

Historically, we have satisfied our cash requirements primarily through
private placements of convertible preferred stock and common stock, our initial
public offering, and incurrence of debt.

In October 2002, we entered into a loan and security agreement with
Comerica Bank -- California (the "Bank"). The agreement allowed for a revolving
line of credit and a term loan. In conjunction with this agreement, a warrant
was issued to the Bank to purchase 50,000 shares of our Common Stock at an
exercise price of $0.46 per share, with a 10-year term. The warrant includes
assignability to Bank's affiliates, antidilution protection and a net exercise
provision. In addition, the Bank can require us to repurchase the warrant for
$69,000 after a change of control. Borrowings under the loan agreement were
collateralized by essentially all of our tangible and intangible assets. At
December 31, 2003, we had a $250,000 balance outstanding under the revolving
line of credit. In January 2004, we repaid the borrowings under the line of
credit and the line of credit was terminated.

We incurred a net loss of $3.0 million for 2003. Over the past three years,
we have taken substantial measures to reduce our costs and we believe that we
have improved our chances of achieving profitability in 2004.

28

Net cash used in operating activities in 2003, 2002, and 2001 was
principally the result of our net losses. The amount of cash used in current
operations was substantially lower during 2003 due to our improved performance.

Net cash provided by investing activities in 2003 was primarily
attributable to the sale of short-term investments offset by property and
equipment acquisitions. The increased spending for property and equipment was
due to purchasing furniture for the Pittsburgh office relocation and updating of
obsolete computer equipment. Net cash used in investing activities in 2002 was
primarily attributable to the purchase of short-term investments. Net cash
provided by investing activities in 2001 was primarily attributable to the sale
of short-term investments.

Net cash used in financing activities in 2003 was primarily due to the
repayment of borrowings under our revolving line of credit. Net cash provided by
financing activities in 2002 was primarily from the proceeds received upon
issuance of our convertible notes and borrowings under our revolving line of
credit. Net cash provided by financing activities in 2001 was primarily from
borrowings under our revolving line of credit.

As of December 31, 2003, we had $1.4 million in cash and cash equivalents
and short-term investments. Additionally, effective January 30, 2004, we secured
an additional $7.5 million, net of expenses, in funding to finance our
operations and the development of our business. The additional funding was
raised through a private placement of equity securities consisting of 12,307,692
shares of common stock and five-year warrants to purchase 6,153,846 shares of
common stock at $0.72 per share. On February 10, 2004, our convertible notes
were converted into common stock as part of terms of the equity funding. Our
ability to continue as a business in our present form is largely dependent on
our ability to generate additional revenues, reduce overall operating expenses,
and achieve profitability and positive cash flows . We believe that we have the
ability to do so and plan to fund 2004 operations through operating revenue and
cash balances.

There can be no assurance that additional capital will be available to us
on reasonable terms, if at all, when needed or desired. If we raise additional
funds through the issuance of equity, equity-related or debt securities, such
securities may have rights, preferences or privileges senior to those of the
rights of our common stock. Furthermore, because of the low trading price of our
common stock, the number of shares of new equity or equity-related securities
that we may be required to issue may be greater than it otherwise would be. As a
result, our stockholders may suffer significant additional dilution. Further,
the issuance of debt securities could increase the risk or perceived risk of our
company.

CONTRACTUAL OBLIGATIONS

As of December 31, 2003, we are obligated to make cash payments in
connection with our capital leases, debt and operating leases. The effect of
these obligations and commitments on our liquidity and cash flows in future
periods are listed below. All of these arrangements require cash payments over
varying periods of time. Some of these arrangements are cancelable on short
notice and others require termination or severance payments as part of any early
termination. Included in the table below are obligations for continuing
operations.

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

(1) On February 10, 2004, the notes were converted into common stock as part of
the terms of an equity offering.

(2) Repaid in January 2004.

29

In January 2004, one of the capital leases with a balance of $55,560
relating to office equipment was cancelled. A new agreement was entered into for
five years. The total obligation relating to the new agreement is $94,980. The
agreement expires in December 2008.

OFF-BALANCE SHEET ARRANGEMENTS

We have no material off-balance sheet debt or other unrecorded obligations
other than the items noted in the above table.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," which provides guidance on
the accounting for costs associated with exit or disposal activities unrelated
to an acquisition. SFAS No. 146 is effective for exit and disposal activities
that are initiated after December 31, 2002. The implementation of SFAS No. 146
has not had a material impact on our results of operations.

In November 2002, the Emerging Issues Task Force reached a consensus on
EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables," which
provides further guidance on accounting for contracts that involve multiple
revenue-generating activities or deliverables and is effective for agreements
entered into in fiscal periods beginning after June 15, 2003. EITF 00-21 has not
had a material impact on our results of operations.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation expands
the disclosure requirements of guarantee obligations and requires the guarantor
to recognize a liability for the fair value of the obligation assumed under a
guarantee. In general, FIN 45 applies to contracts or indemnification agreements
that contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying instrument that is related to an asset,
liability, or equity security of the guaranteed party. Other guarantees are
subject to the disclosure requirements of FIN 45 but not to the recognition
provisions and include, among others, a guarantee accounted for as a derivative
instrument under SFAS No. 133, "Accounting for Derivatives and Hedging" ("SFAS
No. 133"), a parent's guarantee of debt owed to a third party by its subsidiary
or vice versa, and a guarantee which is based on performance. The disclosure
requirements of FIN 45 were effective as of December 31, 2002. The recognition
requirements of FIN 45 were to be applied prospectively to guarantees issued or
modified after December 31, 2002. The adoption of the standard had no impact on
our results of operations for 2003.

Under the indemnification provisions of our standard product license
agreement, we guarantee to defend and indemnify the licensee against any
proceeding based upon infringements of any patent, copyright, trade secret or
other intellectual property right by the products we license to our customers.
We do not expect to incur any infringement liability as a result of the customer
indemnification clauses as of December 31, 2003.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 requires a variable interest entity
to be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. We do not have any
variable interest entities.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
provisions of this statement are to be prospectively applied effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 has not
had a material impact on our results of operations.

Effective May 1, 2003, the FASB issued SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer

30

classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
On November 7, 2003, the FASB issued FASB Staff Position No. 150-3, which allows
entities, who meet certain criteria, to defer the effective date for periods
beginning after December 15, 2004. We do not expect the adoption of this
statement to have a material impact on our consolidated financial statements.

FORWARD LOOKING STATEMENTS

Under the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, we caution investors that statements contained in this
report regarding our intentions, hopes, beliefs, expectations or predictions of
the future are forward-looking statements. We caution you that these
forward-looking statements are not historical facts and are only estimates or
predictions. Actual results may differ materially from those anticipated as a
result of risks and uncertainties including, but not limited to, risks related
to revenue expectations, our software strategy, fluctuations in customer demand,
performance of outside distributors and resellers, use of the Web as a delivery
vehicle for customer support solutions, risks resulting from new product
introductions, integration of acquired products with current offerings, and
customer acceptance of new products, rapid technological change, risks
associated with competition, continued growth in the use of the Internet, our
ability to retain and increase revenue from existing customers and to execute
agreements with new customers, unforeseen expenses, our ability to attract and
retain qualified personnel and to secure necessary financing for our operations
and business development, and other market conditions and risks detailed from
time to time in our Securities and Exchange Commission filings. We undertake no
obligation to update publicly any forward-looking statements, whether as a
result of future events, new information, or otherwise.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Nearly all of our revenues recognized to date have been denominated in
United States dollars and are primarily from customers in the United States. We
have a European distributor located in London, England. Revenues from
international clients were 7% percent in 2003 and 12% in 2002, and nearly all of
these revenues were denominated in United States dollars. In the future, a
portion of the revenues we derive from international operations may be
denominated in foreign currencies. Furthermore, to the extent we engage in
international sales denominated in United States dollars, an increase in the
value of the United States dollar relative to foreign currencies could make our
services less competitive in international markets. Although currency
fluctuations are currently not a material risk to our operating results, we will
continue to monitor our exposure to currency fluctuations and when appropriate,
consider the use of financial hedging techniques to minimize the effect of these
fluctuations in the future. We cannot assure you that exchange rate fluctuations
will not harm our business in the future. We do not currently utilize any
derivative financial instruments or derivative commodity instruments.

