SERVICEWARE TECHNOLOGIES INC/ PA
S-1/A, 2000-07-13
PREPACKAGED SOFTWARE
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<PAGE>   1


     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 13, 2000

                                                      REGISTRATION NO. 333-33818
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                            ------------------------


                                AMENDMENT NO. 4

                                       TO

                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                            ------------------------

                         SERVICEWARE TECHNOLOGIES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                <C>                                <C>
             DELAWARE                             7372                            25-1647861
 (STATE OR OTHER JURISDICTION OF      (PRIMARY STANDARD INDUSTRIAL             (I.R.S. EMPLOYER
  INCORPORATION OR ORGANIZATION)      CLASSIFICATION CODE NUMBER)           IDENTIFICATION NUMBER)
</TABLE>

                              333 ALLEGHENY AVENUE
                          OAKMONT, PENNSYLVANIA 15139
                                 (412) 826-1158
              (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
       INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                            ------------------------

                                  MARK TAPLING
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                         SERVICEWARE TECHNOLOGIES, INC.
                              333 ALLEGHENY AVENUE
                          OAKMONT, PENNSYLVANIA 15139
                                 (412) 826-1158
           (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
                   INCLUDING AREA CODE, OF AGENT FOR SERVICE)
                            ------------------------

                                   COPIES TO:


<TABLE>
<S>                                                 <C>
                   EDUARDO VIDAL                                     MARIE CENSOPLANO
                   DAVID WEXLER                            PAUL, HASTINGS, JANOFSKY & WALKER LLP
            MORGAN, LEWIS & BOCKIUS LLP                               399 PARK AVENUE
                  101 PARK AVENUE                                NEW YORK, NEW YORK 10022
             NEW YORK, NEW YORK 10178                                 (212) 318-6000
                  (212) 309-6000
</TABLE>


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

    APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
                            ------------------------

    If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.  [ ]

    If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.  [ ]

    If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]

    If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box.  [ ]
                            ------------------------

    THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

        THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
        CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
        STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
        EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND
        IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE
        SUCH OFFER OR SALE IS NOT PERMITTED.

                SUBJECT TO COMPLETION, DATED             , 2000

PROSPECTUS

                                4,500,000 SHARES

                               [SERVICEWARE LOGO]

                                  COMMON STOCK

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

This is the initial public offering of 4,500,000 shares of common stock of
ServiceWare Technologies, Inc. We are selling all of the shares of common stock
offered under this prospectus. We anticipate that the initial public offering
price will be between $10.50 and $12.50 per share.

There is currently no public market for our shares. We have applied to have our
common stock approved for listing on the Nasdaq National Market under the symbol
"SVCW".

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 4 TO READ ABOUT RISKS YOU SHOULD CONSIDER CAREFULLY BEFORE
BUYING SHARES OF OUR COMMON STOCK.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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

<TABLE>
<CAPTION>
                                                                PER
                                                               SHARE            TOTAL
                                                              --------         --------
<S>                                                           <C>              <C>
Public offering price.......................................  $                $
Underwriting discounts and commissions......................  $                $
Proceeds, before expenses, to us............................  $                $
</TABLE>

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

We have granted the underwriters a 30-day option to purchase up to an additional
675,000 shares of common stock from us at the initial public offering price less
the underwriting discounts. The underwriters expect to deliver the shares on or
about             , 2000.

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

BEAR, STEARNS & CO. INC.                                                SG COWEN
                                 WIT SOUNDVIEW
                                                          C.E. UNTERBERG, TOWBIN
               The date of this prospectus is             , 2000.
<PAGE>   3





             [Flow chart depicting the manner in which our products
                    and services are accessed by end-users.]
<PAGE>   4

                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Prospectus Summary..........................................     1
Summary Consolidated Financial Information..................     3
Risk Factors................................................     4
Corporate Information.......................................    16
Use of Proceeds.............................................    16
Dividend Policy.............................................    17
Dilution....................................................    18
Capitalization..............................................    19
Selected Historical Financial Data..........................    20
Unaudited Pro Forma Consolidated Financial Data.............    21
Management's Discussion and Analysis of Financial Condition
  and Results of Operations.................................    23
Business....................................................    32
Management..................................................    43
Certain Transactions........................................    52
Principal Stockholders......................................    56
Description of Capital Stock................................    59
Shares Eligible for Future Sale.............................    62
Material U.S. Tax Considerations for Non-U.S. Holders.......    64
Underwriting................................................    67
Legal Matters...............................................    69
Experts.....................................................    69
Where You Can Find More Information.........................    69
Index to Consolidated Financial Statements..................   F-1
</TABLE>


                                        i
<PAGE>   5

                               PROSPECTUS SUMMARY

     To understand this offering fully you should read carefully the entire
prospectus, including the risk factors and the financial statements.

                                  OUR BUSINESS

     We are a leading provider of software and content solutions that businesses
use to provide an Internet-based e-service platform to their customers,
partners, suppliers and employees. We develop and market a comprehensive service
solution to meet the needs of these end-users who, together, form an extended
enterprise. Our eService Suite(TM) includes licensed and subscription-based
software and content products that enable businesses to capture enterprise
knowledge, solve their end-users' problems, reuse solutions and share captured
knowledge through the Internet. Additionally, our patented Cognitive
Processor(TM) contained in the eService Suite continually learns at each
request, keeping knowledge up-to-date and accurate and providing end-users with
relevant and useful answers to their questions. Our customers include Andersen
Consulting, Clarify, Compaq, Hewlett-Packard, Marconi Communications, Merrill
Lynch, Pfizer and Texas Instruments.

     Despite the urgent need for comprehensive service solutions, current
service offerings have not kept pace with the rapid evolution of e-commerce and
traditional commerce. Traditional service solutions, such as call centers and
help desks, have proven to be neither scalable nor cost-effective for the
enterprise. Despite attempts to streamline these operations, companies have been
unable to eliminate the inefficiencies of these solutions due to labor-intensive
and time-consuming customer interactions and the high turnover rates of service
professionals. Customers are becoming increasingly dissatisfied with current
service solutions because the limitations of these systems result in
unacceptable levels of service. The increasing dissatisfaction with current
customer service and the heightened expectations resulting from the growth of
the Internet require a solution which includes intelligent application software
and content.

     Using our eService Suite, our customers can develop and manage a knowledge
base of service-related support information and disseminate that knowledge
through multiple communication channels, such as telephone support, e-mail, chat
and Web-based self-service. Additionally, our Internet-based knowledge portal,
RightAnswers.com(TM), enables our customers to access a continuously updated
knowledge base of content obtained from leading technology companies, including
Microsoft, Novell and 3Com, as well as our internally produced knowledge
content. We also offer integration, training and consulting services that enable
our customers to realize the benefits of our eService Suite.

     We have established distribution alliances with leading providers of
complementary Internet software technologies who resell or co-market our
solutions. We currently have strategic distribution and marketing alliances with
several vendors, including Clarify, Kana Communications, Oracle, Peregrine
Systems, Remedy, Siebel Systems and Tivoli.

     Our products enable our customers to provide e-service solutions that are
intelligent in that they are interactive, adaptable, and have the capability to
update themselves automatically. Customers can use our software and content
products separately or as an integrated solution to reduce the cost and improve
the quality of customer service. We believe that our solutions provide our
customers with a number of key benefits, including:

     - Strengthened Relationships with End-Users.  Our solutions allow
       enterprises to provide their customers and other end-users with
       easy-to-use, intuitive, timely and accurate service. By providing a
       better and more user-friendly experience, we believe that our solutions
       increase the likelihood that a business' customers will complete specific
       transactions and that an enterprise will be able to attract and retain
       its customers.

     - Decreased Operating Costs.  By enabling end-users to access customer
       service online and aiding customer service agents to more effectively
       handle user requests, our solutions provide cost savings and improve
       employee productivity.

                                        1
<PAGE>   6

     - Improved Dissemination of Enterprise Knowledge.  Our eService Suite
       enables our customers to develop a common knowledge base of intellectual
       capital and make it available throughout the extended enterprise.
       Additionally, our eService Suite provides a self-learning capability that
       continually learns at each request, keeping responses up-to-date and
       accurate.

     - Seamless Integration with Existing Solutions.  By integrating with
       existing call center and help desk products, workflow tools, knowledge
       bases and other applications, our software helps customers preserve their
       investments in legacy systems.

     Our objective is to leverage our Internet-based platform to become the
leading worldwide provider of e-service solutions. To achieve our goal, we
intend to enhance our technology and product leadership, broaden our content
solutions to new vertical markets, expand our Internet-based delivery model,
continue to build brand awareness, strengthen strategic alliances and increase
our international presence.

     As of December 31, 1998, 1999 and March 31, 2000, our accumulated deficit
was $7.2 million, $17.2 million and $20.6 million. Net loss for the years ended
December 31, 1997, 1998, 1999 and for the three months ended March 31, 2000 was
$1.5 million, $3.8 million, $10.1 million and $3.4 million.

                                  THE OFFERING


<TABLE>
<S>                                                    <C>
Common Stock Offered.................................  4,500,000 shares
Common Stock to be Outstanding After this Offering...  23,418,558 shares
Use of Proceeds......................................  We intend to use the net proceeds from this
                                                       offering for general corporate purposes,
                                                       including for the repayment of our term loan,
                                                       expansion of our software development staff
                                                       and our sales and marketing capabilities,
                                                       international expansion, possible strategic
                                                       acquisitions or investments and working
                                                       capital requirements.
Proposed Nasdaq National Market Symbol...............  SVCW
</TABLE>



     The outstanding share information is as of June 30, 2000. This information
excludes 2,680,560 shares of common stock issuable upon exercise of options
outstanding as of June 30, 2000, with a weighted average exercise price of $2.70
per share and 389,021 shares of common stock issuable upon exercise of
outstanding warrants with a weighted average exercise price of $6.17 per share.
This information includes 677,480 shares of common stock issuable upon the
declaration of the accrued dividends on Series A and Series B preferred stock
and 68,473 shares of common stock issuable upon the exercise of outstanding
warrants that would otherwise lapse on the effective date of this offering with
a weighted average exercise price of $3.01 per share.


     Unless otherwise indicated, all information contained in this prospectus:

     - assumes conversion of all outstanding convertible preferred stock into
       common stock upon the closing of this offering; and

     - assumes the underwriters' over-allotment option is not exercised.

RECENT DEVELOPMENTS


     On June 2, 2000, we sold an aggregate of 1,325,000 shares of our Series F
convertible preferred stock, par value $0.01 per share, at a purchase price of
$8.00 per share to a total of nine accredited investors, eight of which are
current stockholders and one of which is a new accredited investor. The eight
current stockholders are CEO Venture Fund III, Birchmere Ventures II, Norwest
Equity Partners V, Lovett Miller Venture Fund II, Geocapital III, PNC Investment
Corp. and two affiliates of C.E. Unterberg, Towbin. The new investor is EDS. The
investors received certain registration rights in connection with the purchase
of the Series F convertible preferred stock. Each share of Series F convertible
preferred stock is automatically convertible into one share of common stock upon
the completion of this offering, subject to adjustment. The proceeds from the
Series F convertible preferred stock will be used for general working capital
purposes.


                                        2
<PAGE>   7


                   SUMMARY CONSOLIDATED FINANCIAL INFORMATION



     The following table summarizes the consolidated financial information for
our business. The summary consolidated financial information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
related notes included elsewhere in this prospectus. See notes 2 and 12 of
"Notes to Consolidated Financial Statements" for an explanation of the
determination of the number of shares used in computing per share data. The pro
forma amounts reflect the June 2000 issuance of 1,325,000 shares of Series F
convertible preferred stock at $8.00 per share after deducting issuance costs
and the automatic conversion of our Series A, B, C, D, E and F convertible
preferred stock into our common stock, which will occur upon the closing of this
offering. Pro forma as adjusted amounts reflect the pro forma adjustments as
well as the $2.5 million repayment of the PNC loan and the sale of 4.5 million
shares of our common stock in this offering assuming an initial public offering
price of $11.50 per share, after deducting underwriting discounts and
commissions and offering expenses payable by us.



<TABLE>
<CAPTION>
                                                                                THREE MONTHS
                                                                              ENDED MARCH 31,
                                       YEAR ENDED DECEMBER 31,                  (UNAUDITED)
                           -----------------------------------------------   ------------------
                            1995     1996      1997      1998       1999       1999      2000
                           ------   -------   -------   -------   --------   --------   -------
                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                        <C>      <C>       <C>       <C>       <C>        <C>        <C>
STATEMENT OF OPERATIONS
  DATA:
  Revenues...............  $2,906   $ 5,037   $ 9,686   $12,923   $ 17,652   $  3,480   $ 6,962
  Operating loss.........     (70)     (995)   (1,548)   (3,803)    (9,889)    (1,807)   (3,415)
  Net loss...............     (40)     (948)   (1,508)   (3,816)   (10,062)    (1,843)   (3,421)
  Net loss applicable to
     common
     stockholders........  $  (91)  $(1,004)  $(1,568)  $(3,940)  $(10,157)  $ (1,890)  $(3,421)
  Basic and diluted net
     loss per share......  $(0.02)  $ (0.21)  $ (0.34)  $ (0.85)  $  (1.88)  $  (0.41)  $ (0.49)
  Weighted average shares
     outstanding used in
     computing basic and
     diluted net loss per
     share...............   5,266     4,738     4,609     4,622      5,402      4,637     6,948
  Pro forma net loss per
     share from
     continuing
     operations..........                                         $  (0.63)             $ (0.19)
  Shares used in
     computing pro forma
     basic and diluted
     net loss per
     share...............                                           16,035               17,581
</TABLE>



<TABLE>
<CAPTION>
                                                                       MARCH 31, 2000
                                                          -----------------------------------------
                                                                                         PRO FORMA
                                                            ACTUAL        PRO FORMA     AS ADJUSTED
                                                          -----------    -----------    -----------
                                                          (UNAUDITED)    (UNAUDITED)    (UNAUDITED)
<S>                                                       <C>            <C>            <C>
BALANCE SHEET DATA:
  Cash and cash equivalents.............................    $ 4,016        $14,566        $58,556
  Working capital.......................................     (4,371)         6,179         52,669
  Total assets..........................................     24,883         35,433         79,423
  Outstanding debt including capital leases.............      4,360          4,360          1,860
  Stockholders' equity (deficit)........................      7,696         18,246         64,736
</TABLE>


                                        3
<PAGE>   8

                                  RISK FACTORS

     You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occurs, our
business, financial condition or results of operations could be materially
adversely affected. In this case, the trading price of our common stock could
decline, and you may lose all or part of your investment.

                         RISKS RELATED TO OUR BUSINESS

BECAUSE OUR CURRENT LINE OF PRODUCTS IS RELATIVELY NEW, OUR HISTORICAL FINANCIAL
RESULTS ARE NOT HELPFUL IN EVALUATING OUR PROSPECTS.

     We have undergone a number of changes in our business model. We began in
1991 as a provider of consulting services, and later developed and sold content
relating to technology products for use by customer service operations. In July
1999, we acquired the Molloy Group and its complementary software product suite.
Recently, we integrated our product offerings with those of the Molloy Group and
launched a suite of software and content products intended to form the basis of
businesses' e-service solutions. Since our current line of products is
relatively new, our historical financial results are not helpful in evaluating
our prospects.

ALTHOUGH WE HAVE ACHIEVED RECENT REVENUE GROWTH, WE HAVE A HISTORY OF LOSSES,
ANTICIPATE THAT WE WILL CONTINUE TO INCUR LOSSES FOR THE FORESEEABLE FUTURE 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. Therefore, our recent annual
revenue growth should not be an indicator of the rate of revenue growth, if any,
we can expect in the future.

     As of March 31, 2000, we had an accumulated deficit of $20.6 million. We
have not achieved profitability on a quarterly or annual basis to date. We
anticipate that we will continue to incur net losses for at least the next 12 to
24 months. In 1997, we incurred net losses of $1.5 million, in 1998 we incurred
net losses of $3.8 million, in 1999 we incurred net losses of $10.1 million and
in the three months ended March 31, 2000, we incurred net losses of $3.4
million. We currently expect to increase our operating expenses significantly,
expand our software development staff, increase our sales and marketing
expenditures, and continue to develop and extend our knowledge portal,
RightAnswers.com. If these expenses precede or are not followed by increased
revenues, our losses will continue to grow.

SINCE A SIGNIFICANT PORTION OF OUR REVENUES ARE DERIVED FROM NON-RECURRING SALES
TO A LIMITED NUMBER OF CUSTOMERS AND OUR EXPENSES ARE RELATIVELY FIXED, OUR
QUARTERLY OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST, AND IT IS
DIFFICULT TO DRAW CONCLUSIONS ABOUT OUR FUTURE PERFORMANCE BASED ON OUR PAST
PERFORMANCE.

     Our projected expense levels are based on our expectations regarding future
revenues and are relatively fixed in the short term. If revenue levels are below
expectations in a particular quarter, operating results and net income are
likely to be disproportionately adversely affected because our fixed expenses
are greater than our variable expenses. In addition, a significant percentage of
our revenues is typically derived from non-recurring sales to a limited number
of customers, so it is difficult to estimate accurately future revenues.

     Our quarterly results are also impacted by our revenue recognition
policies. Since 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
shortly after an order is received because installation and training can
generally be completed in significantly less time than for new customers.
However, we may miss recognizing expected revenues at

                                        4
<PAGE>   9

the end of a quarter due to delays in the receipt of expected orders by existing
customers. Delays in recognizing revenues may also occur as a result of delayed
reporting by our distributors.

     Because of these and other factors, revenues in any one quarter are not
indicative of revenues in any future period 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 e-SERVICE SOLUTIONS MARKET IS NEW AND EVOLVING AND, IF IT DOES NOT GROW
RAPIDLY, OUR BUSINESS WILL BE ADVERSELY AFFECTED.

     The e-service 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 eService Suite 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
e-service solutions.

WE ARE CURRENTLY IN THE PROCESS OF RE-BRANDING AND EXPANDING OUR PRODUCT LINES
AND INTEGRATING OUR PRODUCTS WITH RIGHTANSWERS.COM. CUSTOMERS MAY NOT ACCEPT OR
DESIRE THESE CHANGES, RESULTING IN A REDUCTION IN REVENUES.