Our interest income is sensitive to changes in the general level of United
States interest rates, particularly because the majority of our investments are
in short-term instruments. Since we no longer have any debt, we are not
currently subject to material interest rate risk.

31

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements, as of December 31, 2003
and 2002 and for each of the three years in the period ended December 31, 2003
are included herein:

32

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and
Stockholders of ServiceWare Technologies, Inc.

In our opinion, the accompanying consolidated balance sheets as of December
31, 2003 and 2002 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended present fairly, in
all material respects, the financial position of ServiceWare Technologies, Inc.
at December 31, 2003 and 2002, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2002, the Company changed its accounting for intangible assets
pursuant to the provisions of Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets.

/s/ PRICEWATERHOUSECOOPERS LLP

Pittsburgh, Pennsylvania
February 10, 2004

33

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and
Stockholders of ServiceWare Technologies, Inc.

We have audited the accompanying consolidated statements of operations,
stockholders' equity (capital deficiency), and cash flows of ServiceWare
Technologies, Inc. for the year ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of ServiceWare Technologies, Inc. for the year ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP

Pittsburgh, Pennsylvania
January 25, 2002

34

SERVICEWARE TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the consolidated financial
statements.

35

SERVICEWARE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of the consolidated financial
statements.

36

SERVICEWARE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of the consolidated financial
statements.

37

SERVICEWARE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)

The accompanying notes are an integral part of the consolidated financial
statements.

38

SERVICEWARE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of the consolidated financial
statements.
39

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003

NOTE 1. ORGANIZATION OF THE COMPANY

ServiceWare, Technologies, Inc. (the "Company") is a provider of
knowledge-powered support solutions that enable organizations to deliver
superior service for customers, employees and partners by transforming
information into knowledge. Founded in 1991 in Oakmont, Pennsylvania, the
Company sells its products throughout the United States and Europe.

ServiceWare Enterprise(TM), powered by the Cognitive Processor(R), a
patented self-learning search technology, enables organizations to capture and
manage intellectual capital. This repository of corporate knowledge, known as a
knowledge base, can then be easily accessed by way of a browser to effectively
answer inquiries made either over the Web or through the telephone to a customer
contact center or help desk.

Customers use ServiceWare's knowledge management solutions to:

- 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

ServiceWare Enterprise(TM) is a software solution that allows the Company's
customers to provide personalized, automated Web-based service tailored to the
needs of their users. ServiceWare Enterprise enables businesses to capture
enterprise knowledge, solve customer problems, reuse solutions and share
captured knowledge throughout the extended enterprise. It also enables the
extended enterprise to access this knowledge online. In addition, through the
self-learning features of ServiceWare's patented Cognitive Processor technology,
the solutions generated by these products are intelligent in that they have the
capability to learn from each interaction and automatically update themselves
accordingly. ServiceWare Enterprise includes the software products ServiceWare
Self-Service(TM) (Web-based self-service for customers, partners and employees),
ServiceWare Professional(TM) (for customer service, sales and field service
personnel) and ServiceWare Architect(TM) (for quality assurance managers and
system administrators).

In addition to ServiceWare Enterprise, the Company has created a solution
for mid-market companies. ServiceWare Express(TM) is a comprehensive product and
services package that includes browser-based applications, technical
implementation, training services and customer support. ServiceWare Express is
designed to enable midsize enterprises or call center and help desk divisions of
large enterprises to effectively utilize corporate knowledge to improve customer
satisfaction, enhance service quality and reduce operating costs.

Until July 2001, the Company had two reportable business segments: Software
and Content. In July 2001, the Company completed the sale of all of its Content
segment to RightAnswers LLC ("RightAnswers"). The Content segment is reported as
a discontinued operation in the 2001 consolidated statement of operations. See
Note 6.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of all significant
intercompany accounts and transactions. In July 2003, the Company closed its UK
subsidiary.

40

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REVENUE RECOGNITION

The Company's revenue recognition policy is governed by Statement of
Position (SOP) 97-2, "Software Revenue Recognition", issued by the American
Institute of Certified Public Accountants (AICPA), as amended by SOP 98-9
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions". The Company derives its revenues from licenses for its products
sold directly to end-users and indirectly through distributors as well as from
providing related services, including installation and training, consulting,
customer support and maintenance contracts. Revenues are recognized only if
persuasive evidence of an agreement exists, delivery has occurred, all
significant vendor obligations are satisfied, the fee is fixed or determinable,
and collection of the amount due from the customer is deemed probable.
Additionally, in sales contracts that have multi-element arrangements, the
Company recognizes revenue using the residual method. The total fair value of
the undelivered elements as indicated by vendor-specific objective evidence
(price charged when the undelivered element is sold individually) is deferred
and the difference between the total arrangement fee and the amount deferred for
the undelivered elements is recognized as revenue related to the delivered
elements. Additional revenue recognition criteria by revenue type are listed
below.

LICENSES REVENUES

Licenses revenues include fees for perpetual and annual licenses. The
Company recognizes revenues on perpetual license fees after a non-cancelable
license agreement has been signed, the product has been delivered, the fee is
fixed or determinable and collectible, and there is vendor-specific objective
evidence to support the allocation of the total fee to elements of a
multiple-element arrangement. Revenue for annual licenses and software lease
licenses is recognized ratably over the period of the contract.

SERVICES REVENUES

Services revenues are derived from variable fees for installation,
training, consulting and building customized knowledge bases as well as from
fixed fees for customer support and maintenance contracts.

Maintenance and support revenues are derived from the sale of maintenance
and support contracts, which provide end-users with the right to receive
maintenance releases of the licensed products, access to the support Web site
and access to the customer support staff. Maintenance and support revenues are
recognized on a straight-line basis over the term of the contract. Payments for
maintenance and support revenues are normally received in advance and are
nonrefundable.

Revenues for installation and training, implementation and system
integration projects, and consulting services are recognized as the services are
performed.

COST OF REVENUES

Cost of licenses revenues consists primarily of the expenses related to
royalties, the cost of media on which product is delivered, product fulfillment
costs and amortization of purchased technology.

Cost of services revenues consists of direct and indirect costs related to
service revenues which primarily include salaries, benefits, direct expenses and
allocated overhead costs related to the customer support and services personnel,
fees for subcontractors and the cost associated with maintaining our customer
support site.

Deferred revenues relate to product licenses, maintenance services, and
professional services, all of which generally have been paid for in advance.
Additionally, deferred revenues include amounts that are unbilled that represent
non-cancelable amounts billable by the Company at future dates based on payment
terms.

41

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash and interest-bearing money market
deposits with financial institutions having original maturities of ninety days
or less. Cash equivalents are stated at cost, which approximates market value.
The amounts held by major financial institutions may exceed the amount of
insurance provided on such deposits. These deposits may generally be redeemed
upon demand and, therefore, subject the Company to minimal risk.

INVESTMENTS

The Company considers all investments as available-for-sale. Accordingly,
these investments are carried at fair value and unrealized holding gains and
losses, net of the related tax effect, are excluded from earnings and are
reported as a separate component of other comprehensive income (loss) until
realized. Realized gains and losses from the sale of available-for-sale
securities are determined on a specific identification basis.

The majority of our short-term investments are held in an account with an
investment firm of which a Director of the Company is an affiliate (see Note
17).