     Our future financial performance will depend, in significant part, on
customer acceptance of our eService Suite software product line and
RightAnswers.com, both of which became widely available to customers in December
1999. Since 1996, we have been selling technology-related content products on
CD-ROMs under the brand name Knowledge-Pak Desktop Suite(TM). These content
products form the basis of the newly released RightAnswers.com product offering
in both its Web and CD-ROM versions. In 1997, we began selling the companion
Knowledge-Pak Architect(TM) and Knowledge-Pak Viewer(TM) software applications,
which allow our customers to modify our content products or develop their own
knowledge bases for customer service and support. In 1999, we acquired a
complementary software product suite from the Molloy Group. The eService Suite
integrates Knowledge-Pak Architect and Knowledge-Pak Viewer under a different
brand name, adds the self-learning capability acquired from the Molloy Group to
the software and connects our customers' knowledge base to RightAnswers.com. We
cannot be sure that this product line will provide the benefits described in
this prospectus, gain broad commercial acceptance or compete successfully
against products from other vendors.

IF OUR CONTENT PARTNERSHIPS WERE TERMINATED OR NOT RENEWED, WE WOULD LOSE A
LARGE PART OF OUR CONTENT OFFERINGS, WHICH WOULD MAKE OUR CONTENT PRODUCTS LESS
DESIRABLE AND REDUCE OUR MARKET SHARE.

     We currently have content partnerships with Microsoft, Novell and 3Com.
These partnerships provide our RightAnswers.com product offering with content
for its knowledge base. If these partnerships were terminated or not renewed,
our sales of our content products may be reduced.

OUR FAILURE TO EXPAND OUR DIRECT SALES FORCE WILL IMPEDE OUR GROWTH.

     Our ability to achieve significant growth in the future will largely depend
on our success in recruiting and training a sufficient number of direct sales
personnel. Our products and services require a sophisticated sales effort
targeted at the senior management of our prospective customers. New hires
require training and take time to achieve full productivity. Our recent hires
and planned new hires may not become as productive as necessary, and we may be
unable to hire sufficient numbers of qualified individuals in the future. If we
fail to expand our direct sales force, our revenue may not grow or it may
decline.

                                        5
<PAGE>   10

OUR FAILURE TO DEVELOP NEW RELATIONSHIPS AND ENHANCE EXISTING RELATIONSHIPS WITH
THIRD-PARTY DISTRIBUTORS, SOFTWARE VENDORS AND VALUE-ADDED RESELLERS THAT HELP
SELL OUR SERVICES AND PRODUCTS MAY ADVERSELY AFFECT OUR REVENUES.

     We derive a significant portion of our product revenues from third-party
software distributors, vendors and value-added resellers. Our ability to achieve
revenue growth in the future will depend on our success in continuing to develop
new relationships and enhance existing relationships with these software
distributors, vendors and value-added resellers. Additionally, the loss of a
third-party distributor could significantly adversely affect our financial
results. In 1999, sales to Tivoli accounted for 17% of our recognized revenues.
At times, we rely on these third parties to recommend and sell our products to
their customers, and to install and support our products for their customers.
Because of our reliance on these third parties, we face the risk that these
software distributors, vendors and value-added resellers may:

     - choose not to recommend, install or sell our products;

     - develop, market or recommend software applications that compete with our
       products;

     - fail to implement their products and/or our e-service solutions and
       services on the schedule required by the customers;

     - encounter their own financial or operational problems;

     - change their business strategy;

     - terminate their business relationships with us; or

     - be acquired by companies who choose to limit or discontinue relationships
       with us.

WE HAVE RELATIVELY FEW MAJOR CUSTOMERS, AND THE LOSS OF ONE OR MORE OF OUR
PRINCIPAL CUSTOMERS WOULD RESULT IN DECREASED REVENUES.

     Our results of operations in any given period have depended to a
significant extent upon sales to a small number of major customers. Our loss of
one or more of our major customers would result in decreased revenues. Further,
in the event of any downturn in any existing or potential customer's business or
general economic conditions, licenses and subscriptions for our products and
services may be deferred or terminated, also resulting in a decrease in our
revenues.

DUE TO THE LENGTHY SALES CYCLES OF OUR PRODUCTS AND SERVICES, THE TIMING OF OUR
SALES ARE 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, effective
use 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 if a greater
proportion of our total revenues, as we anticipate, is derived from our eService
Suite, which has a high average contract size. 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 18 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. Because of the lengthy sales cycle for our products and
services, we may not realize forecasted revenues from a specific customer in the
quarter in which we expend these significant resources.

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

     A component of our strategy is our planned increase in efforts to attract
more international customers. We are currently exploring business opportunities
in the United Kingdom, France, Germany, Italy,

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<PAGE>   11

Norway, Sweden and Finland. To date, we have only limited experience in
providing our products and services internationally. If we are not able to
market our products and services successfully in international markets, our
expenses may exceed our revenues. By doing business in international markets we
face risks, such as unexpected changes in tariffs and other trade barriers,
fluctuations in currency exchange rates, difficulties in staffing and managing
foreign operations, 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 and may contribute further to our net losses.

IF WE ARE NOT ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE OR UPDATE OUR
CONTENT EFFECTIVELY, 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. Our content
products are comprised of a large amount of information that needs to be updated
frequently, requiring us to continue to invest substantial resources in order to
maintain the accuracy and utility of our content. Also, we rely upon some of our
customers and other third parties to provide data and other support for the
ongoing updating of these products. If we fail to keep pace with the
technological progress of our competitors or update our content effectively,
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, including the search features of
RightAnswers.com. 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.

OUR SUCCESS DEPENDS UPON OUR ABILITY TO HIRE AND RETAIN KEY PERSONNEL,
ESPECIALLY CONTENT AND SOFTWARE DEVELOPERS.

     Our business requires the employment of highly skilled personnel,
especially experienced content and software developers. The inability to recruit
and retain experienced content and software developers in the future could
result in delays in developing new versions of our software products or the
release of deficient software products. Any such delays or defective products
would likely result in lower sales. Even though we expect further growth in the
number of our personnel, competition for this type of personnel is intense. In
particular, we have experienced difficulty in hiring and retaining sales
personnel, product managers, software developers and professional services
employees.

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.

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<PAGE>   12

IF CERTAIN COMPANIES 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 customer relationship
management software sold by Clarify, Kana Communications, Oracle, Peregrine
Systems, 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 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 SIGNIFICANT GOODWILL COSTS RELATED TO THE RECENT ACQUISITION OF THE
MOLLOY GROUP WHICH WILL ADVERSELY AFFECT OUR OPERATING RESULTS FOR THE
FORESEEABLE FUTURE, AND THESE COSTS COULD INCREASE.

     We face significant goodwill costs as a result of our acquisition of the
Molloy Group in July 1999. In addition, we may not achieve value from the
acquisition of the Molloy Group commensurate with the purchase price we paid.

     As a result of the Molloy Group acquisition, we have recorded a significant
amount of goodwill that will adversely affect our operating results for the
foreseeable future. As of March 31, 2000, we had goodwill of approximately $11.4
million, which we expect to amortize over two to four years from the date of the
acquisition. If the amount of recorded goodwill is increased or we have future
losses and are unable to demonstrate our ability to recover the amount of the
goodwill, the amount of amortization could be increased, or the period of
amortization could be shortened. This would either increase annual amortization
charges or result in the write-off of goodwill in a one-time, non-cash charge,
either of which could be significant and would likely harm our operating
results.

BECAUSE WE COMPETE IN THE EMERGING MARKET FOR E-SERVICE SOLUTIONS, WE FACE
INTENSE COMPETITION FROM BOTH ESTABLISHED AND RECENTLY FORMED ENTITIES, AND THIS
COMPETITION MAY ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY.

     We compete in the emerging market for e-service solutions and changes in
the e-service solutions market could adversely affect our revenues and
profitability. We face competition from many firms offering a variety of
products and services. In addition, we face competition from many free or low
cost sources of information generally available via the Internet. Portions of
our content products provided to us by content providers may be the same as
content offered by those content providers as part of their Internet-based
service offerings. Large software vendors may choose to sell (or provide at low
cost or no cost) content products addressing problems encountered by users of
their software. In the future, because there are relatively low barriers to
entry in the software industry, we expect to experience additional competition
from new entrants into the e-service solutions market. In particular, our
current distributors or strategic partners may enter our market with competitive
products. Many of these potential competitors have well-established
relationships with our current and potential customers, extensive knowledge of
the e-service industry, better name recognition, significantly greater
financial, technical, sales, marketing and other resources and the capacity to
offer single vendor solutions. 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 CONTENT AND SOFTWARE PRODUCTS CONTAIN ERRORS OR FAILURES, SALES OF THESE
PRODUCTS COULD DECREASE.

     Content and 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

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<PAGE>   13

inaccurate content, and discovered software errors in certain new versions of
existing products and in new products after their introduction. In the event
that the information contained in our content 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 e-service solutions at all. In
either case, 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
expect that our customers and potential customers have a great sensitivity to
product defects.

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

     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 certain
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.

BECAUSE WE HAVE ISSUED OPTIONS TO EMPLOYEES BELOW THE INITIAL OFFERING PRICE AND
MAY DO SO AGAIN IN THE FUTURE, WE WILL INCUR ADDITIONAL NON-CASH CHARGES
ASSOCIATED WITH STOCK-BASED COMPENSATION ARRANGEMENTS.

     We have issued options to employees and non-employees which are subject to
various vesting schedules of up to 48 months. Because we have issued options to
employees below the initial offering price and may do so again in the future, we
will incur additional non-cash charges for these options. This expense could
reduce our operating results and stock price.

OUR RECENT GROWTH HAS PLACED A STRAIN ON OUR ABILITY TO RAPIDLY INSTALL AND
IMPLEMENT OUR SOFTWARE PRODUCTS AND TRAIN OUR CUSTOMERS' EMPLOYEES TO USE THESE
PRODUCTS. IF WE FAIL TO MANAGE OUR FUTURE GROWTH, OUR BUSINESS COULD SUFFER.


     As demand for our products increases, we need more trained personnel to
install and implement these products and to train our customers' employees in
their use. We recently began to expand our operations rapidly and intend to
continue this expansion. The number of our full-time employees increased from
153 as of January 1, 1999 to 245 as of June 30, 2000. This expansion and the
time and expense involved in training new employees has placed, and is expected
to continue to place, a significant strain on our managerial, operational and
financial resources, which has resulted in a backlog of orders to install our
products. To manage any further growth, we will need to improve or replace our
existing operational, customer service and financial systems, procedures and
controls. Our failure to manage properly these system and procedural transitions
could impair our ability to attract and service customers, and could cause us to
incur higher operating costs and delays in the execution of our business plan.


INTEGRATION OF A NEW MANAGEMENT TEAM AND NEW PERSONNEL MAY STRAIN OUR OPERATIONS
AND OUR NEW MANAGEMENT TEAM MAY HAVE DIFFICULTY MANAGING OUR GROWTH.

     Five members of our senior management team have joined us since January 1,
1999. A significant reduction of employees occurred in conjunction with our
acquisition of the Molloy Group in July 1999. Our new employees include a number
of key managerial, sales, marketing, planning, technical and operations
personnel who have not yet been fully integrated into our organization. In
addition, our current senior management has limited experience working together
in the management of a rapidly growing enterprise. If we are unable to integrate
our new employees or if senior management fails to manage our growth
effectively, we could lose customers who believe they are not receiving the
support they require from us and we could face product delivery delays and
product quality problems.

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IF WE ARE NOT ABLE TO UPGRADE OUR SYSTEMS AND RIGHTANSWERS.COM TO ACCOMMODATE
GROWTH IN THE E-SERVICE SOLUTIONS MARKET, OUR REPUTATION WILL SUFFER, WHICH
COULD RESULT IN LOWER SALES OF OUR PRODUCTS. IN ADDITION, EXPENSES INCURRED IN
UPGRADING THE SYSTEM MAY FORCE US TO RAISE PRICES, WHICH COULD ALSO DECREASE
SALES.

     We face risks related to the ability of RightAnswers.com to operate
effectively with increased usage while maintaining the expected quality of
performance. As the volume and complexity of e-service solutions increase, we
will need to expand our systems and our network infrastructure hosted by third
parties. The expansion and adaptation of our network infrastructure will require
substantial financial, operational and management resources. If we are
unsuccessful in upgrading our systems, we may decrease sales. If our expenses
for upgrading are higher than expected, we may have to raise our prices. In
either case, sales could fall and revenues could decrease.

BECAUSE OUR SUCCESS DEPENDS ON THE UNINTERRUPTED OPERATION OF OUR COMPUTER
SYSTEMS, THEIR SABOTAGE OR SIMILAR DISRUPTIONS WOULD LIKELY DAMAGE OUR ABILITY
TO SELL OUR PRODUCTS.

     Our success largely depends on the efficient and uninterrupted operation of
our computer and communications hardware and network systems. Our network may be
vulnerable to disruptions due to electronic attacks. Because the techniques used
by computer hackers to sabotage networks change frequently and generally are not
recognized until launched against a target, we may be unable to anticipate these
techniques. An actual or perceived breach of Internet security in our internal
systems or those of our customers could adversely affect the market perception
of our products and services. We have also entered into service agreements with
some of our customers that require minimum performance standards, including
standards regarding the availability and response time of our remote content
services. If we fail to meet these standards, our customers could terminate
their relationships with us and we could be subject to contractual monetary
penalties. We have not experienced any attacks on, or interruption of,
RightAnswers.com. However, our e-mail network was interrupted for two days as a
result of the Love Bug virus, which hampered our ability to support our
customers and our internal communications.

     In addition, a substantial number of our computer and communications
systems are located in Oakmont, Pennsylvania. Our systems and operations are
vulnerable to damage or interruption from fire, power loss, telecommunications
failure and similar events.

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
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.

OUR PLAN TO EXPAND OUR SERVICE CAPABILITY COULD ADVERSELY AFFECT GROSS PROFIT
MARGINS AND OPERATING RESULTS.

     Revenues from services such as installation and training, consulting,
customer support and maintenance contracts have lower gross margins than
revenues from licenses and subscriptions. Therefore, the expected increase in
the percentage of our revenues generated from services as compared to revenues
from licenses and subscriptions will lower our overall gross margins. In
addition, the expected increase in the cost of revenues from services as a
percentage of revenues could have a negative impact on overall gross margins. In
the future, we may also choose to outsource a portion of our services business.

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<PAGE>   15

     Although margins related to revenues from services are lower than margins
related to revenues from licenses and subscriptions, our services organization
currently generates gross profits, and we are seeking to expand our services
capability and our revenues from services.

SINCE REVENUES FROM TERM LICENSES ARE RECOGNIZED MORE SLOWLY THAN THOSE FROM
PERPETUAL LICENSES, A CHANGE TO A TERM LICENSE-BASED SALES MODEL WOULD RESULT IN
LOWER RECOGNIZED SHORT TERM REVENUES.

     In the future, we may derive more revenues from licensing arrangements in
which our customer purchases a license for a fixed term. We plan to recognize
revenues from these arrangements ratably over the life of the contract. If
customer demand for these arrangements increases, we may have lower revenues in
the short term than we otherwise would, because revenues for licenses sold under
these arrangements will be recognized over time rather than upon installation
and training.

WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH MAY CAUSE
US TO INCUR SIGNIFICANT COSTS IN LITIGATION AND AN EROSION IN THE VALUE OF OUR
BRANDS AND PRODUCTS.

     Our business is dependent on proprietary technology and the value of our
brands. We rely primarily on patent, copyright, trade secret and trademark law
to protect our technology and brands. We currently have two patents. One of
these patents pertains to certain proprietary data structures and the other
pertains to our Cognitive Processor. 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. 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 data transmitted. Further, we have granted certain
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 may not be enforceable. The
unauthorized use of our proprietary technologies could also decrease the value
of our products.

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 eService Suite 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 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

                                       11
<PAGE>   16

inadequate, the knowledge base will similarly be inadequate, and the value of
our eService Suite to end-users will be impaired. Thus, successful deployment
and broad acceptance of our eService Suite 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. 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 and subscriptions that we have previously sold, any downturn in our
software licenses and subscriptions revenues would negatively impact our future
services revenues. In addition, if customers elect not to renew their
maintenance agreements, our services revenues could be significantly adversely
affected.

                     RISKS RELATED TO THE INTERNET INDUSTRY

OUR BUSINESS DEPENDS ON THE GROWTH OF THE INTERNET, THE CAPACITY AND VIABILITY
OF THE INTERNET INFRASTRUCTURE AND OUR ABILITY TO ADAPT IN A RAPIDLY CHANGING
INDUSTRY.

     Our products address a new and emerging market for e-service solutions to
businesses' customer service needs. Therefore, our future success depends
substantially upon the widespread adoption of the Internet as a significant
medium for commerce and business applications. If this market fails to develop
or develops more slowly than expected, demand for our products and services will
be reduced and our revenues will decrease. Consumers and businesses may reject
the Internet as a viable commercial medium for a number of reasons, including
potentially inadequate network infrastructure, slow development of enabling
technologies or insufficient commercial support. The Internet infrastructure may
not be able to support the demands placed on it by increased usage and bandwidth
requirements. Moreover, critical issues like security, reliability, cost,
accessibility and quality of service remain unresolved and may negatively affect
the attractiveness of conducting commerce and business transactions over the
Internet. Even if the required infrastructure, standards, protocols or
complementary products, services or facilities are developed, we may incur
substantial expenses adapting our products and services to changing or emerging
technologies.

INCREASING GOVERNMENT REGULATION OF THE INTERNET COULD HARM OUR BUSINESS.

     As e-commerce, e-service 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 e-commerce and e-service and, therefore, the market for our products
and services.

     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

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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, 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 e-commerce to
liability, which could limit the growth of Internet usage and e-commerce
generally and therefore the demand for e-service solutions. In addition, similar
or more restrictive laws in other countries could have a similar effect and
hamper our plans to expand overseas.