OTHER CURRENT ASSETS

Other current assets consist primarily of deposits and prepayments for
expenses to be realized within the next year.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets.
Computer equipment is amortized over two years, computer software over three
years, and furniture and office equipment over five years. Leasehold
improvements are amortized over the lesser of their useful lives or the
remaining term of the lease. Amortization of assets recorded under capital
leases is included in depreciation expense. Capital leases, which are for office
equipment, are amortized over the term of the lease. Upon disposal, assets and
related accumulated depreciation are removed from the Company's accounts and the
resulting gains or losses are reflected in the consolidated statement of
operations.

INTERNAL USE COMPUTER SOFTWARE

The Company applies AICPA Statement of Position No. 98-1 "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP No.
98-1"). Accordingly, the Company capitalizes internal and external costs related
to software and implementation services in connection with its internal use
software systems.

42

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INTANGIBLE ASSETS AND GOODWILL

Intangible assets and goodwill resulted primarily from the acquisition of
Molloy Group on July 23, 1999 and consist of the following:

On an ongoing basis, when there are indicators of impairment such as
declining revenues or recurring losses, the Company evaluates the carrying value
of long-lived assets, including identifiable intangible asset resulting from
business acquisitions. If such indicators are apparent, the Company compares the
carrying value of the assets to the estimated future undiscounted cash flows
expected to be generated from the businesses acquired over the remaining life of
the assets. If the undiscounted cash flows are less than the carrying value of
the assets, the cash flows will be discounted to present value and the assets
will be reduced to this amount. There was no impairment for the years ended
December 31, 2003, 2002 and 2001.

The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets
effective January 1, 2002, and ceased amortization of goodwill and concluded
that a transitional impairment adjustment was not necessary. The following
reflects the effect of goodwill amortization on net loss per share as if SFAS
No. 142 had been in effect from the beginning of the year ended December 31,
2001:

SFAS No. 142 requires that goodwill and intangible assets deemed to have an
indefinite useful life be reviewed for impairment upon adoption of SFAS No. 142
and, at a minimum, annually thereafter. Under SFAS No. 142, goodwill impairment
is deemed to exist if the net book value of a reporting unit exceeds the

43

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

estimated fair value. The Company performed an impairment review during the
fourth quarters of 2003 and 2002 and concluded that no impairment loss was
necessary.

CONCENTRATION OF CREDIT RISK / MAJOR CUSTOMERS

Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of accounts receivable. The
Company sells its products to end-users directly, and the Company's customer
base is dispersed across many different geographic areas primarily throughout
North America and parts of Europe. The Company performs ongoing credit
evaluations of its customers' financial condition, and generally no collateral
is required. The Company believes it maintains adequate reserves for potential
credit losses and such losses have been minimal and within management's
estimates.

In 2003, two customers accounted for 12% and 7% of total revenues and 3%
and 28% of total accounts receivable at December 31, 2003. In 2002, two
customers accounted for 11% and 8% of total revenues and 0%, and 34% of total
accounts receivable at December 31, 2002. In 2001, three customers accounted for
a total of 22%, 12% and 10% of total revenues.

CAPITALIZED SOFTWARE

Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Software development costs are
capitalized beginning when a product's technological feasibility has been
established and ending when a product is available for general release to
customers provided recoverability is reasonably assured. The Company follows the
"working model" approach, whereby technological feasibility is established at
the time the Company has a beta customer. The Company releases updated products
periodically soon after technological feasibility has been established for new
enhancements. For 2003, 2002, and 2001, costs which were eligible for
capitalization were insignificant and, thus, the Company has charged its
software development costs to research and development expense in the
accompanying statements of operations with the exception of the technology
acquired from InfoImage on August 21, 2002 whereby $100,000 was capitalized.
These amounts are classified as purchased technology and are being amortized on
a straight-line basis over two to three years.

ADVERTISING COSTS

Advertising and sales promotions are charged to expense during the period
in which they are incurred. Total advertising and sales promotions expense for
the years ended December 31, 2003, 2002, and 2001 were approximately $119,000,
$207,000, and $1,704,000, respectively.

FOREIGN CURRENCY TRANSLATION

The functional currency of the Company's foreign subsidiary was the local
currency in the country in which the subsidiary was located. Assets and
liabilities denominated in foreign currencies were translated to U.S. dollars at
the exchange rate in effect on the last day of the month of the balance sheet
date. Revenues and expenses are translated at the average rates. Translation
adjustments arising from the use of differing exchange rates from period to
period are included as a component of other comprehensive loss. Gains and losses
from foreign currency transactions are included in other income (expense), net
for the periods presented. In July 2003, the Company closed its European
subsidiary.

STOCK BASED COMPENSATION

The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123

44

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

permits the Company to continue accounting for stock-based compensation as set
forth in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB Opinion No. 25"), provided the Company discloses the
pro forma effect on net income and earnings per share of adopting the full
provisions of SFAS No. 123. Accordingly, the Company continues to account for
stock-based compensation under APB Opinion No. 25 (see Note 9).

The following proforma disclosure presents the Company's net loss and loss
per share had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS 123.

The average fair value of the options granted is estimated at $0.36 during
2003, $0.37 during 2002 and $0.65 during 2001, on the date of grant using the
Black-Scholes pricing model with the following assumptions:

The effects of applying SFAS 123 in this pro forma disclosure are not
likely to be representative of the effects on reported net income for future
years. SFAS 123 does not apply to awards prior to 1995 and additional awards in
future years are anticipated.

USE OF ESTIMATES

The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the balance sheet dates and the reported
amounts of revenue and expenses during the reporting periods. Actual results
could differ from those estimates.

45

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NET LOSS PER SHARE

In accordance with SFAS No. 128, "Earnings Per Share", basic and dilutive
net loss per share have been computed using the weighted-average number of
shares of common stock outstanding during the period. All potentially dilutive
securities have not been included in the calculation of net loss per share due
to their anti-dilutive effect.

OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) consists of foreign currency translation
adjustments and net unrealized gains from securities available-for-sale.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," which provides guidance on
the accounting for costs associated with exit or disposal activities unrelated
to an acquisition. SFAS No. 146 is effective for exit and disposal activities
that are initiated after December 31, 2002. The implementation of SFAS No. 146
has not had a material impact on the Company's results of operations.

In November 2002, the Emerging Issues Task Force reached a consensus on
EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables," which
provides further guidance on accounting for contracts that involve multiple
revenue-generating activities or deliverables and is effective for agreements
entered into in fiscal periods beginning after June 15, 2003. EITF 00-21 has not
had a material impact on the Company's results of operations.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation expands
the disclosure requirements of guarantee obligations and requires the guarantor
to recognize a liability for the fair value of the obligation assumed under a
guarantee. In general, FIN 45 applies to contracts or indemnification agreements
that contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying instrument that is related to an asset,
liability, or equity security of the guaranteed party. Other guarantees are
subject to the disclosure requirements of FIN 45 but not to the recognition
provisions and include, among others, a guarantee accounted for as a derivative
instrument under SFAS No. 133, "Accounting for Derivatives and Hedging" ("SFAS
No. 133"), a parent's guarantee of debt owed to a third party by its subsidiary
or vice versa, and a guarantee which is based on performance. The disclosure
requirements of FIN 45 were effective as of December 31, 2002. The recognition
requirements of FIN 45 were to be applied prospectively to guarantees issued or
modified after December 31, 2002. The adoption of this standard had no impact on
the Company's results of operations for 2003.

Under the indemnification provisions of the Company's standard product
license agreement, the Company guarantees to defend and indemnify the licensee
against any proceeding based upon infringements of any patent, copyright, trade
secret or other intellectual property right by the products the Company licenses
to its customers. The Company does not expect to incur any infringement
liability as a result of the customer indemnification clauses as of December 31,
2003.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. The Company does
not have any variable interest entities.

46

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
provisions of this statement are to be prospectively applied effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 has not
had a material impact on the Company's results of operations.

Effective May 1, 2003, the FASB issued SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. On November 7, 2003, the
FASB issued FASB Staff Position No. 150-3, which allows entities, who meet
certain criteria, to defer the effective date for periods beginning after
December 15, 2004. The Company does not expect the adoption of this statement to
have a material impact on its consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

The accompanying financial statements have been prepared on a basis which
assumes that the Company will continue as a going concern and which contemplates
the realization of assets and the satisfaction of liabilities and commitments in
the normal course of business. The Company has an accumulated deficit of
$76,485,039 at December 31, 2003, incurred a net loss of $2,979,305 and had
negative cash flows from operations of $952,948 for the year ended December 31,
2003.

As of December 31, 2003, the Company had $1.4 million in cash and cash
equivalents and short-term investments. Additionally, effective January 30,
2004, the Company secured an additional $7.5 million, net of expenses, in
funding to finance its operations and the development of its business. The
additional funding was raised through a private placement of equity securities
consisting of 12,307,692 shares of common stock and five-year warrants to
purchase 6,153,846 shares of common stock at $0.72 per share. On February 10,
2004, the Company's convertible notes were converted to common stock as part of
the terms of the equity funding. Refer to Note 5. The Company's ability to
continue as a business in its present form is largely dependent on the Company's
ability to generate additional revenues, reduce overall operating expenses, and
achieve profitability and positive cash flows. The Company believes that it has
the ability to do so and plans to fund 2004 operations through operating revenue
and cash balances.

NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of the Company's financial instruments consisting
principally of cash and cash equivalents, short term investments, accounts
receivable and payable, debt, and note receivable from common stockholder
approximate their fair values at December 31, 2003 and 2002.

47

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4. RECEIVABLES

Receivables consist of the following:

Activity in the allowance for doubtful accounts is as follows:

NOTE 5. DEBT

CREDIT FACILITIES

In October 2002, the Company entered into a $2.5 million loan and security
agreement with Comerica Bank -- California (the "Bank"). The agreement provided
for a revolving line of credit and a term loan. The term loan expired on October
16, 2003. Borrowings under the line of credit accrued interest at the Bank's
prime rate plus 1.5%, which was 5.5% at December 31, 2003. Borrowings under the
loan agreement were collateralized by essentially all of the Company's tangible
and intangible assets. At December 31, 2003, the Company had outstanding
borrowings of $250,000 under the revolving line of credit, which were repaid in
January 2004 and the agreement terminated. In conjunction with this agreement, a
warrant was issued to the Bank to purchase 50,000 shares of the Company's Common
Stock at an exercise price of $0.46 per share with a 10-year term. The warrant
includes assignability to the Bank's affiliates, antidilution protection and a
net exercise provision. In addition, the Bank can require the Company to
repurchase the warrant for $69,000 after a change of control. The warrant is
treated as consideration for the agreement and was valued at $22,990 on the date
of the issuance using the Black Scholes option valuation model. As such, the
warrant value was recorded as a debt issue cost and is being amortized to
interest expense over the life of the agreement. As the warrant contains a put
option, the warrant value was accrued as a liability and not recorded as equity.

Previously, the Company had a secured credit facility with PNC Bank. In
April 2002, the then outstanding borrowings of $200,820 were repaid in full. At
December 31, 2002, this agreement had expired and no amounts were outstanding.

48

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONVERTIBLE NOTES

On April 1, 2002, the Company signed a binding commitment letter for the
sale of convertible notes. The closing of the transaction took place in two
tranches on May 6 and June 19, 2002 with total proceeds of $2,975,000 being
received, net of transaction costs of $275,000.

Of the total amount of $3,250,000 of convertible notes issued, convertible
notes with an aggregate principal amount of $2,635,000 were acquired by a
director of the Company and his affiliated entities, who collectively owned
approximately 20% of the Company's stock prior to the acquisition of convertible
notes.

The convertible notes were originally to mature 18 months from the closing
date, bear interest at 10% per annum, and were originally convertible at any
time at the option of the holder, into shares of the Company's common stock at a
conversion price of $0.30 per share. Interest can be paid in cash or additional
convertible notes, at the option of the Company. The convertible notes are
senior unsecured obligations that will rank senior to all future subordinated
indebtedness, pari passu to all existing and future senior, unsecured
indebtedness and subordinated to all existing and future senior secured
indebtedness. While the notes are outstanding, the Company is restricted from
paying or declaring dividends on common stock, making any other distribution on
common stock, or repurchasing or redeeming any shares of common stock.

In accordance with EITF 00-27, "Application of EITF Issue No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios,' to Certain Convertible Instruments",
the Company recognized in 2002 a beneficial conversion feature ("BCF") in the
aggregate amount of $2,225,000 as the difference between the market value of the
Company's common stock on the commitment date and the conversion price of the
convertible notes, reduced for the investors' transaction costs. The BCF was
recorded as an increase in additional paid in capital and a discount on debt in
the accompanying 2002 consolidated balance sheet. Additionally, the Company
incurred total legal and other expenses of approximately $54,000 related to the
transaction, which is also recorded as a discount on debt in the accompanying
2002 consolidated balance sheet. The aggregate discount was being amortized as
interest expense over the 18 month term of the convertible notes.

On March 31, 2003, the noteholders agreed to an amendment to the original
notes. The amendment reduced the conversion price from $0.30 per share to $0.25
per share and extended the term of the notes until July 15, 2004.

On October 31, 2003, April 30, 2003 and October 31, 2002, interest payments
were due on the convertible notes and were paid by issuing additional
convertible notes in the amounts of $177,748, $169,284 and $135,681,
respectively. These additional convertible notes have the same terms as the
amended convertible notes. The Company recognized additional BCF of $906,799 and
$113,067 in 2003 and 2002, respectively, as a result of the amendment of the
notes and payment of interest with additional convertible notes.

On February 10, 2004, the notes were converted into common stock as part of
the terms of an equity funding as discussed in Note 20. Additional interest of
$105,760 was paid in shares of stock in connection with the conversion.

NOTE 6. DISCONTINUED OPERATIONS

In July 2001, the Company completed the sale of its Content business
segment to RightAnswers. The sale was completed in accordance with the terms of
a Purchase and Sale Agreement (the "Agreement"), dated July 20, 2001, between
the Company and RightAnswers.

RightAnswers is a limited liability company that was formed to acquire the
Company's Content business. The Chief Executive Officer of RightAnswers, Mark
Finkel, was the Company's Chief Financial Officer from

49

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

January 2000 to July 2001. In addition, Mr. Finkel owned an equity interest in
RightAnswers at the time of the transaction.

The consideration for the business consisted of the assumption of
approximately $0.5 million of net liabilities associated with the business.
Revenues for the Content segment were $2.9 million for the year ended December
31, 2001.

NOTE 7. RESTRUCTURING AND OTHER SPECIAL CHARGES

In 2001, the Company implemented strategic restructurings to reduce its
cost structure and focus on revenue growth opportunities in the knowledge
management software market. The plans of restructuring approved by the Board of
Directors included severance and other benefit costs, costs for reduction and
relocation of facilities, termination costs for certain service contracts and an
equipment write off. As part of the restructuring plan, 180 employees were laid
off in 2001.

A portion of the restructuring charge related to potential costs for
terminating certain real estate leases at the Company's corporate headquarters
then located in Oakmont, Pennsylvania, in addition to amounts related to unused
capacity within the building. In 2002, the Company decided not to terminate the
lease on the property as anticipated and accordingly reversed approximately
$302,000 in exit reserves. Furthermore, a change in the estimate of the
termination costs for certain service contracts resulted in a reduction to the
restructuring expense of $130,000 in 2002.

A summary of the restructuring activity is as follows (amounts in
thousands):

50

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Other special charges consist of severance costs for senior executives,
forgiveness of loans in connection with repurchases of common stock, and income
tax gross-ups related to the loan forgiveness. The restructuring and other
special charges of separated executives consist of the following amounts:

NOTE 8. CAPITAL STOCK

The Company has two classes of capital stock consisting of common stock and
preferred stock. At December 31, 2003, a total of 100,000,000 shares are
authorized for common stock and 5,000,000 are authorized for preferred stock.