THE IMPOSITION OF SALES TAX AND OTHER TAXES ON PRODUCTS SOLD BY OUR CUSTOMERS
OVER THE INTERNET COULD HAVE A NEGATIVE EFFECT ON ONLINE COMMERCE AND,
INDIRECTLY, THE DEMAND FOR OUR PRODUCTS AND SERVICES.

     The imposition of new sales taxes or other taxes could limit the growth of
Internet commerce generally and, as a result, the demand for our products and
services. Recent federal legislation limits the imposition of state and local
taxes on Internet-related sales. Congress may choose not to renew this
legislation in 2001, in which case state and local governments would be free to
impose additional taxes on electronically purchased goods.

     We believe that most companies that sell products over the Internet do not
currently collect sales or other taxes on shipments of their products into
states or foreign countries where they are not physically present. However, one
or more states or foreign countries may seek to impose sales or other tax
collection obligations on out-of-jurisdiction companies that engage in
e-commerce. A successful assertion by one or more states or foreign countries
that companies that engage in e-commerce should collect sales or other taxes on
the sale of their products over the Internet, even though not physically in the
state or country, could indirectly reduce demand for our products.

PRIVACY CONCERNS RELATING TO THE INTERNET ARE INCREASING, WHICH COULD RESULT IN
LEGISLATION THAT ADVERSELY AFFECTS OUR BUSINESS AND/OR REDUCES SALES OF OUR
PRODUCTS.

     Businesses use our software to capture information regarding their
customers when those customers contact them online with customer service
inquiries. Privacy concerns may cause visitors to resist providing the personal
data necessary to allow our customers to use our software products most
effectively. More importantly, even the perception of privacy concerns, whether
or not valid, may indirectly inhibit market acceptance of our products.
Recently, a high-profile public company faced adverse and widely disseminated
publicity regarding its handling of customer information. In addition,
legislative or regulatory requirements may heighten these concerns if businesses
must notify Web site users that the data captured after visiting certain Web
sites may be used by marketing entities to unilaterally direct product promotion
and advertising to that user. While we are not aware of any legislation or
regulatory requirements of this type currently in effect in the United States,
other countries and political entities, like the European Union, have adopted
this kind of legislation or regulatory requirements and the United States may do
so as well. If consumer privacy concerns are not adequately addressed, our
business could be harmed.

            RISKS RELATED TO THIS OFFERING AND OUR CAPITAL STRUCTURE

WE MAY NOT BE ABLE TO OBTAIN FINANCING IF WE NEED IT IN THE FUTURE, AND RAISING
ADDITIONAL CAPITAL MAY DILUTE EXISTING STOCKHOLDERS.

     We believe that our existing capital resources, including the anticipated
proceeds of this offering, will enable us to maintain our current and planned
operations for at least the next 12 months. However, we may choose to, or be
required to, raise additional funds due to unforeseen circumstances. If our
capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. This financing may not be
available in sufficient amounts or on terms acceptable to us and may be dilutive
to existing stockholders.

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<PAGE>   18

WE HAVE BROAD DISCRETION IN HOW WE USE THE PROCEEDS FROM THIS OFFERING, HAVE NOT
DISCLOSED OUR BUSINESS PLAN TO THE PUBLIC AND MAY USE THE PROCEEDS IN A MANNER
WHICH YOU DO NOT APPROVE.

     We intend to use the net proceeds from the sale of the shares of common
stock offered through this prospectus for general corporate purposes, including
expanding our software development staff and our sales and marketing
capabilities, possibly making strategic acquisitions, expanding internationally
and meeting working capital requirements. We consider our business plan
confidential and have not provided the public with details as to how we will use
the proceeds from this offering. Accordingly, our management will have
significant flexibility in applying the net proceeds of this offering. The
failure of our management to apply these funds effectively could have a material
adverse effect on our business, results of operations and financial condition.

OUR COMMON STOCK HAS NEVER BEEN PUBLICLY TRADED SO WE CANNOT PREDICT THE EXTENT
TO WHICH A MARKET WILL DEVELOP FOR OUR COMMON STOCK OR HOW VOLATILE THAT MARKET
WILL BE.

     Prior to this offering, there has been no market for our common stock. The
initial public offering price of our common stock will be determined by
negotiations between us and Bear, Stearns & Co. Inc. and SG Cowen, our co-lead
underwriters. The price of our common stock after this offering may fluctuate
widely. The reasons for these fluctuations may include the business community's
perception of our prospects and of the e-service solutions industry in general.
Differences between our actual operating results and those expected by investors
and analysts and changes in analysts' recommendations or projections could also
affect the price of our common stock. Other factors potentially causing
volatility in the price for our common stock may include changes in general
economic or market conditions and broad market fluctuations, particularly those
affecting the prices of the common stocks of companies related to the Internet
like ours. We will apply to include our common stock for quotation on the Nasdaq
National Market. Inclusion in the Nasdaq National Market does not, however,
guarantee that an active and liquid trading market for our common stock will
develop.

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

     The stock market has from time to time experienced significant price and
volume fluctuations that have affected the market price for the common stocks of
technology companies, particularly Internet companies like ours. 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.

SUBSEQUENT TO THIS OFFERING, OUR OFFICERS AND DIRECTORS WILL STILL BE ABLE TO
EXERT SIGNIFICANT CONTROL OVER OUR FUTURE DIRECTION AND OPERATIONS.


     Upon completion of this offering, our officers, directors and persons and
entities affiliated with them, will beneficially own, in the aggregate,
approximately 35.9% of the outstanding shares of our common stock (34.9% if the
underwriters' over-allotment option is exercised in full). As a result, these
stockholders, if acting together, would be able to significantly influence
matters requiring stockholder approval, including the election of directors and
the approval of a merger, consolidation or sale of all or substantially all of
our assets.



     18,699,560, OR 98.9%, OF OUR CURRENTLY OUTSTANDING SHARES ARE RESTRICTED
FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR FUTURE. THIS
COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF
OUR BUSINESS IS DOING WELL.



     After this offering, we will have outstanding 23,418,558 shares of common
stock. This includes the 4,500,000 we are selling in this offering, which may be
resold in the public market immediately. The


                                       14
<PAGE>   19


remaining 18,918,558 million shares will become available for resale in the
public market as shown in the chart below, subject to certain holding period and
other requirements of securities law.


     As restrictions on resale end, the market price could drop significantly if
the holders of these restricted shares sell them or are perceived by the market
as intending to sell them.


<TABLE>
<CAPTION>
  Number of shares/% of total outstanding
             prior to offering                  Date of availability for resale into public market
--------------------------------------------    --------------------------------------------------
<S>                                             <C>
219,000/1.2%................................    Immediately after effectiveness of the
                                                registration statement because these stockholders
                                                are not subject to lock-up restrictions.
18,621,084/98.4%............................    180 days after the date of this prospectus due to
                                                these stockholders being subject to lock-up
                                                restrictions.
78,474/0.4%.................................    90 days after the date of this prospectus due to
                                                the requirements of federal securities laws.
</TABLE>


For a more detailed description, see "Shares Eligible for Future Sale" on page
62.

THIS OFFERING WILL CAUSE YOU IMMEDIATE DILUTION.


     Investors in this offering will experience immediate and substantial
dilution in net tangible book value of $9.21 per share based on the assumed
initial public offering price of $11.50.


WE DO NOT ANTICIPATE PAYING DIVIDENDS.

     We do not anticipate paying cash dividends on our common stock in the
foreseeable future.

ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK GIVE OUR BOARD
OF DIRECTORS THE ABILITY TO MAKE IT DIFFICULT FOR A THIRD-PARTY TO ACQUIRE US,
EVEN IF YOU ARE IN FAVOR OF THE ACQUISITION.

     Certain provisions of the Delaware General Corporation Law give our Board
of Directors the power to delay, discourage or prevent a change in control.
These provisions may discourage bids for our common stock at a premium over the
market price and may adversely affect the market price and the voting and other
rights of the holders of our common stock. In addition, upon consummation of
this offering, our governing documents will provide for a staggered Board of
Directors and authorize the issuance of up to five million shares of preferred
stock. This preferred stock, which will be issuable by our Board of Directors
without stockholder approval, could grant its holders rights and powers that
would tend to discourage changes in control.

                 CAUTIONARY NOTE ON FORWARD LOOKING STATEMENTS

     Some of the matters discussed under the captions "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus include
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, including among
other things:

     - implementing our business strategy;

     - developing and introducing new services and products;

     - obtaining and expanding market acceptance of our services and products;

     - meeting our requirements with customers; and

     - competition in providing customer service solutions over the Internet.

                                       15
<PAGE>   20

     In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "potential," "continue," "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions. These statements are based on our current beliefs, expectations and
assumptions and are subject to a number of risks and uncertainties. A
description of some risks that could cause our results to vary appears under the
caption "Risk Factors" and elsewhere in this prospectus. In light of these
assumptions, risks and uncertainties, the forward-looking events discussed in
this prospectus might not occur.

                             CORPORATE INFORMATION


     We were first incorporated as a Pennsylvania corporation in January 1991 as
ServiceWare, Inc. In May 2000, we changed our name to ServiceWare Technologies,
Inc. and reincorporated as a Delaware corporation. On or before the effective
date of this offering, we intend for our Board of Directors to approve a new
Certificate of Incorporation, new by-laws and a new employee stock purchase
plan. For purposes of this prospectus, the information described herein
describes our company as it will be constituted upon the approval of these acts.
Our executive offices are located at 333 Allegheny Avenue, Oakmont, Pennsylvania
15139. Our telephone number is (412) 826-1158. Our Web site is
http://www.serviceware.com. The information on our Web site is not part of this
prospectus.


                                USE OF PROCEEDS

     We estimate that we will receive net proceeds from the sale of the shares
of our common stock in this offering of $46.5 million, based on an assumed
initial public offering price of $11.50 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters exercise their over-allotment option in full, we estimate that our
net proceeds will be $53.7 million.

     We intend to use the net proceeds from this offering for general corporate
purposes, including the repayment of our term loan, expanding our software
development staff and our sales and marketing capabilities, international
expansion, possible strategic acquisitions or investments and working capital
requirements, including general and administrative and capital expenditures. At
March 31, 2000, we owed $2.5 million under a term loan provided by PNC Bank due
in two equal installments on June 10, 2001 and December 10, 2001 bearing
interest at the Base Rate plus 2.25%. The term loan will be repaid with the
proceeds of this offering. The Base Rate is the lesser of the bank's prime rate
or the Federal Funds Effective Rate plus 2%.


     The ranges of the major uses for the net proceeds of the public offering as
set forth in our current operating plan are set forth below. These ranges are
estimates only and are subject to change.



     - Repayment of debt of $2,500,000;



     - Research and development expenditures of between $4,000,000 and
       $6,000,000 over the next 18 months;



     - Sales and marketing expenditures of between $12,000,000 and $15,000,000
       over the next 18 months;



     - General and administrative expenditures of between $2,000,000 and
       $3,000,000 over the next 18 months; and



     - Capital expenditures of between $3,000,000 and $4,000,000 over the next
       18 months.


     We believe that our capital resources, including the anticipated proceeds
of this offering, will enable us to maintain our current and planned operations
for at least the next 12 months. We evaluate potential

                                       16
<PAGE>   21

strategic acquisitions or investments, but at the present time we have no
understandings, commitments or agreements with respect to any such acquisition
or investment. Pending such uses, we intend to invest the net proceeds from this
offering in United States government securities and investment-grade, interest-
bearing instruments. Our idle cash will be managed in accordance with an
investment policy that management intends to propose to the Board of Directors
for approval. The guidelines would authorize investments in accordance with
strict guidelines. For example, the guidelines would allow investments only in
high grade instruments, such as commercial paper rated A-1/P-1. Maturities would
also be subject to these guidelines, with a maximum of one year. We have made no
material commitments or allocations for the net proceeds, and the use of the
proceeds will depend upon developments and opportunities in our business and the
Internet industry in general.

     The foregoing represents our present intentions based upon our present
plans and business conditions. The occurrence of unforeseen events or changed
business conditions, however, could result in the application of the proceeds of
this offering in a manner other than described in this prospectus.

                                DIVIDEND POLICY

     We have never declared or paid any cash dividend on our common stock and do
not expect to do so in the foreseeable future. We currently intend to retain any
earnings to finance the expansion and development of our business. Any future
payment of dividends will be made at the discretion of our Board of Directors
based upon conditions then existing, including our earnings, financial condition
and capital requirements, as well as such economic and other conditions as our
Board of Directors may deem relevant.

                                       17
<PAGE>   22

                                    DILUTION


     The pro forma net tangible book value of our common stock, as of March 31,
2000, after giving effect to the conversion of all outstanding preferred stock
to common stock immediately prior to this offering, was $6.8 million or $0.38
per share of common stock. Net tangible book value per share is equal to our
total tangible assets minus total liabilities divided by the number of shares of
common stock outstanding. After giving effect to our sale of 4.5 million shares
of common stock offered through this prospectus at the assumed initial public
offering price of $11.50 per share (the mid-point of the filing range),
deducting underwriting discounts and commissions and estimated offering expenses
payable by us, our net tangible book value as adjusted as of March 31, 2000
would have been $53.3 million, or $2.29 per share of common stock. This
represents an immediate increase in net tangible book value as adjusted of $1.91
per share to existing stockholders, and an immediate dilution in net tangible
book value as adjusted of $9.21 per share to new investors purchasing shares of
common stock in this offering. Dilution is determined by subtracting pro forma
net tangible book value per share after this offering from the amount of cash
paid by a new investor for a share of common stock. The dilution calculations
take into consideration the proceeds of the shares issued under the Series F
convertible preferred stock financing which closed in June 2000, but excludes
losses incurred in the second quarter of fiscal year 2000.



     The following table illustrates the dilution per share as described above:





<TABLE>
<S>                                                           <C>     <C>
Assumed initial public offering price.......................          $11.50
  Pro forma net tangible book value as of March 31, 2000
    (after giving effect to the conversion of all
    outstanding preferred stock immediately prior to this
    offering)...............................................  $0.38
  Increase in net tangible book value attributable to new
    investors...............................................   1.91
                                                              -----
Pro forma net tangible book value after this offering.......          $ 2.29
                                                                      ------
Dilution per share to new investors.........................          $ 9.21
                                                                      ======
</TABLE>


     The following table sets forth on a pro forma as adjusted basis, as of
March 31, 2000, after giving effect to the conversion of all outstanding
preferred stock immediately prior to this offering, the number of shares of
common stock purchased from us, the total cash consideration paid and the
average price per share paid by the existing stockholders and by new investors
purchasing shares of common stock in this offering, assuming an initial public
offering price of $11.50 per share before deducting estimated underwriting
discounts and commissions and estimated expenses payable by us:


<TABLE>
<CAPTION>
                                                                   TOTAL CASH
                                      SHARES PURCHASED           CONSIDERATION          AVERAGE
                                    ---------------------    ----------------------    PRICE PER
                                      NUMBER      PERCENT      AMOUNT       PERCENT      SHARE
                                    ----------    -------    -----------    -------    ---------
<S>                                 <C>           <C>        <C>            <C>        <C>
Existing stockholders.............  18,172,605        78%    $26,302,378        33%     $ 1.45
New investors.....................   4,500,000        19%     51,750,000        66%     $11.50
Declaration of dividends on Series
  A and Series B and exercise of
  outstanding warrants that would
  otherwise lapse.................     745,953         3%        624,995         1%     $  .84
                                    ----------     -----     -----------     -----
         Total....................  23,418,558     100.0%    $78,677,373     100.0%
                                    ==========     =====     ===========     =====
</TABLE>



     The foregoing tables assume no exercise of the underwriters' over-allotment
option. If the underwriters' over-allotment is exercised in full, the pro forma
net tangible book value per share of common stock as of March 31, 2000, as
adjusted, would have been $2.53 per share, which would result in dilution to the
new investors of $8.97 per share, and the number of shares held by the new
investors would increase to 5,175,000, or 22% of the total number of shares to
be outstanding after this offering, and the number of shares held by the
existing stockholders would be 18,172,605 shares, or 75% of the total number of
shares to be outstanding after this offering. As of March 31, 2000, there were
outstanding options and warrants to purchase an aggregate of 3,069,581 shares of
common stock with a weighted average exercise price of $3.14 per share, 876,950
of which were then exercisable. We have also reserved up to an additional
160,836, 2.0 million and 500,000 shares of common stock for issuance upon the
exercise of options which had not yet been granted under our 1996 stock option
plan, our 2000 stock incentive plan and our 2000 employee stock purchase plan.
To the extent options or warrants are exercised, there will be further dilution
to new investors.


                                       18
<PAGE>   23

                                 CAPITALIZATION

     The following table shows our capitalization as of March 31, 2000:

     - On an actual basis;


     - On a pro forma basis to give effect to: (1) the receipt of $10,550,000
       net proceeds from the sale of Series F preferred stock, (2) the
       conversion of all outstanding preferred stock into common stock upon
       consummation of this offering, including the Series F preferred stock
       issued in June 2000 and (3) the increase in the number of authorized
       shares of common stock; and


     - On a pro forma as adjusted basis to reflect the pro forma adjustment, as
       well as the $2.5 million repayment of the PNC term loan and the sale of
       4.5 million shares of common stock in this offering after deducting
       underwriting discounts and commissions and estimated offering expenses.