COMMON STOCK AND PREFERRED STOCK

The Company has reserved 20,764,609 shares of common stock as of December
31, 2003. Of this total, 14,930,835 are reserved for the conversion of the
convertible notes, 5,668,960 shares are reserved for exercise of stock options,
and 164,814 shares are reserved for exercise of warrants. There are no shares of
preferred stock outstanding as of December 31, 2003.

STOCK SPLIT

At a special meeting of stockholders on February 10, 2003, the stockholders
approved an amendment to the Company's Certificate of Incorporation to effect a
reverse stock split of its common stock and to grant its board of directors the
authority until June 30, 2004 to set the ratio for the reverse split or to not
complete the reverse split. As necessary, the Company intends to consider
implementing a reverse stock split if it believes it would increase the
probability that the Company's stock could be relisted on a stock exchange.

NOTE 9. STOCK OPTION PLAN

Effective April 2000, the Company's Board of Directors approved the
ServiceWare Technologies, Inc. 2000 Stock Incentive Plan (the "Plan") which
amended and restated the 1996 ServiceWare, Inc. Amended and Restated Stock
Option Plan (the "1996 Plan"). The Plan is administered by the Board of
Directors and provides for awards of stock options to employees, officers,
directors, consultants and advisors. A total of 7,750,000 shares of the
Company's Common Stock plus any shares of Common Stock previously reserved for
stock options granted under the 1996 Plan which are forfeited prior to exercise
may be issued pursuant to the Plan. The exercise price of incentive stock
options was determined by management and the Board of Directors for the period
from April 2000 through the IPO date. After the IPO, the exercise price is the
closing market price of the Company's Common Stock on the date of the grant. The
exercise price of nonqualified options is also determined by the Board of
Directors. Options generally vest over a two-year period in equal annual
amounts, or over such other period as the Board of Directors determines, and may
be accelerated in the event of certain transactions such as merger or sale of
the Company. These options expire within ten years after the date of grant.
During 2002, the Company recorded $78,344 in stock based compensation expenses
related to accelerated vesting of outstanding options. During 2001, the Company
recorded $1,125,194 in reversals of deferred compensation in conjunction with
repurchasing shares of restricted stock and forgiving stockholder

51

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

loans (see Note 11 for further explanation), $350,350 in reversals of deferred
compensation for cancelled options, and $51,882 in stock based compensation
expenses.

The following table summarizes option activity for the years ended December
31, 2003, 2002, and 2001:

The options outstanding as of December 31, 2003 have been segregated into
ranges for additional disclosure as follows:

On August 28, 2002, the Company offered its full-time and part-time
employees and non-employee directors the opportunity to exchange their
outstanding stock options for an equal number of new options (adjusted for a
reverse stock split or similar event, should this happen) to be granted on the
first business day that is at least six months plus one day after the expiration
of the offer. The offer expired September 30, 2002, and options for 436,460
shares of common stock were tendered. New options for 436,460 shares of common
stock were granted on March 31, 2003 to those participants who were employed by
the Company on both the date this offer expired and the date that the new
options were granted.

52

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

EMPLOYEE STOCK PURCHASE PLAN

In May 2000, the Company adopted the Employee Stock Purchase Plan (ESPP).
Under the terms of the ESPP, the Company is authorized to issue up to 500,000
shares of common stock, plus annual increases, as defined by the plan document.
The ESPP enables employees to purchase shares of the Company's common stock at a
discounted price through after-tax payroll deductions. Shares are offered to
employees in six month offering periods. Eligible employees elect to have
deducted from 1% to 15% of their base compensation. The amounts deducted can be
used to purchase the Company's common stock at the lesser of 85% of the fair
value on the first day of the offering period or 85% of the fair value on last
day of the offering period (purchase date). At December 31, 2003, 348,941 shares
remained available for purchase under the plan.

NOTE 10. WARRANTS

The following table summarizes warrant activity for the years ended
December 31, 2003, 2002 and 2001:

The valuation of warrants was calculated using the Black-Scholes pricing
model. The holders of the warrants have the right to exercise their warrants for
shares of the Company's common stock at anytime until the expiration of the
warrant. Expiration dates of the warrants are as follows:

Warrant amortization recorded as a reduction of revenue was $9,548,
$104,348 and $159,725 during 2003, 2002, and 2001, respectively, and relates to
warrants issued to a customer primarily in connection with a master license
agreement entered into in 2000.

53

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11. NOTES RECEIVABLE FROM COMMON STOCKHOLDERS

Certain common stockholders have exercised options through the issuance of
promissory notes. The respective total number of shares purchased and the
amounts loaned to stockholders as well as amounts repurchased due to employment
termination are set forth in the table below.

In January 1999, a former president of the Company exercised options to
purchase 86,956 shares of Common Stock at a purchase price of $2.30 per share. A
promissory note in the amount of $199,999 was issued in conjunction with the
sale. The note bears interest at the applicable federal rate defined in the
Internal Revenue Code of 1986, as amended, and was due September 2003 and has
yet to be paid.

In January and February 2000, certain executive officers exercised options
to purchase shares of common stock, and issued promissory notes to the Company
in conjunction with the purchases. These officers are personally liable for the
principal and interest due on their loans. Each loan is secured by the shares
purchased with the proceeds of that loan. Each loan becomes due and payable
three years from the date it was made or earlier if the individual's employment
is terminated or he or she no longer owns the shares. These loans were made at
interest rates between 5.8% and 6.1%, which were the applicable Federal rates in
effect under Section 1274(d) of the Internal Revenue Code of 1986, as amended,
on the date of issuance.

During 2001, five of the loans were forgiven in the amount of $2,030,422 in
exchange for 826,750 restricted and unrestricted shares outstanding under the
loans. In accordance with repurchase agreements, restricted shares were
repurchased at the price paid for the shares (exercise price of the option).
Unrestricted shares were repurchased at the fair market value on the date of
termination. The difference between the principal of the loan balance and the
value of the shares repurchased of $732,323 was recorded as compensation expense
and is classified as restructuring and other special charges during 2001. An
amount of $307,160 was recorded to treasury stock in 2001 for the repurchased
shares, which was the fair market value of the shares on the date of
termination. Amounts in excess of fair market value have been recorded as
additional paid in capital. Additionally, $1,125,914 of deferred stock based
compensation was reversed for the restricted shares that were repurchased from
the executives.

Under severance agreements with four of the executives, the Company agreed
to pay any personal tax liability arising from these transactions. As a result,
the Company recorded an expense of $350,546 in 2001 which has been classified as
restructuring and other special charges. An additional expense of $49,711 was
recognized in 2002 as actual personal tax liabilities were determined. All
amounts were paid by December 31, 2002. Additionally, interest on the loans of
$191,175 was also forgiven. This income was reversed and is classified as other
expense in 2001.

In 2001, the loan made in January 1999 and one loan made in January 2000,
which remained outstanding at December 31, 2000, were reserved. The total
principal amount of these loans were $319,789 and $62,636 in accrued interest
were determined to be uncollectible.

54

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12. CAPITAL AND OPERATING LEASES

The Company has several capital and operating leases covering office space
and certain equipment. Future minimum lease payments due under noncancelable
capital and operating leases are as follows:

Total rent expense under all operating leases amounted to $295,922,
$464,108 and $1,426,416 in 2003, 2002 and 2001, respectively.

During 2001, the Company entered into a sublease for part of its office
space in Oakmont, Pennsylvania. The monthly lease payment is $5,927. The Company
received $40,501, $71,124 and $25,811 in 2003, 2002 and 2001, respectively, in
rental payments for this sublease.

In May 2003, the Company exercised its option to terminate the lease with
six months notice. Effective December 19, 2003, the Company moved to its new
location at One North Shore, 12 Federal Street, Suite 503, Pittsburgh, PA 15212.
The lease is for a term of 66 months. The annual rent obligation is reflected in
the table above.