<TABLE>
<CAPTION>
                                                                       MARCH 31, 2000
                                                             -----------------------------------
                                                                                      PRO FORMA
                                                             ACTUAL     PRO FORMA    AS ADJUSTED
                                                             -------    ---------    -----------
                                                                       (IN THOUSANDS)
<S>                                                          <C>        <C>          <C>
Long-term debt including capital leases
  (excluding current portion)..............................  $ 2,942     $ 2,942       $   442
                                                             -------     -------       -------
Stockholders' equity.......................................
  Convertible preferred stock, $1 par value, 7,813,408
     shares authorized; 7,461,392 shares issued and
     outstanding, actual; $0.01 par value per share,
     5,000,000 shares authorized, none issued and
     outstanding, pro forma and pro forma as adjusted......   21,930          --            --
  Common stock and additional paid-in capital, no par
     value, 25,000,000 shares authorized, actual; 7,415,068
     shares issued and outstanding, actual; $0.01 par value
     per share, 100,000,000 shares authorized, pro forma
     and pro forma as adjusted; 18,047,805 shares issued
     and outstanding, pro forma and 22,547,805 shares
     issued and outstanding, pro forma as adjusted.........   10,054      42,534        89,024
  Deferred Compensation....................................   (1,986)     (1,986)       (1,986)
  Warrants.................................................      857         857           857
  Note receivable from common stockholders.................   (2,548)     (2,548)       (2,548)
  Accumulated deficit......................................  (20,611)    (20,611)      (20,611)
                                                             -------     -------       -------
     Total stockholders' equity (capital deficiency).......    7,696      18,246        64,736
                                                             -------     -------       -------
     Total capitalization..................................  $10,638     $21,188       $65,178
                                                             =======     =======       =======
</TABLE>


     The information in this table does not include the following:


     - 2,453,408 shares of common stock issuable upon exercise of outstanding
       options as of March 31, 2000 with a weighted average price of $2.10 per
       share;



     - 155,688 shares of common stock issuable upon exercise of outstanding
       warrants with a weighted average price of $3.42 per share; and



     - 160,836 shares of common stock reserved for issuance upon the exercise of
       options which have not yet been granted under our 1996 stock option plan,
       2 million shares of common stock under our 2000 stock incentive plan and
       500,000 shares of common stock reserved under our 2000 employee stock
       purchase plan as of March 31, 2000.


     This table should be read in conjunction with "Selected Historical
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and notes thereto
included elsewhere in this prospectus.

                                       19
<PAGE>   24

                       SELECTED HISTORICAL FINANCIAL DATA

     Our results for the year ended December 31, 1999 and the three months ended
March 31, 2000 reflect the July 23, 1999 acquisition of the Molloy Group, which
was accounted for using the purchase method. Accordingly, the results of
operations of the Molloy Group are included in our results from the applicable
closing date. Since the date of the acquisition of the Molloy Group was
completed in 1999, the effects of this transaction are reflected in the balance
sheet, dated as of December 31, 1999 and the three months ended March 31, 2000.
The following selected financial data for the years ended December 31, 1995,
1996, 1997, 1998 and 1999 are derived from our consolidated financial
statements, which have been audited by Ernst & Young LLP, independent auditors.
The following selected financial data for the three months ended March 31, 2000
are derived from unaudited financial statements included elsewhere in this
prospectus which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
fair presentation of our financial position and results of operations for that
period. The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included elsewhere in
this prospectus. Our historical results are not necessarily indicative of future
results.

<TABLE>
<CAPTION>
                                                                                                 THREE MONTHS ENDED
                                                           YEAR ENDED DECEMBER 31,                    MARCH 31,
                                               -----------------------------------------------   -------------------
                                                1995     1996      1997      1998       1999       1999       2000
                                               ------   -------   -------   -------   --------   --------   --------
                                                               (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S>                                            <C>      <C>       <C>       <C>       <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
  Licenses and subscriptions.................  $1,799   $ 4,106   $ 9,250   $11,284   $ 13,311   $ 2,733    $ 5,442
  Services...................................   1,107       931       436     1,639      4,341       747      1,520
                                               ------   -------   -------   -------   --------   -------    -------
Total revenues...............................   2,906     5,037     9,686    12,923     17,652     3,480      6,962
COST OF REVENUES
  Cost of licenses and subscriptions.........      82       250       126       372        982       119        448
  Cost of services...........................     704       720       502     1,057      3,506       692      1,563
                                               ------   -------   -------   -------   --------   -------    -------
Total cost of revenues.......................     786       970       628     1,429      4,488       811      2,011
                                               ------   -------   -------   -------   --------   -------    -------
GROSS MARGIN.................................   2,120     4,067     9,058    11,494     13,164     2,669      4,951
OPERATING EXPENSES
  Sales and marketing........................     738     1,960     4,326     7,198     11,582     2,513      4,021
  Research and development...................     842     2,005     4,400     5,298      6,849     1,550      1,973
  General and administrative.................     610     1,097     1,881     2,801      2,418       413        718
  Intangible assets amortization.............      --        --        --        --      2,204        --      1,264
  Stock based compensation...................      --        --        --        --         --        --        390
                                               ------   -------   -------   -------   --------   -------    -------
Total operating expenses.....................   2,190     5,062    10,607    15,297     23,053     4,476      8,366
                                               ------   -------   -------   -------   --------   -------    -------
LOSS FROM OPERATIONS.........................     (70)     (995)   (1,549)   (3,803)    (9,889)   (1,807)    (3,415)
Other income (expense), net..................      27        47        40       (13)      (173)      (36)        (6)
                                               ------   -------   -------   -------   --------   -------    -------
Loss before income taxes.....................     (43)     (948)   (1,509)   (3,816)   (10,062)   (1,843)    (3,421)
Income tax (benefit) expense.................      (3)       --        --        --         --        --         --
                                               ------   -------   -------   -------   --------   -------    -------
NET LOSS.....................................  $  (40)  $  (948)  $(1,509)  $(3,816)  $(10,062)  $(1,843)   $(3,421)
Less preferred dividend amounts..............     (51)      (56)      (59)     (124)       (95)      (47)        --
                                               ======   =======   =======   =======   ========   =======    =======
Net loss applicable to common stock..........  $  (91)  $(1,004)  $(1,568)  $(3,940)  $(10,157)  $(1,890)   $(3,421)
                                               ======   =======   =======   =======   ========   =======    =======
Net loss per common share, basic and
  diluted....................................  $(0.02)  $ (0.21)  $ (0.34)  $ (0.85)  $  (1.88)  $ (0.41)   $ (0.49)
                                               ======   =======   =======   =======   ========   =======    =======
Shares used in computing per share amounts...   5,266     4,738     4,609     4,622      5,402     4,637      6,948
                                               ======   =======   =======   =======   ========   =======    =======
</TABLE>

<TABLE>
<CAPTION>
                                                                DECEMBER 31,                         MARCH 31,
                                               -----------------------------------------------   -----------------
                                                1995     1996      1997      1998       1999      1999      2000
                                               ------   -------   -------   -------   --------   -------   -------
                                                                         (IN THOUSANDS)             (UNAUDITED)
<S>                                            <C>      <C>       <C>       <C>       <C>        <C>       <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................  $  462   $ 2,132   $ 1,955   $   891   $  6,623   $   533   $ 4,016
Working capital..............................   1,165     2,128       415    (3,819)    (2,762)   (5,781)   (4,371)
Total assets.................................   2,053     4,523     6,706     6,357     26,734     4,631    24,883
Outstanding debt.............................      --       129       416     1,968      4,402     1,878     4,360
Shareholders' equity (deficit)...............   1,472     2,999     1,498    (2,301)    10,661    (4,142)    7,696
</TABLE>

                                       20
<PAGE>   25

                UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

     The following table sets forth our selected historical consolidated
financial information for the year ended December 31, 1999. The pro forma
information reflects our acquisition of the Molloy Group using the purchase
method of accounting and the effects of that acquisition. We have presented this
pro forma information to give a better understanding of what our business might
have looked like had we owned this acquired company since January 1, 1999. The
Molloy Group may have performed differently if it had actually been consolidated
with our operations during the year ended December 31, 1999. Reliance should not
be placed on the unaudited pro forma information as indicative of the historical
results that we would have had or the future results that will be experienced
after the acquisition. A pro forma consolidated balance sheet as of December 31,
1999 is not presented as the effects of the acquisition are included in the
historical consolidated balance sheet data as of December 31, 1999 presented in
"Selected Historical Financial Data -- Balance Sheet Data."

     Our year ended December 31, 1999 column includes data for the June 23, 1999
Molloy Group acquisition beginning on July 24, 1999 through the end of the year.
The pro forma amounts give effect to the acquisition as if it had occurred on
January 1, 1999.


<TABLE>
<CAPTION>
                                                     SERVICEWARE
                                                 TECHNOLOGIES, INC.     MOLLOY GROUP, INC.
                                                     YEAR ENDED           7 MONTHS ENDED     ACQUISITION
                                                  DECEMBER 31, 1999      JULY 23, 1999(5)    ADJUSTMENTS     PRO FORMA
                                                 ------------------     ------------------   -----------     ---------
                                                                           (UNAUDITED)       (UNAUDITED)    (UNAUDITED)
                                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                             <C>                     <C>                  <C>            <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
  Licenses and subscriptions..................        $ 13,311               $ 1,596           $    --       $ 14,907
  Services....................................           4,341                 1,058                --          5,399
                                                      --------               -------           -------       --------
Total revenues................................          17,652                 2,654                --         20,306
COST OF REVENUES
  Cost of licenses and subscriptions..........             982                    10               333(1)       1,325
  Cost of services............................           3,506                   628                --          4,134
                                                      --------               -------           -------       --------
Total cost of revenues........................           4,488                   638               333          5,459
                                                      --------               -------           -------       --------
GROSS MARGIN..................................          13,164                 2,016              (333)        14,847
OPERATING EXPENSES
  Sales and marketing.........................          11,582                 1,083                --         12,665
  Research and development....................           6,849                   870                --          7,719
  General and administrative..................           2,418                 1,212                --          3,630
  Intangible assets amortization..............           2,204                    --             2,806(2)       5,010
  Stock based compensation....................              --                   135              (135)(3)         --
                                                      --------               -------           -------       --------
Total operating expenses......................          23,053                 3,300             2,671         29,024
                                                      --------               -------           -------       --------
LOSS FROM OPERATIONS..........................          (9,889)               (1,284)           (3,004)       (14,177)
Other income (expense), net...................            (173)                 (180)              193(4)        (160)
                                                      --------               -------           -------       --------
NET LOSS......................................        $(10,062)              $(1,464)          $(2,811)      $(14,337)
Less preferred dividend amounts...............             (95)                   --                --            (95)
                                                      --------               -------           -------       --------
Net loss applicable to common stock...........        $(10,157)                   --                --       $(14,432)
                                                      ========               =======           =======       ========
Net loss per common share, basic and
  diluted.....................................        $  (1.88)              $    --           $    --       $  (2.31)
                                                      ========               =======           =======       ========
Shares used in computing per share amounts....           5,402                    --                --          6,247
                                                      ========               =======           =======       ========
</TABLE>


---------------
(1) Represents amortization of $1.8 million in purchased technology associated
    with the acquisition as if it had occurred on January 1, 1999. Amortization
    is calculated using the straight line method over three years.

(2) Represents amortization of $14.8 million in intangible assets associated
    with the acquisition as if it had occurred on January 1, 1999. Amortization
    is calculated using the straight line method over two to four years.

(3) Adjustment reflects stock based compensation that would not have been
    expensed if the acquisition occurred on January 1, 1999, due to the
    conversion of the stock options during the acquisition.

(4) Represents interest expense that would not have been paid if the acquisition
    occurred on January 1, 1999 due to the conversion of subordinated
    convertible notes of various shareholders of the Molloy Group.

                                       21
<PAGE>   26

(5) The following is a summary reconciliation of the unaudited historical
    statement of operations of the Molloy Group, Inc. between the nine months
    ended June 30, 1999 and the seven months ended July 23, 1999 disclosed
    above:

<TABLE>
<CAPTION>
                                                               3 MONTHS
                                              9 MONTHS          ENDED           3 WEEKS         7 MONTHS
                                                ENDED        DECEMBER 31,        ENDED            ENDED
                                            JUNE 30, 1999        1998        JULY 23, 1999    JULY 23, 1999
                                            -------------    ------------    -------------    -------------
<S>                                         <C>              <C>             <C>              <C>
Total revenues............................    $     2,991      $    (304)      $      (33)      $     2,654
Cost of products and services sold........            819           (279)               98              638
Total operating expenses..................          4,438         (1,628)              490            3,300
Loss from operations......................        (2,265)           1,603            (622)          (1,284)
                                              -----------      ----------      -----------      -----------
Net loss..................................    $   (2,517)      $    1,665      $     (612)      $   (1,464)
                                              ===========      ==========      ===========      ===========
</TABLE>

                                       22
<PAGE>   27

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     You should read this discussion together with our financial statements and
the related notes and other financial information included elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from those
discussed in the forward-looking statements as a result of various factors,
including but not limited to those listed under "Risk Factors" and included in
other portions of this prospectus.

OVERVIEW

     We were founded in 1991 as a provider of consulting services focused on
helping businesses better incorporate knowledge into their customer service and
support offerings. In March 1993, we pioneered the industry's first
technical-support knowledge bases, called Knowledge-Paks, containing answers and
solutions to commonly asked questions about the use of personal computers. In
June 1996, we combined all of our existing Knowledge-Paks into a single
knowledge content product called the Knowledge-Pak Desktop Suite. In August
1997, we began marketing the Knowledge-Pak Architect and the Knowledge-Pak
Viewer software applications for knowledge management, which enable companies to
modify our content products and develop their own knowledge bases for customer
service and support.

     In July 1999, we acquired the Molloy Group in a stock transaction, which
resulted in the Molloy Group's stockholders acquiring, assuming the conversion
of our preferred stock, approximately 24% of our common stock. The Molloy
Group's software products and technologies were complementary to our own
existing products. Additionally, the Molloy Group provided us with experienced
software developers and its patented Cognitive Processor technology, which has
become the foundation of our self-learning solution. In December 1999, we began
the ongoing process of integrating all of our existing software products and the
newly-acquired Molloy Group's Knowledge Bridge and Knowledge Kiosk software
products and offering these products to our customers as our eService Suite. The
integration of our business with the Molloy Group was completed by the end of
the first quarter 2000.

     In the first quarter of 2000, we combined significant new content from
Microsoft, Novell and 3Com with our existing Knowledge-Pak Desktop Suite and
Knowledge-Pak SAP R/3 Suite to create RightAnswers.com, an Internet-based
knowledge portal which enables our customers to access a continuously updated
database of technology-related content.

     We market and sell our products in North America through both our direct
sales force and indirectly through software vendors and value-added resellers.
Internationally, we market products primarily through value-added resellers,
software vendors and system integrators. International revenues historically
have not been a significant percentage of total revenues.

     We derive our revenues from licenses and subscriptions for software and
content products and from providing related services, including installation and
training, consulting, customer support and maintenance contracts. License and
subscription revenues include fees for both perpetual licenses and for periodic
subscription access. Services revenues contain variable fees for installation,
training and consulting, as well as fixed fees for customer support and
maintenance contracts. We recognize revenues on license fees after a
non-cancelable license agreement has been signed, the product has been
delivered, the fee is fixed, determinable and collectable, and there is
vendor-specific objective evidence to support the allocation of the total fee to
elements of a multiple-element arrangement. We recognize revenues on periodic
subscription licenses over the subscription term. We recognize revenues on
installation, training and consulting on a time-and-material basis, and customer
support and maintenance contracts are recognized over the life of the contract.

     Cost of license and subscription revenues consists primarily of the
expenses related to royalties, the cost of media on which our product is
delivered, product fulfillment costs, amortization of purchased technology and
salaries, benefits, direct expenses and allocated overhead costs related to
product fulfillment and the costs associated with maintaining our
RightAnswers.com Web site. Cost of services revenues

                                       23
<PAGE>   28

consists of the salaries, benefits, direct expenses and allocated overhead costs
of customer support and services personnel, fees for sub-contractors and the
costs associated with maintaining our customer support site.

     We classify our operating costs into four general categories: sales and
marketing, research and development, general and administrative and intangible
assets amortization, based upon the nature of the costs. We allocate the total
costs for overhead and facilities, based upon headcount, to each of the
functional areas that use these services. These allocated charges include
general overhead items such as building rent, equipment-leasing costs,
telecommunications charges and depreciation expense. Sales and marketing
expenses consist primarily of employee compensation for direct sales and
marketing personnel, travel, public relations, sales and other promotional
materials, trade shows, advertising and other sales and marketing programs.
Research and development expenses consist primarily of expenses related to the
development and upgrade of our proprietary software, content and other
technologies. These expenses include employee compensation for software
developers, content developers and quality assurance personnel and for
third-party contract development costs. General and administrative expenses
consist primarily of compensation for personnel and fees for outside
professional advisors. Intangible assets amortization expense consists of the
amortization of intangible assets acquired through our acquisition of the Molloy
Group. These assets are amortized on a straight line basis over their respective
estimated useful lives.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                                THREE MONTHS
                                                   YEAR ENDED DECEMBER 31,    ENDED MARCH 31,
                                                   -----------------------    ----------------
                                                   1997     1998     1999      1999      2000
                                                   -----    -----    -----    ------    ------
<S>                                                <C>      <C>      <C>      <C>       <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
  Licenses and subscriptions.....................   95.5%    87.3%    75.4%    78.5%     78.2%
  Services.......................................    4.5     12.7     24.6     21.5      21.8
                                                   -----    -----    -----    -----     -----
Total revenues...................................  100.0    100.0    100.0    100.0     100.0
COST OF REVENUES
  Cost of licenses and subscriptions.............    1.3      2.9      5.5      3.4       6.4
  Cost of services...............................    5.2      8.2     19.9     19.9      22.5
                                                   -----    -----    -----    -----     -----
Total cost of revenues...........................    6.5     11.1     25.4     23.3      28.9
                                                   -----    -----    -----    -----     -----
GROSS MARGIN.....................................   93.5     88.9     74.6     76.7      71.1
OPERATING EXPENSES
  Sales and marketing............................   44.7     55.7     65.6     72.3      57.8
  Research and development.......................   45.4     41.0     38.8     44.5      28.3
  General and administrative.....................   19.4     21.6     13.7     11.8      10.3
  Intangible assets amortization.................    0.0      0.0     12.5      0.0      18.2
  Stock based compensation.......................    0.0      0.0      0.0      0.0       5.6
                                                   -----    -----    -----    -----     -----
Total operating expenses.........................  109.5    118.3    130.6    128.6     120.2
                                                   -----    -----    -----    -----     -----
LOSS FROM OPERATIONS.............................  (16.0)   (29.4)   (56.0)   (51.9)    (49.1)
Other income (expense), net......................    0.4     (0.1)    (1.0)    (1.0)     (0.1)
                                                   -----    -----    -----    -----     -----
NET LOSS.........................................  (15.6)%  (29.5)%  (57.0)%  (52.9)%   (49.2)%
Loss preferred dividend amounts..................   (0.6)    (1.0)    (0.5)    (1.4)      0.0
                                                   -----    -----    -----    -----     -----
Net loss applicable to common stock..............  (16.2)%  (30.5)%  (57.5)%  (54.3)%   (49.2)%
                                                   =====    =====    =====    =====     =====
</TABLE>

                                       24
<PAGE>   29

THREE MONTHS ENDED MARCH 31, 1999 AND 2000

  Revenues


     Total revenues in the first quarter of 1999 were $3.5 million and $7.0
million in the first quarter of 2000, an increase of $3.5 million, or 100%.
License and subscription revenues increased from $2.7 million in the first
quarter of 1999 by $2.7 million, or 99%, to $5.4 million in the first quarter of
2000. The increase in license and subscription revenues from the first quarter
of 1999 to the first quarter of 2000 was attributable to an increased number of
new customers and an increase in the average contract size. Service revenues
increased from $0.7 million in the first quarter of 1999 by $0.8 million or 104%
to $1.5 million in the first quarter of 2000. The increase in service revenues
from the first quarter of 1999 through the first quarter of 2000 was primarily
attributable to an increased number of new customers and a significant increase
in the size of service contracts. Approximately $1.4 million and $4.2 million
was recognized in revenues related to indirect sales channels in the first
quarter 1999 and the first quarter 2000, respectively. Revenue from software
licensing and subscription services was approximately $2.1 million and $0.6
million in first quarter 1999 and $3.6 million and $1.8 million in first quarter
2000. Deferred revenue for software licensing and subscription services was $2.9
million and $1.2 million at March 31, 1999 and $4.3 million and $3.1 million at
March 31, 2000.