NOTE 13. INCOME TAXES

A reconciliation of the benefit for income taxes on operations computed by
applying the federal statutory rate of 34% to the loss from operations before
income taxes and the reported benefit for income taxes on operations is as
follows:

55

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31 are as
follows:

Management has recorded a valuation allowance against the deferred tax
assets until such time that the Company demonstrates an ability to generate
taxable income on a consistent basis.

At December 31, 2003, the Company had net operating loss carryforwards of
approximately $61,991,000, which expire between 2010-2023. Utilization of
certain net operating loss carryforwards is subject to limitation under Section
382 of the Internal Revenue Code.

NOTE 14. NET LOSS PER SHARE

The following table sets forth the computation of basic and diluted
earnings (loss) per share:

Dilutive securities include convertible notes, options and warrants as if
converted. Potentially dilutive securities totaling 20,764,609, 17,519,189 and
4,981,292 shares for the years ended December 31, 2003, 2002 and 2001,
respectively, were excluded from historical basic and diluted loss per share
because of their antidilutive effect.

56

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 15. RETIREMENT PLAN

The Company has a 401(k) profit sharing plan (the "Plan") covering all of
its employees subject to certain age and service requirements. Under provisions
of the Plan, participants may contribute up to 15% of their eligible
compensation to the Plan. The Company contributed $26,952, $186,547 and $419,125
in matching contributions to the Plan in 2003, 2002 and 2001, respectively.

NOTE 16. SEGMENT REPORTING

Subsequent to the sale of the Content segment in July 2001, the Company has
only one business segment (see Note 6).

GEOGRAPHIC INFORMATION

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

(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

Sales are made primarily through the Company's direct sales force. See
discussion of major customers in Note 2.

NOTE 17. RELATED PARTY TRANSACTIONS

The Company's short-term investments are held in an account with an
investment firm that is related to a director of the Company and his affiliated
entities, who collectively own more than 40% of the Company's stock. Also, as
investments are purchased and sold, a cash balance may be held by this
investment firm. At December 31, 2003 and 2002, the cash balance with this
investment firm was $326,722 and $8,026, respectively. The maximum balance in
the short-term investments and cash accounts during 2003 and 2002 was $525,750
and $3,707,787, respectively.

Of the total amount of $3,732,713 of convertible notes issued as of
December 31 ,2003, convertible notes with an aggregate principal amount of
$3,029,531 were owned by a director of the Company and his affiliated entities,
who collectively owned approximately 20% of the Company's stock prior to the
acquisition of convertible notes. See Note 5.

57

SERVICEWARE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 18. QUARTERLY FINANCIAL DATA (UNAUDITED)

NOTE 19 CONTINGENCIES

On October 1, 2003, the Company filed suit against Primus Knowledge
Solutions, Inc. ("Primus") in the United States District Court for the Western
District of Pennsylvania. It is the Company's position that Primus has
infringed, contributed to the infringement of and induced infringement of its
patents. Primus has denied the Company's allegations and has asserted
counterclaims against the Company. The Company also believes that other
companies, including direct and indirect competitors, may be infringing its
patents. In order to protect or enforce its patent rights, the Company may
initiate additional patent litigation suits against third parties, such as
infringement suits or interference proceedings. The suit against Primus and any
other lawsuits that the Company may file are likely to be expensive, take
significant time and divert management's attention from other business concerns.
Litigation also places the Company's patents at risk of being invalidated or
interpreted narrowly. The Company may also provoke these third parties to assert
claims against the Company. Patent law relating to the scope of claims in the
technology fields in which the Company operates is still evolving and,
consequently, patent positions in the Company's industry are generally
uncertain. The Company may not prevail in any of these suits, the damages or
other remedies that may be awarded to the Company may not be commercially
valuable and the Company could be held liable for damages as a result of
counterclaims.

On January 16, 2004, the Company entered into a release agreement with its
prior landlord, Sibro Enterprises, LP ("Sibro"), pursuant to which the Company
settled all outstanding disputes under the lawsuit Sibro had filed in the Court
of Common Pleas of Allegheny County, Pennsylvania. Pursuant to the release
agreement, the Company paid Sibro Enterprises an agreed upon amount representing
rent due through December 31, 2003, which was recorded in its 2003 consolidated
financial statements and issued Sibro Enterprises a warrant to purchase 125,000
shares of common stock at a purchase price of $0.84 per share. In exchange, the
Company mutually agreed to terminate the lease as of December 31, 2003, dismiss
the lawsuit with prejudice, and release each other from any and all claims as of
the date of the release agreement.

NOTE 20. SUBSEQUENT EVENTS

On January 30, 2004, the Company secured an additional $7.5 million, net of
expenses, in funding to finance its operations and the development of its
business. The additional funding was raised through a private placement of
equity securities consisting of 12,307,692 shares of common stock and five-year
warrants to purchase 6,153,846 shares of common stock at $0.72 per share.

On February 10, 2004, the Company's convertible notes were converted into
common stock as part of the terms of the equity funding. Refer to Note 5.

On January 26, 2004, the Company granted restricted stock to Kent Heyman
and Scott Schwartzman totaling 123,077 and 92,308 shares, respectively. The
restrictions on the restricted stock elapse over a two-year period and, as such,
deferred compensation totaling approximately $183,000 will be amortized over a
two-year period.

58

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

The information required by this Item was previously disclosed in our
current report on Form 8-K dated April 15, 2002.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Our principal
executive officer and our principal financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14(c) and 15d-14(c)) have concluded that, as of the end of the
period covered by this report our disclosure controls and procedures were
adequate and effective to ensure that material information relating to our
company and our consolidated subsidiaries would be made known to them by others
within those entities.

(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that occurred during the fourth quarter of
2003 that could significantly affect our disclosure controls and procedures
subsequent to the date of their evaluation, nor were there any significant
deficiencies or material weaknesses in our internal controls. As a result, no
corrective actions were required or undertaken.

59

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table identifies our current executive officers and
directors:

Kent Heyman joined our board of directors in February 2002. As a Class III
director, Mr. Heyman's term as a director will expire in 2006. Mr. Heyman was
employed as our president and chief executive officer in September 2001. From
June 1996 to December 2000, he served as senior vice president at Mpower
Communications, a facilities-based communications provider. Prior to his tenure
at Mpower, Mr. Heyman served as litigation department chairman and lead trial
counsel for Dowling Magarian Aaron and Heyman, a law firm in Fresno, California.
Mr. Heyman earned a doctor of law (J.D.) degree from the University of the
Pacific's McGeorge School of Law, and received a bachelor's degree from
California State University, Fresno.

Scott Schwartzman has served as our chief financial officer and secretary
since February 2003 and our chief operating officer since October 2001. From
October 2000 to October 2001, Mr. Schwartzman served as our vice president of
global enterprise services. From September 1998 to September 2000, Mr.
Schwartzman served as vice president of professional services at Firepond, Inc.,
a provider of e-business selling solutions. From February 1994 to August 1998,
Mr. Schwartzman served in a variety of positions, including director of
professional services, for SAP America, an Enterprise Resource Planning (ERP)
software company. Prior to his tenure at SAP, Mr. Schwartzman held positions in
operations and systems management at Star Dynamic Corporation, Dep Corporation
and Revlon Corporation. Mr. Schwartzman received a Bachelor of Science degree in
business administration from Syracuse University.

Robert Hemphill, Jr. has served as a director since June 2001. As a Class
I Director, Mr. Hemphill's term in office will expire in 2004. Mr. Hemphill is a
co-founder and managing director of Toucan Capital Corp., a private equity and
venture capital investment company formed in 1996. Prior to founding Toucan
Capital Corp., from 1981 to 1996, Mr. Hemphill co-founded and was employed by
AES Corporation, a leading global power company, most recently serving as
executive vice president. Mr. Hemphill serves on the board of directors of AES
Corporation (an energy production and distribution company), the National Museum
of American History (Smithsonian Institute) and on the advisory board of other
private companies. Mr. Hemphill received a bachelor's degree from Yale
University, a graduate degree in political science from the University of
California, Los Angeles and a master's degree in business administration from
George Washington University.

Timothy Wallace joined our board of directors in 1994. As a Class II
Director, Mr. Wallace's term in office will expire in 2005. Mr. Wallace
currently is the chairman and chief executive officer of Full Tilt Solutions, a
business-to-business software company, which he joined in January 2000. Prior to
Full Tilt, Mr. Wallace was the president and chief executive officer of Xerox
Connect, a network integration technology company from May 1998 through December
1999. From May 1996 until May 1998, Mr. Wallace was the president, chief
executive officer and a director of XLConnect Solutions, which he founded. Xerox
Connect acquired XLConnect in May 1998. From 1991 to 1996, Mr. Wallace was the
vice president of professional services of The Future Now, a national systems
integration company. Mr. Wallace received a Bachelor of Science degree in
business administration from Indiana University of Pennsylvania and a master's
degree in business administration from Miami University of Ohio.

60

Thomas Unterberg has served as a director since June 2001. As a Class I
Director, Mr. Unterberg's term in office will expire in 2004. Mr. Unterberg is a
co-founder and, since June 1989, has served as a chairman of C.E. Unterberg,
Towbin, L.P., an investment banking firm. Mr. Unterberg currently serves on the
boards of directors of Electronics for Imaging, Inc., PDLD (analytical
communications company), Reasoning (an automated software inspection company),
Rumson-Fair Haven Bank & Trust Company, and Club One, LLC (a fitness club
company). Mr. Unterberg is a graduate of Princeton University and received a
master's degree in business administration from the Wharton School, University
of Pennsylvania.

Bruce Molloy has served as a member of our board of directors since July
1999. As a Class III director, Mr. Molloy's term in office will expire in 2006.
Mr. Molloy founded the Molloy Group and served as its chief executive officer
and chairman of the board from October 1992 until we acquired that company in
July 1999. Subsequent to our acquisition of the Molloy Group, Mr. Molloy served
as a consultant with us from July 1999 through January 2001. Since October 2002,
Mr. Molloy has served as Chief Executive Officer of Connotate Technologies,
Inc., a software technology firm. Mr. Molloy is the inventor of the patented
Cognitive Processor(R) used in our products. Mr. Molloy received a Bachelor of
Arts degree in music and physics from Columbia University.

None of our executive officers or directors is related to any other
executive officer or to any of our directors. Our executive officers are elected
annually by our board of directors and serve until their successors are duly
elected and qualified.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than 10% of our equity securities, to file
initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission. Such persons are required by the Exchange
Act to furnish us with copies of all Section 16(a) forms they file.

Based on our review of the copies of such forms received by us with respect
to transactions during 2003, or written representations from reporting persons,
we believe that all filing requirements applicable to our directors, executive
officers and persons who own more than 10% of our equity securities have been
complied with on a timely basis except that Thomas Unterberg and C.E. Unterberg
Towbin failed to report their acquisition of convertible notes in payment of
interest on convertible notes owned by them and their affiliates. Mr. Unterberg
has subsequently reported the acquisition of these securities on a Form 5 filed
in January 2004. Our board of directors has designated Timothy Wallace as our
"audit committee financial expert" and has determined that he is independent
within the meaning of the rules of the SEC.

CODE OF ETHICS

We have adopted a Corporate Code of Conduct and Ethics (the "Code of
Ethics") that applies to our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions, as well as to other directors, officers and employees of
ours. The Code of Ethics is posted on our website (www.serviceware.com) and is
available in print free of charge to any shareholder who requests a copy.
Interested parties may address a written request for a printed copy of the Code
of Ethics to: Frank Lauletta, ServiceWare Technologies, Inc., One North Shore
Centre, 12 Federal Street, Suite 503, Pittsburgh Pennsylvania 15212. We intend
to satisfy the disclosure requirement regarding any amendment to, or a waiver
of, a provision of the Code of Ethics for our principal executive officer,
principal financial officer, principal accounting officer or controller or
persons performing similar functions by posting such information on our website.

ITEM 11. EXECUTIVE COMPENSATION

The following table shows, for the fiscal years ended December 31, 2003,
2002, and 2001, the cash compensation paid by us, as well as certain other
compensation paid or accrued for such year, to our chief

61

executive officer and other executive officers during 2003. Such table also
indicates all capacities in which they served.

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

(1) Mr. Heyman commenced employment with us in September 2001, and therefore,
the compensation shown for him for 2001 is for the period from September
2001 through December 2001.

(2) Includes contributions by us under our 401(k) Plan.

(3) 50,000 of the options granted to Mr. Schwartzman in 2001 were canceled in
September 2002 and reissued with a new price in March 2003.

None of the individuals listed above received perquisites or personal
benefits during any of the years indicated in excess of the lesser of $50,000 or
10% of his annual salary and bonus. The amount of such benefits to all executive
officers as a group during any of the years indicated was less than 10% of their
aggregate annual salaries and bonuses.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Our compensation committee currently consists of Thomas Unterberg and
Timothy Wallace. Neither of the members of our compensation committee has ever
been an officer or employee of our company. None of our executive officers has
served or serves as a member of our compensation committee of any entity that
has one or more executive officers on our board of directors or compensation
committee. There are no, and during 2003 there were no, compensation committee
interlocks.

EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS

Under the provisions of Kent Heyman's employment agreement and our
executive compensation plan, Mr. Heyman is entitled to a salary of $225,000 per
year with a target bonus of $125,000 for 2004. Mr. Heyman can earn up to 150% of
the target bonus based on our EBITDA performance during 2004. In addition, Mr.
Heyman will be granted options to purchase 800,000 shares of stock with vesting
over three years. The employment agreement expires on January 25, 2005, unless
sooner terminated. Mr. Heyman is also entitled to participate in all of our
standard benefit plans.

Under the provisions of Scott Schwartzman's employment agreement and our
executive compensation plan, Mr. Schwartzman is entitled to a salary of $195,000
per year with a target bonus of $100,000 for 2004. Mr. Schwartzman can earn up
to 150% of the target bonus based on our EBITDA performance during 2004 and his
individual performance. In addition, Mr. Schwartzman will be granted options to
purchase 500,000 shares of stock with vesting over three years. The employment
agreement expires on January 25, 2005, unless sooner terminated. Mr. Schwartzman
is also entitled to participate in all of our standard benefit plans.

Under their employment agreements, each of Mr. Heyman and Mr. Schwartzman
is entitled to a severance package equal to six months of their base salary if
their employment with us is terminated without cause or as a result of a change
of control. Additionally, 100% of their annual bonus is automatically payable as
a result of a change of control, with 50% paid at the closing of the transaction
effecting the change of control and the balance paid at the earlier of nine
months after the closing or upon termination as a result of a change of control.

62

OPTION GRANTS IN LAST FISCAL YEAR

The table below sets forth information regarding all stock options granted
in the 2003 fiscal year under our stock option plans to our executive officers
named in the Summary Compensation Table above.

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

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

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES

The following table shows aggregate exercises of options during 2003 and
the values of options held as of December 31, 2003, by our executive officers
named in the Summary Compensation Table above.

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(1) Amounts shown are based upon the closing sale price for our common stock on
December 31, 2003, which was $0.60 per share.

COMPENSATION OF DIRECTORS

Our directors do not receive any cash compensation for their services as
directors, but we reimburse directors for reasonable and necessary expenses
incurred in connection with attendance at meetings of our board of directors and
other company business. On March 21, 2002, pursuant to our 2000 Stock Incentive
Plan, we granted to each of Messrs. Hemphill, Molloy, Unterberg and Wallace
options to purchase 285,000 shares of our common stock, and we granted to Mr.
Goodman options to purchase 225,000 shares of our common stock. The exercise
price of these options is $0.40 per share, and one-half of the options vest on
each of March 21, 2003 and 2004. On October 15, 2003, we granted Mr. Wallace
options to purchase 150,000 shares of our common stock. The exercise price of
these options is $0.26 per share, and one-half of the options vest on each of
October 15, 2004 and 2005.