  Cost of Revenues

     Cost of revenues increased from $0.8 million in the first quarter of 1999
to $2.0 million in the first quarter of 2000. Cost of revenues as a percentage
of revenues increased from 23.3% in the first quarter of 1999 to 28.9% in the
first quarter of 2000. Cost of license and subscription revenues increased from
$0.1 million in the first quarter of 1999 to $0.4 million in the first quarter
of 2000. Cost of license and subscription revenues as a percentage of revenues
increased from 3.4% in the first quarter of 1999 to 6.4% in the first quarter of
2000. The increase in the cost of license and subscription revenues was
primarily attributable to the overall growth in the number of customers. Cost of
service revenues increased from $0.7 million in the first quarter of 1999 to
$1.6 million in the first quarter of 2000. Cost of service revenues as a
percentage of revenues increased from 19.9% in the first quarter of 1999 to
22.5% in the first quarter of 2000. The increase in the cost of service revenues
was primarily attributable to an increase in the size of service staff.

  Operating Expenses

     Sales and Marketing. Sales and marketing expenses increased from $2.5
million in the first quarter of 1999 to $4.0 million in the first quarter of
2000. Sales and marketing expenses as a percentage of revenues decreased from
72.3% in the first quarter of 1999 to 57.8% in the first quarter of 2000. The
increase in dollars from the first quarter of 1999 to the first quarter of 2000
was primarily attributed to additional staffing and investments in sales and
marketing activities. The decrease in sales and marketing expenses as a
percentage of revenues was primarily attributable to the pace of revenue growth
exceeding the rate of growth in sales and marketing expenses.

     Research and Development. Research and development expenses increased from
$1.6 million, or 44.5% of revenues, in the first quarter of 1999, to $2.0
million, or 28.3% of revenues, in the first quarter of 2000. The increase in
research and development expenses from the first quarter of 1999 to the first
quarter of 2000 was primarily attributable to the increase in the number of
software developers hired, and the decrease in research and development expenses
as a percentage of revenues was primarily attributable to the pace of revenue
growth exceeding the rate of growth in research and development expenses.

     General and Administrative. General and administrative expenses increased
from $0.4 million in the first quarter of 1999 to $0.7 million in the first
quarter of 2000. As a percentage of revenues, general and administrative
expenses were 11.8% in the first quarter of 1999 and 10.3% in the first quarter
of 2000. The increase from the first quarter of 1999 to the first quarter of
2000 resulted primarily from the addition of finance, human resources, executive
and administrative personnel.

                                       25
<PAGE>   30

     Intangible Assets Amortization. Intangible assets amortization consists of
the consideration in excess of the fair value of assets acquired and liabilities
assumed in the acquisition of the Molloy Group in July 1999.

     Stock based compensation. Stock based compensation in the first quarter of
2000 relates to the issuance of stock options with exercise or purchase prices
below the deemed fair market value of the common stock for financial reporting
purposes on the date of the grant and related to modifications of certain stock
options. We incurred no stock compensation charges in the first quarter of 1999.
Additional unvested outstanding options will continue to vest over the next four
years, which will result in additional compensation expense of approximately
$2.0 million in the aggregate over the next four years.

  Other Income (Expense), Net

     Other income (expense), net consists primarily of interest income received
from the investment of proceeds from our financing activities, offset by
interest expense and other fees related to our bank borrowings. Other income
(expense), net increased from $(35,830) in 1999 to $(6,287) in 2000. The
increase was a result of interest earned exceeding interest paid on outstanding
loans.

FISCAL YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

  Revenues


     Total revenues were $9.7 million, $12.9 million and $17.7 million in 1997,
1998 and 1999, representing increases of $3.2 million, or 33%, from 1997 to
1998, and $4.8 million, or 37%, from 1998 to 1999. License and subscription
revenues increased from $9.3 million in 1997 by $2.1 million, or 23%, to $11.3
million in 1998, and by $2.0 million, or 18%, to $13.3 million in 1999. The
increase in license and subscription revenues from 1997 to 1999 was attributable
to an increased number of new customers and an increase in the average contract
size. Services revenues increased from $0.4 million in 1997 by $1.2 million or
275% to $1.6 million in 1998, and by $2.7 million, or 165%, to $4.3 million in
1999. The increase in services revenues from 1997 through 1999 is primarily
attributable to an increased number of new customers and a significant increase
in the size of service contracts. Approximately $5.1 million, $6.3 million and
$7.8 million was recognized in revenues related to indirect sales channels in
1997, 1998 and 1999, respectively. Revenue from software licensing and
subscription services was approximately $7.2 million and $2.0 million in 1997,
$8.5 million and $2.8 million in 1998 and $9.7 million and $3.6 million in 1999.
Deferred revenue for software licensing and subscription services was $2.3
million and $1.2 million at March 31, 1997, $2.2 million and $1.2 million at
March 31, 1998 and $3.4 million and $3.7 million at March 31, 2000.


     The increase in revenues from 1998 to 1999 of 37% was disproportionate to
the increase in deferred revenue of 83% (an increase in deferred revenue from
$5.0 million in 1998 to $9.1 million in 1999). This disproportionate increase is
a result of a distributor report received in the fourth quarter 1999, which
included a significant amount of subscription revenues which will be recognized
in subsequent periods.

  Cost of Revenues

     Cost of revenues increased from $0.6 million in 1997 to $1.4 million in
1998 and to $4.5 million in 1999. Cost of revenues as a percentage of revenues
increased from 7% in 1997 to 11% in 1998 and to 25% in 1999. Cost of license and
subscription revenues increased from $0.12 million in 1997 to $0.37 million in
1998 and to $0.98 million in 1999. Cost of license and subscription revenues as
a percentage of revenues increased from 1.3% in 1997 to 2.9% in 1998 to 5.5% in
1999. The increase in the cost of license and subscription revenues was
primarily attributable to the overall growth in the number of customers. Cost of
services revenues increased from $0.5 million in 1997 to $1.1 million in 1998
and to $3.5 million in 1999. Cost of services revenues as a percentage of
revenues increased from 5.2% in 1997 to 8.2% in 1998 to 19.9% in 1999. The
increase in the cost of service revenues was primarily attributable to an
increase in the size of service staff.

                                       26
<PAGE>   31

  Operating Expenses

     Sales and Marketing.  Sales and marketing expenses increased from $4.3
million in 1997 to $7.2 million in 1998 and to $11.6 million in 1999. Sales and
marketing expenses as a percentage of revenues increased from 44.7% in 1997 to
55.7% in 1998 and to 65.6% in 1999. The increase from 1997 to 1999 and the
increase as a percentage of revenues resulted primarily from increases in
additional staffing and investments in sales and marketing activities.

     Research and Development.  Research and development expenses increased from
$4.4 million, or 45.4% of revenues, in 1997, to $5.3 million, or 41.0% of
revenues, in 1998, and increased to $6.8 million, or 38.8% of revenues, in 1999.
The increase in research and development expenses from 1997 to 1999 was
primarily attributable to the increase in the number of software developers
hired, and the decrease in research and development expenses as a percentage of
revenues was primarily attributable to the pace of revenue growth exceeding the
rate of growth in research and development expenses.

     General and Administrative.  General and administrative expenses increased
from $1.9 million in 1997 to $2.8 million in 1998 and decreased to $2.4 million
in 1999. As a percentage of revenues, general and administrative expenses were
19.4% in 1997, 21.6% in 1998, and 13.7% in 1999. The increase from 1997 to 1998
resulted primarily from the addition of finance, human resources and executive
and administrative personnel. The decrease from 1998 to 1999 was due to one time
costs related to financing activities in 1998.

     Intangible Assets Amortization.  Intangible assets amortization consists of
the consideration in excess of the fair value of assets acquired and liabilities
assumed in the acquisition of the Molloy Group in July 1999.

  Other Income (Expense), Net

     Other income (expense), net consists primarily of interest income received
from the investment of proceeds from our financing activities, offset by
interest expense and other fees related to our bank borrowings. Other income
(expense), net decreased from $40,125 in 1997 to $(12,978) in 1998 and to
$(173,213) in 1999. The decreases were a result of interest paid on outstanding
loans.

  Net Operating Losses

     On the basis of our tax returns as filed or as anticipated to be filed, we
have approximately $21 million of federal income tax net operating loss
carryforwards as of December 31, 1999. The amount of these net operating loss
carryforwards may be reduced on an audit of our tax returns by the Internal
Revenue Service, and the use of these net operating loss carryforwards to
shelter our income may be subject to limitation if we undergo an ownership
change under Section 382 of the Internal Revenue Code. Further, we do not
anticipate using these loss carryforwards for the foreseeable future because, as
we discussed in "Risk Factors", we anticipate that we will continue to incur net
losses during such time.

                                       27
<PAGE>   32

QUARTERLY OPERATING RESULTS

     The following tables set forth our unaudited quarterly results of
operations data for our eight most recent quarters, as well as the percentage of
revenues represented by each item. You should read these tables along with our
consolidated financial statements and related notes. We have prepared this
unaudited information on the same basis as our audited financial statements, and
it includes all adjustments, consisting only of normal recurring adjustments,
that we consider necessary for a fair presentation of our financial position and
operating results for the quarters presented.

<TABLE>
<CAPTION>
                                                                          QUARTER ENDED
                                    -----------------------------------------------------------------------------------------
                                    MAR 31,   JUN 30,   SEP 30,   DEC 31,   MAR 31,   JUN 30,   SEP 30,   DEC 31,   MARCH 31,
                                     1998      1998      1998      1998      1999      1999      1999      1999       2000
                                    -------   -------   -------   -------   -------   -------   -------   -------   ---------
                                                                         (IN THOUSANDS)
<S>                                 <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
  Licenses and subscriptions......  $ 2,239   $ 2,664   $3,102    $ 3,279   $ 2,733   $ 2,767   $ 3,137   $ 4,674    $ 5,442
  Services........................      279       305      567        488       747       872     1,223     1,499      1,520
                                    -------   -------   ------    -------   -------   -------   -------   -------    -------
Total revenues....................    2,518     2,969    3,669      3,767     3,480     3,639     4,360     6,173      6,962
COST OF REVENUES
  Cost of licenses and
    subscriptions.................       29        49       97        197       119       118       277       468        448
  Cost of services................      167       203      352        335       693       697     1,010     1,106      1,563
                                    -------   -------   ------    -------   -------   -------   -------   -------    -------
Total cost of revenues............      196       252      449        532       812       815     1,287     1,574      2,011
                                    -------   -------   ------    -------   -------   -------   -------   -------    -------
GROSS MARGIN......................    2,322     2,717    3,220      3,235     2,668     2,824     3,073     4,599      4,951
OPERATING EXPENSES
  Sales and marketing.............    1,526     1,833    1,733      2,106     2,513     2,846     3,271     2,952      4,021
  Research and development........    1,307     1,443    1,179      1,369     1,550     1,514     1,932     1,853      1,973
  General and administrative......      533       912      639        717       412       452       661       893        718
  Intangible assets
    amortization..................       --        --       --         --        --        --       943     1,261      1,264
  Stock based compensation........       --        --       --         --        --        --        --        --        390
                                    -------   -------   ------    -------   -------   -------   -------   -------    -------
Total operating expenses..........    3,366     4,188    3,551      4,192     4,475     4,812     6,807     6,959      8,366
                                    -------   -------   ------    -------   -------   -------   -------   -------    -------
LOSS FROM OPERATIONS..............   (1,044)   (1,471)    (331)      (957)   (1,807)   (1,988)   (3,734)   (2,360)    (3,415)
Other income (expense), net.......       16        20      (18)       (31)      (36)      (68)      (29)      (40)        (6)
                                    -------   -------   ------    -------   -------   -------   -------   -------    -------
NET LOSS..........................  $(1,028)  $(1,451)  $ (349)   $  (988)  $(1,843)  $(2,056)  $(3,763)  $(2,400)    (3,421)
Preferred dividends...............      (16)      (16)     (46)       (46)      (47)      (48)       --        --         --
                                    -------   -------   ------    -------   -------   -------   -------   -------    -------
Net loss applicable to common
  stock...........................  $(1,044)  $(1,467)  $ (395)   $(1,034)  $(1,890)  $(2,104)  $(3,763)  $(2,400)   $(3,421)
                                    =======   =======   ======    =======   =======   =======   =======   =======    =======
</TABLE>

                                       28
<PAGE>   33

SELECTED QUARTERLY OPERATING RESULTS

<TABLE>
<CAPTION>
                                                                  QUARTER ENDED
                             ---------------------------------------------------------------------------------------
                             MAR 31,   JUN 30,   SEP 30,   DEC 31,   MAR 31,   JUN 30,   SEP 30,   DEC 31,   MAR 31,
                              1998      1998      1998      1998      1999      1999      1999      1999      2000
                             -------   -------   -------   -------   -------   -------   -------   -------   -------
<S>                          <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
PERCENTAGE OF TOTAL
  REVENUE:
REVENUES
  Licenses and
    subscriptions..........     88.9%     89.7%    84.5%     87.0%      78.5%     76.0%     71.9%     75.7%     78.2%
  Services.................     11.1      10.3     15.5      13.0       21.5      24.0      28.1      24.3      21.8
                             -------   -------   ------    ------    -------   -------   -------   -------   -------
Total revenues.............    100.0     100.0    100.0     100.0      100.0     100.0     100.0     100.0     100.0
COST OF REVENUES
  Cost of licenses and
    subscriptions..........      1.2       1.7      2.6       5.2        3.4       3.2       6.3       7.6       6.4
  Cost of services.........      6.6       6.8      9.6       8.9       19.9      19.2      23.2      17.9      22.5
                             -------   -------   ------    ------    -------   -------   -------   -------   -------
Total cost of revenues.....      7.8       8.5     12.2      14.1       23.3      22.4      29.5      25.5      28.9
                             -------   -------   ------    ------    -------   -------   -------   -------   -------
GROSS MARGIN...............     92.2      91.5     87.8      85.9       76.7      77.6      70.5      74.5      71.1
OPERATING EXPENSES
  Sales and marketing......     60.6      61.8     47.3      55.9       72.3      78.2      75.0      47.9      57.8
  Research and
    development............     51.9      48.6     32.1      36.3       44.5      41.6      44.3      30.0      28.3
  General and
    administrative.........     21.2      30.7     17.4      19.0       11.8      12.4      15.2      14.4      10.3
  Intangible assets
    amortization...........      0.0       0.0      0.0       0.0        0.0       0.0      21.6      20.4      18.2
  Stock based
    compensation...........      0.0       0.0      0.0       0.0        0.0       0.0       0.0       0.0       5.6
                             -------   -------   ------    ------    -------   -------   -------   -------   -------
Total operating expenses...    133.7     141.1     96.8     111.3      128.6     132.2     156.1     112.7     120.2
                             -------   -------   ------    ------    -------   -------   -------   -------   -------
LOSS FROM OPERATIONS.......    (41.5)    (49.6)    (9.0)    (25.4)     (51.9)    (54.6)    (85.6)    (38.2)    (49.1)
Other income (expense),
  net......................      0.7       0.7     (0.5)     (0.8)      (1.1)     (1.9)     (0.7)     (0.7)     (0.1)
                             -------   -------   ------    ------    -------   -------   -------   -------   -------
NET LOSS...................    (40.8)%   (48.9)%   (9.5)%   (26.2)%    (53.0)%   (56.5)%   (86.3)%   (38.9)%   (49.2)%
Preferred dividends........     (0.6)     (0.5)    (1.3)     (1.2)      (1.4)     (1.3)       --        --        --
                             -------   -------   ------    ------    -------   -------   -------   -------   -------
Net loss applicable to
  common stock.............    (41.5)%   (49.4)%  (10.8)%   (27.4)%    (54.3)%   (57.8)%   (86.3)%   (38.9)%   (49.2)%
                             =======   =======   ======    ======    =======   =======   =======   =======   =======
</TABLE>

     The increase in comparable quarterly licenses and subscriptions revenues
for the 1998 and 1999 fiscal years primarily resulted from the growth in the
number of customers and increases in the average contract size. The quarterly
increases in revenues within each fiscal year are the result of the timing of
installations and the results of sales promotions rather than an underlying
seasonality. The increases in services revenues are the result of the increasing
size of services engagements and increase in revenue from maintenance contracts.


     The increases in cost of revenues between comparable quarters are primarily
the result of increases in the size of the service staff.


     The increases in operating costs over the periods presented primarily
resulted from the growth in the size of the operating departments. The costs of
intangible assets amortization reflect the amortization of the assets acquired
in the acquisition of the Molloy Group.

LIQUIDITY AND CAPITAL RESOURCES

     Historically, we have satisfied our cash requirements primarily through
private placements of convertible preferred stock and common stock. As of March
31, 2000, we had $4.0 million in cash and cash equivalents. We believe that the
cash proceeds from this offering, together with our existing cash balances, will
be sufficient to meet anticipated cash requirements for at least the 12 months
following the date of this prospectus. We may, nonetheless, seek additional
financing to support our activities during the next twelve months or thereafter.
There can be no assurance, however, that additional capital will be available to
us on reasonable terms, if at all, when needed or desired.

                                       29
<PAGE>   34


     In fiscal year 1999 we consumed $3.1 million in operating activities and
used another $1.5 million in investing activities. In the quarter ended March
31, 2000, we used $2.2 million in operating activities and used another $0.4
million in investing activities. We expect the levels of cash use by current
operations to be higher during the next four quarters. At these anticipated
levels the proceeds from this offering would sustain operations through fiscal
year 2001. Sizeable increases in operating activities or lower than anticipated
levels of revenues would result in higher than anticipated levels of cash use by
operating activities. Investing activities, which may include merger and
acquisition activities, might require significantly higher levels of capital
resources than prior patterns.


     Net cash used in operating activities was $1.4 million for 1998, $3.1
million for 1999 and $2.2 million for the three months ended March 31, 2000.
Cash used in operating activities for 1998 and 1999 resulted primarily from the
net losses in those periods.

     Net cash used in investing activities of $1.1 million for 1998, $1.5
million for 1999 and $0.4 million for the three months ended March 31, 2000 was
primarily attributable to property and equipment acquisitions.

     Net cash provided by financing activities was $1.5 million for 1998 and
primarily consisted of proceeds from borrowings under our revolving line of
credit and equipment loan. Net cash provided by financing activities was $10.4
million for 1999 and primarily consisted of net proceeds from the issuance of
Series D preferred stock and our term loan. Net cash provided by financing
activities was $0.1 million for the three months ended March 31, 2000 consisted
primarily of proceeds from the exercise of stock options.

     We have a secured credit facility with PNC bank. This facility consists of
three sub-facilities: a revolving credit loan facility, a convertible equipment
loan and a term loan.

     The revolving credit facility provides for $7.5 million of availability
less the principal outstanding on the term loan and matures on December 10,
2001. Any amounts drawn under this facility bear interest at the Base Rate plus
0.50%. "Base Rate" is defined as the lesser of the bank's prime rate or the
Federal Funds Effective Rate plus 2%. The availability of credit is based on a
percentage of eligible accounts receivable. At December 31, 1999 and March 31,
2000, $1.5 million and $2.5 million was available for use and $1.25 million was
outstanding on the revolving credit facility.

     The convertible equipment loan is for $0.75 million. On June 8, 2000,
outstanding amounts under this loan will be converted to a single term loan
which matures on June 1, 2003. Any amounts drawn under this facility bear
interest at the Base Rate plus 0.75%. The availability of advances on this line
is based on a percentage of invoice amounts for equipment acquisitions. At
December 31, 1999 and March 31, 2000, nothing had been drawn within the year,
and $0.5 million was outstanding on the equipment loan from the previous
equipment line. Principal repayments of this loan are required to be made upon
conversion of the loan into the term loan in 36 equal installments beginning
July 1, 2000.

     The term loan is for $2.5 million and is due in two equal installments on
June 10, 2001 and December 10, 2001. However, upon the completion of this
offering, the term loan must be repaid. Any amounts drawn under this facility
bear interest at the Base Rate plus 2.25%. No amounts were outstanding under the
term loan on December 10, 1999. At December 31, 1999 and March 31, 2000, $2.5
million was outstanding on the term loan.

     In addition, as part of the consideration for this credit facility, we
issued to PNC Bank warrants to purchase 80,000 shares of our common stock. These
warrants need not be exercised at the offering and are entitled to certain
registration rights. We also issued to PNC Bank warrants to purchase 6,814
shares of our common stock as part of the consideration for a bridge loan in the
amount of $0.75 million which was repaid with the proceeds from the sale of our
Series D convertible preferred stock.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We develop our products in the United States. We sell our products
globally, through our direct sales force and independent distributors.
Currently, only a small amount of our revenue is derived from foreign

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<PAGE>   35

sales. In the future, we expect to increase our international operations in our
existing markets and in geographic locations where we do not currently have any
operations. As a result, our financial results may be affected by factors such
as changes in foreign currency exchange rates and weak economic conditions in
foreign markets.

RECENT ACCOUNTING PRONOUNCEMENTS

     In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions. The adoption
of this pronouncement for fiscal year 2000 is not expected to materially affect
our revenue recognition policies.

     In December 1999, the Staff of the Securities and Exchange Commission
released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," to
provide guidance on the recognition, presentation and disclosure of revenues in
financial statements. We believe our revenue recognition practices are in
conformity with SAB No. 101.

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<PAGE>   36

                                    BUSINESS

OVERVIEW

     We are a leading provider of software and content solutions that businesses
use to provide an Internet-based e-service platform to their customers,
partners, suppliers and employees. We develop and market a comprehensive service
solution to meet the needs of these end-users who, together, form an extended
enterprise. Our eService Suite includes licensed and subscription-based software
and content products that enable businesses to capture enterprise knowledge,
solve their end-users' problems, reuse solutions and share captured knowledge
through the Internet. Additionally, our patented Cognitive Processor contained
in the eService Suite continually learns at each request, keeping knowledge
up-to-date and accurate and providing end-users with relevant and useful answers
to their questions.

     Our eService Suite includes software and content products which enable our
customers to develop and manage a knowledge base of service-related information.
Our solutions also permit the dissemination of knowledge through multiple
communication channels, such as telephone support, e-mail, chat and Web-based
self-service. Additionally, our Internet-based knowledge portal,
RightAnswers.com, enables our customers to access a continuously updated
knowledge base of content obtained from leading technology companies, including
Microsoft, Novell and 3Com, as well as our internally produced knowledge
content. We also offer integration, training and consulting services that enable
our customers to realize the benefits of our eService Suite. Our customers
include Andersen Consulting, Clarify, Compaq, Hewlett-Packard, Marconi
Communications, Merrill Lynch, Pfizer and Texas Instruments.

INDUSTRY BACKGROUND

  Evolution of e-Commerce and Impact on Customer Service

     The rapid growth in the number of users on the Internet has forced
companies and other organizations to adjust to new ways of conducting business
both online and offline. International Data Corporation projects that the number
of Internet users worldwide will grow from 196 million in 1999 to 502 million in
2003. With this growth, e-commerce has rapidly evolved from businesses
delivering predominantly static information about products and services to
online commerce sites that provide transactional capabilities linking businesses
to their customers. Today, e-commerce and traditional commerce are further
evolving to link, via the Internet, all entities involved in producing,
marketing, selling and servicing products.

     This evolution in e-commerce and traditional commerce has resulted in a
growing need for improved service for end-users. The increased speed of online
transactions in conjunction with the always-on nature of the Internet has
resulted in end-users requiring information and service instantaneously on a
twenty-four hours a day, seven days a week basis. The market for supplying
products and services to businesses which allow them to provide online
self-service alone is estimated by IDC to grow from $3 billion in 1999 to over
$14 billion in 2003. Additionally, the increasingly complex nature of products
and services has resulted in a tremendous increase in the volume of information
which needs to be accessed by end-users.

  The e-Service Multiplier Effect

     Another important factor driving the growing need for effective online
service is that e-commerce results in an e-service multiplier effect. This means
that a single e-commerce transaction can generate multiple e-service
interactions. These e-service interactions are not limited to the resolution of
post-transaction problems, but in fact occur before, during and after an
e-commerce transaction has been completed. According to Forrester Research, for
example, in the business-to-consumer market, 19% of Internet purchasers need
assistance during the shopping experience, 58% check on order status and 19%
have questions immediately upon the receipt of shipped goods. Therefore, the
ability to provide efficient, accurate e-service is becoming a vital part of the
entire online and offline transaction experience.

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<PAGE>   37

     As a result of the e-service multiplier effect, superior e-service is
increasingly the key to competitive differentiation for enterprises that
formerly used price and selection as a means to attract and retain customers.
Competition is increasingly driven by customer demand for prompt, accurate and
personalized resolution of inquiries and problems. By successfully responding to
these demands, companies are able to develop closer contacts and create
long-term satisfaction and loyalty among their customers, partners, suppliers
and employees. In turn, companies have the opportunity to increase their
profitability per customer and reduce the need for continuous, substantial
expenditures on marketing and other intensive customer acquisition and retention
efforts.

  Existing Service Solutions are Inadequate

     Despite the urgent need for comprehensive service solutions, current
service offerings have not kept pace with the rapid evolution of e-commerce and
traditional commerce. These solutions fail to meet the expectations and demands
of the extended enterprise. Traditional service solutions, such as call centers
and help desks, are neither scalable nor cost-effective because of
labor-intensive and time-consuming customer interactions and the high turnover
rates of service professionals. Despite attempts to streamline certain segments
of the service continuum, companies have been unable to eliminate the
inefficiencies of these solutions. Additionally, alternatives to telephone
support, such as online chat or automated e-mail response applications, have
been used to augment existing service solutions. However, these applications
have proven insufficient to answer questions or solve problems in a way that
fully satisfies the service needs of the extended enterprise.

     In addition, current customer service software applications, which are used
to provide information to call centers and help desks, are rarely customized or
personalized to a company's preferences. This results, among other problems, in
lengthy service cycles for even the simplest service inquiries. These problems
are particularly acute for online businesses. For example, a Jupiter
Communications survey discovered that approximately 50% of the Web sites
surveyed took five or more days to respond, never responded or failed to post an
e-mail address on their Web site to address customer service e-mail requests.
Further, the inability of customer service systems to transfer information
across existing service solutions often results in end-users having to describe
their problem at each stage of the service process as they switch from one
communication channel to another or escalate to increasing levels of assisted
service. Increased call center volumes often overwhelm call centers and lead to
inaccurate and delayed responses. Therefore, the optimal e-service solution must
provide intelligent self-service and must support the agents who provide
assisted service to end-users.

  Requirements of a Comprehensive e-Service Solution

     The increasing dissatisfaction with current customer service and the
heightened expectations resulting from the growth of the Internet require a
solution which includes intelligent application software and content. In order
to enable businesses to provide superior e-service, a comprehensive solution
needs to:

     - provide the option for a personalized 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, fax or chat, at any stage of interaction;

     - 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; and

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

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<PAGE>   38

     An effective solution will enable anyone in the extended enterprise to
address any question from any source via any communication channel at any time.

THE SERVICEWARE SOLUTION

     We are a leading provider of e-service solutions that enterprises use to
strengthen relationships with their customers, partners, suppliers and
employees. We license software and content products to enterprises that form the
basis of their e-service solutions. Our solutions enable businesses to capture
enterprise knowledge, solve customer problems, reuse solutions and share
captured knowledge throughout the extended enterprise. Our solutions also enable
the extended enterprise to access this knowledge online. In addition, through
the self-learning features of our patented Cognitive Processor, the solutions
generated by our products are intelligent in that they are interactive,
adaptable and have the capability automatically to update themselves. Customers
can use our software and content products separately or as an integrated
solution to reduce the cost and improve the quality of their customer service.
We believe our solutions provide our customers with a number of key benefits,
including:

     Strengthened Relationships with their 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. 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.

     Decreased Operating Costs.  By enabling end-users to access customer
service online and by aiding customers service agents to more effectively handle
user requests, our solutions often provide cost savings and improve employee
productivity. For example, IDC states that the cost of providing live telephone
support is $30 to $50 per call as compared to only $0.45 for providing Internet
self-service. These savings and increased productivity are a result of reduced
telephone call volume, the ability to process more end-user interactions per
employee and reduced levels of employee training.

     Improved Dissemination of Enterprise Knowledge.  Our eService Suite 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, e-mail or chat, draw
from this knowledge base. Additionally, the patented Cognitive Processor
contained in our eService Suite provides a self-learning capability that
continually learns at each request, which keeps responses up to date and
accurate and provides end-users with relevant and useful answers to their
questions.

     Seamless Integration with Existing Solutions.  Our products are designed
for rapid deployment, typically in eight to 12 weeks, and some of our customers
have implemented our solutions in as little as three weeks. Our software helps
our customers to preserve their investments in, and deployments of, call center
and help desk products, 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 Clarify, Kana Communications, Oracle, Peregrine
Systems, Remedy and Siebel Systems. As a result, this enables our customers to
deploy best of breed applications configured to suit their particular e-service
needs.

     Access to Our Existing Knowledge Base.  We provide our customers with
immediate and user-friendly access to RightAnswers.com, our Internet-based
knowledge portal. Through natural language queries, all end-users can access and
draw from our extensive and continuously growing knowledge base of technology-
related information. By accessing this knowledge base, an enterprise can
cost-effectively and efficiently acquire the technical expertise necessary to
resolve frequently asked inquiries.

     Consistent Service Across Communication Channels.  Our solution allows
access to knowledge from a wide variety of communication channels. Our
proprietary software enables end-users to transfer inquiries

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<PAGE>   39

easily from self-help to e-mail responses to live interaction. Escalation of
customer inquiries helps ensure that our customers 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 the
eService Suite allows both large and growing organizations to maintain a
consistent level of service as the volume of traffic across their communication
channels increases. By adding additional servers, providing replication features
between servers and capitalizing on the capabilities of our Java-based
architecture, our products provide consistent responsiveness to end-user
interactions despite rising volumes of traffic.

STRATEGY

     Our solutions enable enterprises to provide an Internet-based e-service
platform for their customers, partners, suppliers and employees to access and
manage business critical knowledge. Our objective is to leverage this platform
to become the leading worldwide provider of e-service solutions. To achieve our
goal, we intend to:

  Enhance Technology and Product Leadership.

     We intend to broaden our leadership position in the e-service solutions
market by continuing to increase the depth of content, performance,
functionality and scalability of RightAnswers.com and our eService Suite. 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 best of breed applications and existing enterprise systems. We plan to
continue to devote substantial resources to the development of new and
innovative technologies, including our patented Cognitive Processor, to increase
efficiencies, offer real time answers and minimize service response time. We
will expand the current eService Suite offering to incorporate advances in
wireless and handheld technology for mobile users which will allow us to add
value to existing customer implementations, leverage the capabilities of the
technologies we deploy and extend our reach within the enterprise.

  Broaden Content Solutions to New Vertical Markets.

     We intend to broaden the reach of our content offerings into new vertical
markets. Our customers currently use our knowledge content to access
technology-focused information. Our alliances with leading technology content
providers have provided us with a deep knowledge of end-user service demands as
well as industry knowledge. Initially, we plan to extend our content to include
other vertical markets with similar characteristics to technology-related
industries, including financial services, health care, entertainment,
telecommunications and industrial products. These industries market and sell
complex products and require strong customer service or support. We intend to
enter these new vertical markets by developing alliance relationships with
existing customers and other content providers in those vertical markets.

  Expand Internet-Based Delivery Model.

     We have recently introduced RightAnswers.com, our Internet-based knowledge
portal. We also plan to expand our software offerings to businesses by deploying
a hosted Web-based delivery model for our eService Suite. By offering a
traditional license model and a new Web-based subscription model, our customers
will have the flexibility to choose how to roll out our products and determine
their preferences in terms of price, speed of implementation, depth and
customization of knowledge base and complexity of the user interface. This will
minimize our customers' upfront investment in hardware, software, content and
services. To facilitate this Web-based delivery model, we are planning to
partner with leading application service providers to host our eService Suite.

  Continue to Build Brand Awareness.

     To enhance public awareness of our e-service offerings, we are pursuing an
aggressive brand development strategy by increasing mass market and targeted
advertising, continuing a visible presence at

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industry/partner events, and maintaining relationships with recognized industry
analysts and the public. We believe that our marketing programs will highlight
the advantages of our eService Suite relative to our competitors. We also
believe that enhancing our brand will increase opportunities with corporate
customers.

  Expand Strategic Alliances.

     In order 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 partners to increase our sales by leveraging
our partners' industry expertise, business relationships and sales and marketing
resources. Currently, we have strategic alliances with Clarify, Kana
Communications, Oracle, Peregrine Systems, Remedy, Siebel Systems and Tivoli.
Additionally, we plan to increase our service capabilities by pursuing strategic
relationships with leading systems integrators and consultants.

  Expand International Presence.

     To expand our sales to both new and existing customers, we intend to
increase our worldwide sales effort by adding direct sales personnel and new
office locations to complement our existing international operations in the
United Kingdom. In addition, to capitalize on international opportunities for
our e-service solutions, we intend to commence product localization efforts,
initially concentrating on European markets such as France, Germany, Italy, the
United Kingdom and Scandinavia and then later expanding to other international
markets. Furthermore, we will expand our international presence by establishing
additional overseas offices, adding direct sales personnel and increasing our
relationships with local distributors.

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<PAGE>   41

PRODUCTS AND SERVICES

     Our eService Suite is a software and content solution allowing our
customers to provide personalized, automated e-service tailored to the needs of
their end-users. Our eService Suite includes our eService Site, eService
Architect and eService Professional software products and RightAnswers.com. In
addition to our products, we offer integration, training, consulting and
maintenance services related to our eService Suite. The following diagram
depicts the eService Suite:

[Flow Chart depicting the components of our products and services and the manner
                    in which they are accessed by end-users]

     eService Site.  The eService Site allows our customers to provide Web-based
self-service to their end-users. End-users can access the eService Site through
an Internet or corporate intranet connection. This Web-based e-service solution
allows self-help users to access the knowledge base at any time, using a simple,
easy-to-use, intuitive interface via a natural language query. The eService Site
can be customized to conform to the look and feel of a customer's Web site.
Finally, eService Site provides access to our customers' knowledge sources, as
well as those of RightAnswers.com.

     eService Professional.  The eService 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 as
well as capture and revise additional knowledge. eService Professional
integrates with many of our partners' customer relationship applications to
provide a seamless interface for a customer service professional.

     eService Architect.  The eService Architect provides a robust set of
knowledge tools that allows customers' subject matter experts and system
administrators to administer, design, manage and maintain

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<PAGE>   42

knowledge bases. The eService Architect provides knowledge authoring and editing
capabilities as well as administrative tools for all necessary product suite
functions.