From time to time, members of our board of directors have previously been
granted options to purchase shares of our common stock. See "Security Ownership
of Management and Certain Beneficial Owners" for disclosure of vested options
held by each director.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The following table sets forth, as of March 18, 2004 (unless otherwise
indicated in the footnotes), certain information with respect to our common
stock owned beneficially by each director, by each executive officer,

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by all executive officers and directors as a group and by each person known by
us to be a beneficial owner of more than 5% of our outstanding common stock.

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* 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 52,252,474
shares of common stock outstanding on March 18, 2004, plus any common stock
equivalents (convertible securities) 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
March 25, 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 626,923 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 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) Mr. Heyman's shares include 1,150,000 shares of our common stock underlying
options which are presently exercisable.

(5) Mr. Schwartzman's shares include 875,000 shares of our common stock
underlying options which are presently exercisable.

(6) Mr. Hemphill's shares consist of 285,000 shares of our common stock
underlying options which are presently exercisable.

(7) Mr. Molloy's ownership includes 25,000 shares of our common stock owned by
Mr. Molloy's wife and 379,125 shares of our common stock underlying options
which are presently exercisable.

(8) Information is based on information provided by the beneficial owner as of
March 25, 2004, and assumes no changes in beneficial ownership since that
time. Includes 1,170,288 shares (including warrants

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exercisable for 125,000 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. Excludes 12,500 shares of
our common stock owned by Mr. Unterberg's wife, as to which Mr. Unterberg
disclaims beneficial ownership.

(9) Mr. Wallace's shares include 462,000 shares of our common stock underlying
options which are presently exercisable.

(10) See Notes 4 through 9.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table provides information regarding options, warrants or
other rights to acquire equity securities under our equity compensation plans as
of December 31, 2003:

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We entered into a note purchase agreement on May 6, 2002 with C.E.
Unterberg, Towbin Private Equity Partners II-Q, L.P., C.E. Unterberg, Towbin
Private Equity Partners II, L.P., certain other entities affiliated with Mr.
Unterberg, a member of our board of directors, and other investors pursuant to
which we agreed to issue and sell to those investors 10% convertible promissory
notes for an aggregate principal amount of $3,000,000. On June 19, 2002, we
amended the note purchase agreement to increase the amount of convertible notes
issuable to $3,250,000. Of the $3,250,000 of convertible notes issued,
convertible notes with an aggregate principal amount of $2,635,000 were acquired
by Mr. Unterberg and entities affiliated with him, who collectively owned
approximately 20% of our stock prior to the acquisition of convertible notes.
The note purchase agreement provided for a maturity date of 18 months from the
closing date, interest at 10% per annum, and a conversion price of $0.30 per
share. In March 2003, our convertible notes were amended to extend the maturity
date to July 15, 2004 and to reduce the conversion price to $0.25 per share.
Interest can be paid in cash or additional convertible notes, at our option. On
October 31, 2002, April 30, 2003 and October 31, 2003 we issued additional
convertible notes in payment of interest due on those dates. The convertible
notes were senior unsecured obligations that rank senior to all future
subordinated indebtedness, pari passu to all existing and future senior,
unsecured indebtedness and subordinate to all existing and future senior secured
indebtedness. All of the convertible notes were converted into common stock in
February 2004.

C. E. Unterberg, Towbin, LLC served as one of the placement agents for us
in connection with our private placement of an aggregate of 12,307,692 shares of
common stock and warrants to purchase up to an aggregate of 6,153,846 shares of
common stock. In connection with the private placement, C. E. Unterberg, Towbin,
LLC received a placement fee of $240,000 and agent warrants to acquire 184,615
units, each unit consisting of one share of our common stock and a warrant to
purchase an additional one-half share of our common stock. Affiliates of C. E.
Unterberg, Towbin, LLC purchased $445,000 of units in the private placement. In
addition, entities with respect to which Thomas Unterberg has or shares voting
power purchased $162,500 of units in the private placement.

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ITEM 14. PRINCIPAL ACCOUNTANT'S FEES AND SERVICES

AUDIT FEES

The aggregate fees billed by PricewaterhouseCoopers LLP for the audit of
our annual financial statements, the reviews of our financial statements
included in our quarterly reports on Form 10-Q and services that are normally
provided by the accounting firm in connection with statutory and regulatory
filings were approximately $113,550 for the year ended December 31, 2003 and
$120,363 for the year ended December 31, 2002.

The aggregate fees billed by Ernst & Young LLP for the audit of our annual
financial statements, the reviews of our financial statements included in our
quarterly reports on Form 10-Q and services that are normally provided by the
accounting firm in connection with statutory regulatory filings were
approximately $22,800 for the year ended December 31, 2002. No such fees were
incurred to Ernst & Young LLP in 2003.

AUDIT-RELATED FEES

The aggregate fees billed by PricewaterhouseCoopers LLP for assurance and
related services that were reasonably related to the performance of the audit
and reviews referred to above were approximately $3,500 for the year ended
December 31, 2003 and $13,884 for the year ended December 31, 2002. The fees in
2003 were attributable to travel expenses related to the audit. The fees in 2002
were attributable to travel expenses related to the audit and S-3 filings.

The aggregate fees billed by Ernst & Young LLP for assurance and related
services that were reasonably related to the performance of the audit and
reviews referred to above were approximately $15,233 for the year ended December
31, 2002. These fees primarily related to S-3 filings. No such fees were
incurred to Ernst & Young LLP in 2003.

TAX FEES

No fees were billed for tax compliance, tax advice and tax planning
rendered by PricewaterhouseCoopers LLP or Ernst & Young LLP during 2003 or 2002.

ALL OTHER FEES

The aggregate fees billed for all other non-audit services rendered by
PricewaterhouseCoopers LLP to us were approximately $7,200 for the year ended
December 31, 2002. These fees primarily related to the August 28, 2002 tender
offer and consultation regarding our stock option plan. No such fees were
incurred in 2003.

The aggregate fees billed for all other non-audit services rendered by
Ernst & Young LLP to us were approximately $12,100 for the year ended December
31, 2002. These fees primarily related to revenue recognition consultation. No
such fees were incurred in 2003.

All non-audit services require an engagement letter to be signed prior to
commencing any services. The engagement letter must detail the fee estimates and
the scope of services to be provided. The current policy of our audit committee
is that the audit committee must be informed of the non-audit services in
advance of the engagement and the audit committee's responsibilities in this
regard may not be delegated to management.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

1. Financial Statements and Supplementary Data. The following consolidated
financial statements of the Company are included in Part II, Item 8:

2. Financial Statement Schedules. Schedules are not submitted because they
are not required or are not applicable, or the required information is
shown in the consolidated financial statements or notes thereto.

3. Exhibits. The Exhibits listed below are filed or incorporated by
reference as part of this Form 10-K. Where so indicated by footnote,
exhibits which were previously filed are incorporated by reference.

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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.

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(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

* Filed herewith.

(b) Reports on Form 8-K

During the quarter ended December 31, 2003, we filed a current report on
Form 8-K on October 30, 2003 to announce earnings for the third quarter 2003.

* * * * * *

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of
Pittsburgh, Commonwealth of Pennsylvania on March 29, 2004.

SERVICEWARE TECHNOLOGIES, INC.

By: /s/ KENT HEYMAN

------------------------------------
Kent Heyman
Chief Executive Officer

Each person whose signature appears below hereby appoints Kent Heyman and
Scott Schwartzman, and both of them, either of whom may act without the joinder
of the other, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K, and to file the same, with all exhibits thereto and all
other documents in connection therewith, with the Commission, granting unto said
attorneys-in-fact and agents full power and authority to perform each and every
act and thing appropriate or necessary to be done, as fully and for all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or their substitute or substitutes
may lawfully do or cause to be done by virtue hereof.

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