     RightAnswers.com.  RightAnswers.com is an Internet-based knowledge portal
that enables our customers to access a continuously updated database of
currently over 350,000 problem-solution pairs in a cost effective and timely
manner. RightAnswers.com enables customer support organizations and end-users to
have direct access to solutions to the most commonly asked technology-related
questions. Through RightAnswers.com, customers can simply go to our Web site,
type a natural language query and receive back a single, unified list of
probable answers from our licensed knowledge bases. We currently offer
multi-vendor support content obtained from leading technology companies,
including Microsoft, Novell and 3Com. In addition to the technology content
supplied by our partners, RightAnswers.com includes technology content that we
produce in-house for common desktop, network and SAP R/3 applications.
RightAnswers.com is primarily distributed on a subscription basis. A CD-ROM
version of this product, previously marketed as Knowledge-Pak Desktop Suite, is
also available.

     Professional Services and Customer Support.  Our professional services
organization provides our customers with implementation and integration
services, which allows them to deploy our e-service solutions effectively. In
addition, our professional services organization offers education and training
to enable our customers' internal team to support the implementation and
maintenance of our solutions. All customers under a maintenance agreement have
access to our technical support engineers via telephone, fax or e-mail. In
addition, we provide self-service support to our customers on a twenty-four
hours a day, seven days a week basis through our RightAnswers.com Web site.

TECHNOLOGY AND ARCHITECTURE

     Our eService Suite employs industry-standard technologies to create an
object-based open architecture for all our applications. The suite 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 provides flexibility and scalability.

     At the core of our technology is our Cognitive Processor, which provides
self-learning capability to our eService Suite. 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. Access to the Cognitive Processor is provided
via our knowledge server, which performs the role of an application server. The
knowledge server, written in the C++ programming language, performs session
management, thread management, spooling, caching and access management to the
Cognitive Processor. The replication capability of the server was designed to
update multiple databases worldwide on a distributed network by using any
leading database application. This permits our customers to locate servers in
various locations close to their end-user base.

     We refer to the architecture of our family of Web-based products as Java
Knowledge Management Architecture, or JKMA. The JKMA is a framework built using
Java and XML that includes components specifically designed to take advantage of
each element of the modern Web environment. This enables an extremely
configurable, extensible application to be delivered based on current Internet
standards. New tools and products based on the JKMA framework can be built at an
accelerated pace as standard system functionality is already available in the
core framework.

     The core technology for RightAnswers.com is based on industry standard
commercial software. All servers are based on Microsoft Windows NT and Microsoft
Internet Information Server. Server components are written in C++. Client
interfaces are implemented with HTML, Java and XML. The core search engine is
Verity's K2 architecture. RightAnswers.com is hosted by GTB Internetworking
which provides tier 1 Internet services, including load balancing, security,
communications and hardware services.

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CUSTOMERS

     With a greater number of customers than many of our competitors, we are a
leading provider of software and content solutions used by businesses to provide
an Internet-based e-service platform. To date, we have licensed our eService
Suite to over 200 customers and licensed our Knowledge-Pak Desktop Suite to over
4,000 customers. We have traditionally targeted our products and services to a
wide range of industry groups.

     The following customers are representative of our historical customer base
and target market.

<TABLE>
<S>                                         <C>
SERVICES                                    CONSUMER
ADP                                         Kimberly Clark
Andersen Consulting                         The Disney Store
DecisionOne                                 Yamaha Corporation of America
Fourth Shift
Marriott                                    TECHNOLOGY/COMMUNICATIONS
Stream International                        Canon
                                            CDW
FINANCIAL SERVICES                          Clarify
Bear Stearns                                Compaq
First Union National Bank                   Data General
Fleet Services                              Hewlett-Packard
Merrill Lynch                               Ingram Micro
Transamerica Occidental Life Insurance      Jamcracker
                                            Lucent Technologies
EDUCATION/GOVERNMENT                        Marconi Communications
Gelco Government Services                   National Computer Systems
U.S. Air Force                              Sharp Electronics
U.S. Navy                                   Texas Instruments
U.S. Patent & Trademark Office              United Messaging
University of Utah                          U.S. Cellular Wireless Communications
Wake Forest University
                                            INDUSTRIAL
HEALTH CARE                                 Eaton Cutler-Hammer
Allina Health Systems                       Grumman Systems Support
Amgen                                       Hughes Supply
Hoechst HiServ                              Johnson Controls
McKesson -- HBOC
Pfizer
</TABLE>

     The following case studies illustrate the issues encountered by our
customers in providing e-service and the benefits achieved through utilization
of our products and services.

  Stream International

     Stream International provides customer care and technical support services
for many of the world's premier technology businesses. With over 7,000
employees, innovative technologies and the commitment to continuously exceed the
expectations of its clients, Stream has a global reputation for enhancing the
customer experience. On a twenty-four hours a day, seven days a week basis and
in 13 languages, Stream harnesses its knowledge resources to resolve over 20
million customer and technical issues annually in its eleven contact center
locations in the United States, Europe and a joint venture in Japan.

     To manage these complex inquiries and improve responsiveness to customers,
Stream wanted to put a knowledge management infrastructure in place that would
leverage best practices throughout the organization. Using our solutions, Stream
can now gather, document and refine knowledge, and make that knowledge available
through several mechanisms to internal employees. Stream selected our solution
for its technically advanced knowledge engine, its ability to be integrated with
other information technology

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<PAGE>   44

systems and our expertise in the knowledge industry. For Stream's agents using
Knowledge Bridge to support their clients, information that is captured from a
customer interaction, whether via telephone, email or chat, is channeled by
Knowledge Bridge into Stream's knowledge base. Additionally, this knowledge is
exported and made available as a self-service option to Stream's customers via
the Web. After installing Knowledge Bridge, Stream became more effective in
their ability to solve and report customer problems. Support agents have
decreased call escalations and improved the consistency and quality of answers.

  Marconi Communications


     Marconi Communications is one of the world's fastest growing communications
and information technology companies. Before becoming Marconi Communications on
November 30, 1999, the company was known as GEC or The General Electric Company,
p.l.c. Today, the company is comprised of a wide range of organizations,
including companies recently purchased by Marconi Communications such as Fore
Systems, RELTEC, Picker Medical, Positron Fibre and others. It is a
global-leader in smart broadband optical networks, ATM backbone switches,
telephony products, wireless products, medical imaging and more.



     A team of internal analysts and a worldwide network of field-service
personnel provide customer service, installation and trouble-shooting for
Marconi's constantly expanding product line. In a two-pronged effort to provide
consistent and high quality information while reducing the training necessary to
prepare analysts and field personnel, Marconi turned to us for the foundation of
a consolidated online knowledge management system and self-service Web site. As
the program continues to roll out across Marconi's worldwide enterprise, it will
be integrated with the Remedy call management software and an email management
package.



     With its internal analysts fully trained in the use of our knowledge
management software, expert knowledge is now available to even the most junior
analyst. Marconi is already experiencing a 25 percent reduction in the time it
takes to train new hires and anticipates this reduction to reach 40 percent
improvement as the program is deployed to its worldwide field-service network.
Marconi anticipates a soon-to-be-launched, Web-based self-help feature will
further reduce incoming calls to the Marconi help desk, and provide improved
time-to-resolution for the company's customer base.


  Yamaha Corporation of America


     With an inventory that includes a wide range of music-making devices, from
pianos and synthesizers to electric guitars, sound equipment and CD recorders,
the Product Information Department at Yamaha Corporation of America supports
over 1,700 products, including newly-added lines to its U.S. product offerings
and all products carrying the Yamaha name, even if they have been discontinued.
With the interactive Yamaha Solutions Network(TM) located on the Service &
Support section of its Web site, Yamaha has made its knowledge directly
available to its customers via the Web and, in the process, improved customer
satisfaction.



     Based upon our eService Suite, the Yamaha Solutions Network features a
constantly evolving knowledge base that provides the answers that customers need
when they need them. Since its deployment, Yamaha has experienced a decrease in
its time-to-resolution as well as in the number of calls to Yamaha's support
center, while improving customer satisfaction significantly. In addition,
because the product information is categorized and managed by our software,
Yamaha has been able to partially outsource the support related to one of its
new high-tech products. Yamaha has recently been awarded the prestigious WebStar
award by the Software Support Professionals Association, which recognizes
companies that utilize the Web to excel at meeting their customer service
expectations.


SALES AND MARKETING


     We market our solutions through a direct sales force and indirect sales
channels. We sell our eService Suite primarily through our direct sales force.
The CD-ROM version of RightAnswers.com, which was previously marketed as
Knowledge-Pak Desktop Suite, is sold primarily through indirect distribution
channels consisting of software vendors and value-added resellers. The online
version of RightAnswers.com is being sold both directly and through software
vendors and value-added resellers.


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<PAGE>   45


     As of June 30, 2000, our sales team consisted of 35 sales representatives
and managers. We have sales personnel throughout North America and,
internationally, in the United Kingdom.



     To increase the effectiveness of our direct selling efforts and our
penetration of the e-service solutions market, we build brand awareness of
ServiceWare and our solutions through numerous marketing programs. These
programs include print and Internet advertisements, direct mailings, public
relationship activities, trade shows, 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 histories, return-on-investment analyses,
presentations, white papers and demonstrations. In addition, our marketing group
helps identify and develop key partnership opportunities and channel
distribution relationships. As of June 30, 2000, our marketing team consisted of
19 full-time employees. In May 2000, we initiated a marketing program to promote
the new release of our eService Suite and the re-branding of our associated
products and services.


STRATEGIC ALLIANCES


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


  Distribution Alliances


     We have established distribution alliances with leading providers of
complementary e-commerce technologies who resell or co-market our solutions. We
benefit from the lead generation and established marketing capabilities of these
firms. In turn, our partners benefit from being able to offer a more
comprehensive solution in their product offerings and thereby increase their
customers' satisfaction. We currently have strategic distribution and marketing
alliances with several vendors, including Clarify, Kana Communications, Oracle,
Peregrine Systems, Remedy, Siebel Systems and Tivoli. In 1999, sales to Tivoli
accounted for 17% of our total revenue.


  Content Alliances


     We have established content alliances with leading technology vendors. Our
relationships with these content providers help us offer customers a diverse
range of technical information and problem-solving techniques. We currently have
content partnerships with Microsoft, Novell and 3Com.


RESEARCH AND DEVELOPMENT


     We develop most enhancements to our existing and new products internally.
We plan to continue to evaluate externally developed technologies for
integration into our product line as well. In 1999, we directed the majority of
our research and development expenditure towards fully integrating the
technology acquired from the Molloy Group and towards making platform changes
that provided us with the capability of building new applications and expanding
into new markets.



     Our research and development expenditures for fiscal 1997, 1998 and 1999
were approximately $4.4 million, $5.3 million and $6.8 million. In order to keep
pace with the rapidly changing technology environment, we expect to continue to
devote significant resources toward research and development.


COMPETITION


     We compete in the emerging market of e-service solutions. Competition in
this market 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
e-service solutions, including Ask Jeeves, Inference-eGain Communications,
Peregrine Systems, Primus Knowledge Solutions, Quintus and Servicesoft
Technologies. In addition, we face competition in our content product solutions
from firms such as EarthWeb. We also face competition from many free or low cost
sources of information generally available via the Internet, including portions
of our content products provided to us by software developers, who may choose to
provide this content as part of their Internet-based support offerings. As there
are


                                       41
<PAGE>   46

relatively low barriers to entry in the software industry, we expect to
experience additional competition from new entrants in our markets.


     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
timely 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 consolidations.


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 have two patents, one pertaining to certain proprietary data structures
and the other pertaining to our Cognitive Processor. We also have one trademark
registration and one pending trademark application in the United States.



     We seek to avoid disclosure of our intellectual property by generally
entering into confidentiality or license agreements with our employees,
consultants and alliance partners, and 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 which have been granted certain
limited contractual rights to use proprietary information may improperly use or
disclose such proprietary information. In addition, certain of our products
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


     We 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, diversity and
cooperation among our employees. As of June 30, 2000, we had 245 employees,
including 62 in sales, 50 in customer services, 87 in research and development,
19 in marketing, 13 in general and administration, and 14 in operations.


PROPERTIES


     Our principal executive offices are located in Oakmont, Pennsylvania where
we lease 28,200 square feet of office space. The term of the lease expires in
2006. We also operate a 24,300 square foot office in Parsippany, New Jersey.
This lease expires in 2002. We also lease a 3,871 square foot office in Redwood
City, California with the term of lease expiring in 2002 and a smaller office in
the United Kingdom.


LEGAL PROCEEDINGS

     We are not a party to any material legal proceedings.

                                       42
<PAGE>   47

                                   MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

     The following table sets forth certain information concerning each of our
executive officers, directors and key employees, their ages, and their
respective positions with the company:


<TABLE>
<CAPTION>
NAME                                        AGE                         POSITION
----                                        ---                         --------
<S>                                         <C>   <C>
Rajiv Enand...............................  38    Chairman of the Board of Directors
Mark Tapling..............................  43    President, Chief Executive Officer and Director
Mark Finkel...............................  45    Chief Financial Officer, Treasurer and Secretary
Lisa Neal Graves..........................  36    Chief Technology Officer
Peggy Biddison............................  51    Vice President of Marketing
Richard Joslin............................  37    Vice President of RightAnswers.com
Richard Koloski...........................  37    Vice President of Software Development
Lou Venezia...............................  49    Vice President of Global Sales
Kevin Hall(2).............................  41    Director
Susanne Harrison(1)(2)....................  55    Director
Bruce Molloy..............................  45    Director
Timothy Wallace(1)(2).....................  42    Director
</TABLE>


---------------
(1) Member of the Compensation Committee of the Board of Directors.

(2) Member of the Audit Committee of the Board of Directors.

     Rajiv Enand has served as Chairman of the Board of Directors since August
1999. Mr. Enand previously served as our President from July 1998 to May 1999,
Chief Executive Officer from July 1998 to January 2000, Vice President of
Business Development from May 1996 to July 1998, Vice President of Operations
from February 1995 to May 1996 and Vice President of Engineering from April 1993
to February 1995. Mr. Enand received a Bachelor of Science degree in Computer
Science from West Virginia University and has completed graduate courses at East
Tennessee State University and Southern Methodist University.

     Mark Tapling has served as our President and Chief Executive Officer since
January 2000 and a director since May 2000. Mr. Tapling previously served as our
President and Chief Operating Officer from May 1999 to January 2000 and as our
Vice President of Worldwide Sales from February 1998 to May 1999. From September
1996 to February 1998, Mr. Tapling was employed by Comshare, most recently as
Senior Vice President of Operations for the Americas. From April 1994 to
September 1996, Mr. Tapling was employed by Lotus Development Corporation, most
recently as Region Director for the Northeast. Mr. Tapling received a Bachelor
of Science degree in Economics and Management from Michigan State University.

     Mark Finkel has served as our Chief Financial Officer since January 2000
and our Treasurer and Secretary since May 2000. From June 1996 to January 2000,
Mr. Finkel was employed as a consultant and/or acting executive officer for a
variety of technology companies, including InterWorld, BackWeb Technologies and
the Molloy Group. From May 1995 to June 1996, Mr. Finkel was employed by Logic
Works as Executive Vice President and Chief Financial Officer. Prior to May
1995, Mr. Finkel served as Chief Financial Officer for a number of technology
companies, including Consilium and Neuron Data, now Blaze Software, and also
practiced corporate and securities law in California. Mr. Finkel received a
Bachelor of Arts degree from Oberlin College, a Master's degree in Business
Administration from New York University and a Juris Doctor degree from the
University of California at Davis.

     Lisa Neal Graves has served as our Chief Technology Officer since May 2000.
From 1999 to 2000, Ms. Graves was employed as a Senior Vice President at Chase
Manhattan Bank and from 1997 to 2000,

                                       43
<PAGE>   48

she served as President and Chief Operating Officer of LANCreations. Previously,
Ms. Graves was a General Manager of Enterprise Call Center Products at Lucent
Technologies and a Division Manager of Electronic Commerce Architecture and
Applications at AT&T. Ms. Graves received a Bachelor of Science degree in
Computer Science from Hampton University, a Master of Science degree in Computer
Science from Michigan State University and a Master's degree in Engineering
Management from the University of Colorado.

     Peggy Biddison has served as our Vice President of Marketing since June
1999. Ms. Biddison was previously employed by QAD as Vice President of Marketing
from October 1994 to June 1999. From September 1993 to November 1994, Ms.
Biddison was employed by Fourth Shift as Vice President of Professional
Services. Ms. Biddison received a Bachelor of Arts degree from the University of
California at Santa Cruz.

     Richard Joslin has served as our Vice President of RightAnswers.com since
September 1999. From October 1995 to September 1999, Mr. Joslin held a variety
of positions with us, most recently as Vice President of Knowledge Engineering.
Previously, Mr. Joslin was employed by a division of Westinghouse Electric,
which was acquired by Eaton Cutler-Hammer, most recently as Manager of
Commercial Systems Support. Mr. Joslin received a Bachelor of Science degree in
Computer Science from Indiana University of Pennsylvania. Mr. Joslin has
received a number of industry commendations in the customer service field,
including the 1999 Service 25 Award from ServiceNews magazine.

     Richard Koloski has served as our Vice President of Software Development
since July 1999. From October 1997 to June 1999, Mr. Koloski was employed in the
same capacity by the Molloy Group. From June 1996 to October 1997, Mr. Koloski
was employed by Claremont Technology Group as Director of the Technology
Infrastructure Laboratories and Vice President of Telecommunications.
Previously, Mr. Koloski was employed by EDS, most recently as a Senior Software
Engineer and Architect. Mr. Koloski received a Bachelor of Arts degree in the
International Business Honors Program from William Paterson College.


     Lou Venezia has served as our Vice President of Global Sales since July
1999. From November 1998 to July 1999, Mr. Venezia was President and Chief
Operating Officer of the Molloy Group. From April 1998 to November 1998, Mr.
Venezia was Vice President of Sales of the Molloy Group. From 1993 to 1998, Mr.
Venezia was employed by Versatility as Senior Vice President of Enterprise
Solutions. Mr. Venezia received a Bachelor of Science degree in Mathematics and
Physics from the University of Massachusetts.


     Kevin Hall has served as a director since April 1996.  Mr. Hall has been a
General Partner of Norwest Equity Partners since 1993. He serves on the board of
directors of Continuus Software and many other private companies. Mr. Hall
received a Master's degree in Business Administration from Stanford University
and Master of Science and Bachelor of Science degrees in Electrical Engineering
from Purdue University.

     Susanne Harrison has served as a director since July 1994. Ms. Harrison has
been a General Partner of Poly Ventures, LP since 1989 and Poly Ventures II, LP
since 1991. Ms. Harrison is also President of Harrison Enterprises, a technology
Angel investment fund. She serves as a director of several privately held
companies, as well as a director of Long Island Venture Group, and Long Island
Capital Forum. Ms. Harrison received a Master's degree in Business
Administration from Adelphi University, a Master of Arts degree from the State
University of New York and a Bachelor of Arts degree from Hunter College of the
City University of New York.

     Bruce Molloy has served as a director since July 1999. Mr. Molloy founded
the Molloy Group and served as its Chief Executive Officer and Chairman of the
Board of Directors from October 1992 until its acquisition in July 1999. Mr.
Molloy is the inventor of the patented Cognitive Processor used in our products.
Mr. Molloy received a Bachelor of Arts degree in Music and Physics from Columbia
University.

     Timothy Wallace has served as a director since July 1994. Since January
2000, Mr. Wallace has served as the Chairman and Chief Executive Officer of Full
Tilt Solutions, a business-to-business

                                       44
<PAGE>   49

professional service company. Prior to Full Tilt, Mr. Wallace was the President
and Chief Executive Officer of Xerox Connect, a network integration technology
company. From May 1996 until May 1998, Mr. Wallace was the President, Chief
Executive Officer and a director of XLConnect Solutions, which he founded. Xerox
acquired XLConnect in May 1998. From August 1991 to March 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.

COMMITTEES OF THE BOARD OF DIRECTORS

     The Board of Directors has two standing committees: an Audit Committee and
a Compensation Committee.

     The responsibilities of the Audit Committee include:

     - recommending to the Board of Directors the independent public accountants
       to be selected to conduct the annual audit of our books and records;

     - reviewing the proposed scope of the audit and approving the audit fees to
       be paid;

     - reviewing our accounting and financial controls with the independent
       public accountants and our financial and accounting staff; and

     - reviewing and approving transactions between us and our directors,
       officers and affiliates.

     Kevin Hall, Susanne Harrison and Timothy Wallace are the members of the
Audit Committee.

     The Compensation Committee provides a general review of our compensation
plans to ensure that they meet corporate objectives. The responsibilities of the
Compensation Committee also include administering our stock incentive plans.
Susanne Harrison and Timothy Wallace are the members of the Compensation
Committee.

     None of the members of our Compensation Committee or Audit Committee has
ever been an officer or employee of our company. None of our executive officers
serves as a member of the Board of Directors or on the compensation committee of
any entity that has one or more executive officers serving on our Board of
Directors.

DIRECTOR COMPENSATION

     Effective August 18, 1999, three directors who are not our employees or
consultants were each granted 60,000 non-qualified stock options under our 1996
stock option plan with an exercise price of $2.50 per share. 15,000 of these
options vested on August 18, 1999, with an additional 15,000 options vesting on
August 18 of each of the three subsequent years, provided that such individual
remains a member of our Board of Directors on such date of vesting. We also
reimburse our directors for their reasonable out-of-pocket expenses incurred in
attending meetings of our Board of Directors or its committees.

AMENDED AND RESTATED STOCK OPTION PLAN

     In December 1996, our Board of Directors adopted and our stockholders
approved the ServiceWare, Inc. Amended and Restated Stock Option Plan, effective
January 1, 1996, which we refer to as the 1996 stock option plan. We may grant
incentive or nonqualified stock options under the 1996 stock option plan to our
employees, directors, consultants and advisors. This plan amended and restated
the ServiceWare, Inc. 1994 Stock Option/Stock Issuance Plan. The 1996 stock
option plan provides that it will terminate on February 15, 2004, unless it is
earlier terminated by our Board of Directors. As discussed below, however, the
Board of Directors intends to terminate the 1996 stock option plan and replace
it with the 2000 stock incentive plan prior to the effectiveness of this
registration statement. The shares of common stock that are

                                       45
<PAGE>   50

reserved pursuant to an option under the 1996 stock option plan, and which are
later terminated by us prior to exercise, will become available for reissuance
under the 2000 stock incentive plan.


     We are authorized to issue 4,000,000 shares of our common stock under the
1996 stock option plan. As of June 30, 2000, we had options outstanding to
purchase 2,478,560 shares of common stock under the 1996 stock option plan.


     The Compensation Committee of our Board of Directors administers the 1996
stock option plan and is responsible for determining the terms and conditions of
all grants of options under the 1996 stock option plan. Subject to certain
exceptions, all rights to exercise options will terminate on the first of the
following to occur:

     - the scheduled expiration date as set forth in the applicable stock option
       agreement;

     - 90 days following the date of termination of employment for any reason
       other than death or permanent disability of the participant; or

     - one year following the date of termination of employment by reason of the
       participant's death or permanent disability.

     If control of our company changes through, for example, a merger,
acquisition or consolidation of more than 50% of our stock by another person or
company, or through a merger with another company, and the acquiror fails to
assume or replace with equivalent options all outstanding options under the 1996
stock option plan, then all outstanding options that have not vested prior to
the change of control will immediately vest.

2000 STOCK INCENTIVE PLAN

     Introduction.  We have adopted a 2000 stock incentive plan to serve as the
successor program to our 1996 stock option plan.

     Awards.  We may grant incentive stock options, nonqualified stock options
or restricted stock under the 2000 stock incentive plan.


     Share Reserve.  Two million shares of our common stock are reserved for
issuance under the 2000 stock incentive plan, plus any shares of our common
stock previously reserved for stock options granted under the 1996 stock option
plan which are forfeited prior to their exercise. The shares reserved under our
2000 stock incentive plan will automatically increase on the first trading day
in January of each calendar year, beginning with calendar year 2001, by an
amount equal to the lesser of 1.0 million or 6.25% of the total number of shares
of our common stock outstanding on the last trading day of December in the prior
calendar year, unless our Board of Directors determines to increase the amount
by a lesser number of shares. No participant will receive a grant of more than
500,000 shares of our common stock on an annual basis. As of June 30, 2000, we
had options outstanding to purchase 202,000 shares of common stock under the
2000 stock incentive plan.


     Eligibility.  The individuals eligible to participate in our 2000 stock
incentive plan include our officers, other employees, members of our Board of
Directors and any consultants we hire.

     Administration.  Our 2000 stock incentive plan is administered by our
Compensation Committee. The Compensation Committee determines which eligible
individuals are to receive option grants or stock issuances under the 2000 stock
incentive plan, the time or times when the issuances are to be made, the number
of shares subject to each grant or issuance, the status of any granted option as
either an incentive stock option or a nonstatutory stock option under the
federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance and the maximum term for which any granted option is to remain
outstanding.

     Change of Control.  If control of our company changes through, for example,
an acquisition of more than 50% of our stock by another person or company, or
through a merger with another company, and the acquiror fails to assume or
replace with equivalent awards all outstanding awards under the 2000 stock
                                       46
<PAGE>   51

incentive plan, then all outstanding options that have not vested prior to the
change of control will immediately vest and the restrictions on any restricted
stock that have not lapsed before the change of control will immediately lapse.
In addition, any replacement options issued by the acquiror to any participant
will vest, and any restrictions on any replacement restricted stock issued to
such participant will lapse, if the participant is terminated without cause
within 12 months after the change of control.

2000 EMPLOYEE STOCK PURCHASE PLAN

     We intend for our Board of Directors to adopt a 2000 employee stock
purchase plan. Subject to approval by our stockholders, the plan will become
effective immediately prior to the consummation of this offering and, unless our
Board of Directors terminates it earlier, will continue for a term of 20 years.
The plan is designed to permit eligible employees to purchase common stock,
through payroll deductions, at a discount from its fair market value. We will
initially reserve 500,000 shares of our common stock for issuance under the 2000
employee stock purchase plan. The reserve will automatically increase on the
first trading day of each calendar year beginning in 2001 in an amount equal to
the total number of shares purchased under the 2000 employee stock purchase plan
during the immediately preceding fiscal year, up to a maximum of one million
shares that can be reserved for issuance under the plan.

     We intend for the 2000 employee stock purchase plan to be qualified under
Section 423 of the Internal Revenue Code. The 2000 employee stock purchase plan
will consist of six-month purchase periods. Participating employees will
automatically make stock purchases at the end of each purchase period. The
initial purchase period will begin on the date of the consummation of this
offering.

     Our Board of Directors or a committee appointed by our Board of Directors
will administer the 2000 employee stock purchase plan. The 2000 employee stock
purchase plan will permit eligible employees to purchase common stock through
payroll deductions, which may not exceed 15% of an employee's compensation,
unless our Board of Directors decides to modify such amount. The purchase price
will be equal to the lower of 85% of the fair market value of the common stock
at the beginning of the applicable purchase period or 85% of the fair market
value of the common stock at the end of each such purchase period. Our
employees, including officers and employee directors, will be eligible to
participate in the 2000 employee stock purchase plan if they are employed by us
for at least 20 hours per week and more than five months in the year. Employees
will be permitted to withdraw from participation in the 2000 employee stock
purchase plan at any time and receive a refund of their payroll deductions made
since the last purchase date. Participation will end automatically upon
termination of employment.

     If another company acquires us, the 2000 employee stock purchase plan
generally will provide that the acquiror will assume each right to purchase
stock or shall substitute equivalent rights; otherwise, each right to purchase
common stock will accelerate and become exercisable immediately before the
acquisition. Our Board of Directors will have the power to amend or terminate
the 2000 employee stock purchase plan at any time, except that any amendment,
although effective when made, will be subject to stockholder approval if
required by any federal or state law or regulation.

EXECUTIVE BONUS

     The Board of Directors has established an executive bonus plan for fiscal
year 2000. The plan will pay performance-based bonuses of up to a maximum of
$75,000 to each senior executive and up to a maximum of $100,000 to our Chief
Executive Officer, as incentive for the participants to contribute to our
growth. The Compensation Committee of the Board of Directors will administer the
plan. The bonus will be determined based on whether we meet and/or exceed our
corporate and financial goals.

401(k) PLAN

     We maintain a 401(k) retirement savings plan. All of our employees meeting
certain minimum eligibility requirements are eligible to participate in the
401(k) plan. Under the 401(k) plan, an employee may contribute up to 15% of his
or her pre-tax gross compensation. The contribution cannot exceed a statutorily
prescribed annual limit. The 401(k) plan permits us, but does not require us, to
make additional

                                       47
<PAGE>   52

contributions to the 401(k) plan. All amounts contributed by the employee
participants in conformance with plan requirements and earnings on such
contributions are fully vested at all times. For the years ended December 31,
1997, 1998 and 1999, we did not contribute to the 401(k) plan. As of January 1,
2000, however, we provide a 25% company match to participant contributions.

LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION MATTERS

     Our Certificate of Incorporation, as amended, limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that directors of a corporation will not be personally liable for monetary
damages for breach of their fiduciary duties as directors, except liability for:

     - any breach of their duty of loyalty to the corporation or its
       stockholders;

     - acts or omissions not in good faith or which involve intentional
       misconduct or a knowing violation of law;

     - unlawful payments or dividends or unlawful stock repurchases or
       redemptions; or

     - any transaction from which a director derives an improper personal
       benefit.

     This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.

     Our Certificate of Incorporation, as amended, and Bylaws provide that we
will indemnify our directors and executive officers, and may indemnify our other
officers and employees and other agents, to the fullest extent permitted by law.
We believe that indemnification under our Bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our Bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity and certain
other capacities, such as serving as a director of another corporation at the
request of the Board of Directors, regardless of whether the Bylaws would permit
indemnification.

                                       48
<PAGE>   53

EXECUTIVE COMPENSATION

     The following table sets forth information concerning the compensation
received for services rendered during 1999 by (1) the Chief Executive Officer
and (2) the four other most highly compensated executive officers as of December
31, 1999 whose total salary and bonus in 1999 exceeded $100,000. The All Other
Compensation column includes automobile allowances of $1,846 paid to Mr. Enand
and $3,850 paid to Mr. Tapling.

                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                        LONG-TERM
                                                                       COMPENSATION
                                                                          AWARDS
                                             ANNUAL COMPENSATION   --------------------
                                             -------------------   NUMBER OF SECURITIES    ALL OTHER
NAME AND PRINCIPAL POSITION                   SALARY      BONUS     UNDERLYING OPTIONS    COMPENSATION
---------------------------                  --------    -------   --------------------   ------------
<S>                                          <C>         <C>       <C>                    <C>
Rajiv Enand
  Chairman(a)..............................  $200,000    $45,000         100,000           $ 1,846
Mark Tapling
  President and CEO(b).....................  $185,417    $45,000         310,000           $39,190(e)
Lou Venezia
  Vice-President of Global Sales...........  $177,083(c) $47,500          92,000
Peggy Biddison
  Vice-President of Marketing..............  $ 93,817(d) $58,750         100,000
Richard Koloski
  Vice-President of Software Development...  $150,000(f) $62,500          56,950
</TABLE>


---------------
(a) Mr. Enand was our Chief Executive Officer during 1999 and President for a
    portion of that year.

(b) Mr. Tapling was President, Chief Operating Officer and Vice President of
    Worldwide Sales at various times during 1999. His current base salary is
    $200,000.

(c) Includes earnings of $99,167 paid while at the Molloy Group prior to its
    acquisition by us.

(d) Part year salary, based upon a base salary of $165,000.

(e) Includes $35,340 in commissions paid while Vice President of Worldwide
    Sales.


(f) Includes earnings of $106,250 paid while at the Molloy Group prior to its
    acquisition by us.


                                       49
<PAGE>   54

STOCK OPTIONS

                             OPTION GRANTS IN 1999

     The following table provides information concerning grants of stock options
under our 1996 stock option plan to the Chief Executive Officer and the four
other most highly compensated executive officers during 1999. The percentages of
total options granted to employees in 1999 are based on grants of 1,979,120
options which include the 393,950 options given to the Molloy Group option
holders in exchange for their Molloy Group options upon our acquisition of the
Molloy Group.

     Potential realizable value is based on the assumption that the price per
share of common stock appreciates at the assumed annual rate of stock
appreciation on the assumed initial public offering price of $11.50 over the
term of the option. The assumed 5% and 10% annual rates of appreciation
(compounded annually) over the term of the option are set forth in accordance
with the rules and regulations adopted by the Securities and Exchange Commission
and do not represent our estimate of stock price appreciation.


<TABLE>
<CAPTION>
                                               INDIVIDUAL GRANTS
----------------------------------------------------------------------------------------------------------------
                                                                                  POTENTIAL REALIZABLE VALUE AT
                               NUMBER OF    % OF TOTAL                               ASSUMED ANNUAL RATES OF
                               SECURITIES    OPTIONS                               STOCK PRICE APPRECIATION FOR
                               UNDERLYING   GRANTED TO   EXERCISE                          OPTION TERM
                                OPTIONS     EMPLOYEES      PRICE     EXPIRATION   ------------------------------
NAME                            GRANTED      IN 1999     ($/SHARE)      DATE           5%               10%
----                           ----------   ----------   ---------   ----------   ------------      ------------
<S>                            <C>          <C>          <C>         <C>          <C>               <C>
Rajiv Enand..................   100,000        5.05%       $2.50     10/20/2009    1,873,350         2,983,100
Mark Tapling.................    10,000        0.51%       $1.00      1/01/2009      187,335           298,310
                                300,000       15.16%       $1.00      6/11/2009    5,620,050         8,949,300
Lou Venezia..................    92,000        4.65%       $2.50      7/23/2009    1,723,482         2,744,452
                                 99,000(1)     5.00%       $1.21      7/23/2009    1,854,617         2,953,269
Peggy Biddison...............   100,000        5.05%       $1.00      6/07/2009    1,873,350         2,983,100
Richard Koloski..............    56,950        2.88%       $2.50      7/23/2009    1,066,873         1,698,875
                                 28,050(1)     1.42%       $1.21      7/23/2009      525,475           836,760
</TABLE>


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

(1) These options were issued in exchange for Molloy Group options upon our
    acquisition of the Molloy Group.


                AGGREGATE OPTION EXERCISES IN 1999 OPTION VALUES

     The following table sets forth certain information regarding the stock
options held as of December 31, 1999 by our Chief Executive Officer and the
other four most highly compensated executive officers. None of these executive
officers exercised options in 1999.


<TABLE>
<CAPTION>
                                            NUMBER OF SHARES OF COMMON          VALUE OF UNEXERCISED
                                           STOCK UNDERLYING UNEXERCISED         IN-THE-MONEY OPTIONS
                                           OPTIONS AT DECEMBER 31, 1999         AT DECEMBER 31, 1999
                                          ------------------------------   ------------------------------
NAME                                      EXERCISABLE      UNEXERCISABLE   EXERCISABLE      UNEXERCISABLE
----                                      -----------      -------------   -----------      -------------
<S>                                       <C>              <C>             <C>              <C>
Rajiv Enand.............................          0           100,000      $        0        $  900,000
Mark Tapling............................     18,750           366,250         148,125         3,699,125
Lou Venezia.............................     99,000            92,000       1,018,710           828,000
Peggy Biddison..........................          0           100,000               0         1,050,000
Richard Koloski.........................     11,220            73,780         115,454           685,731
</TABLE>


EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS

     All of our executive officers serve at the discretion of the Board of
Directors.

     Pursuant to a resolution of our Board of Directors, 50% of the then
unvested options held by executive officers and employees with a title of "Vice
President" will vest and become exercisable upon

                                       50
<PAGE>   55

the occurrence of a "Change of Control," as defined in the 1996 stock option
plan, provided such executive officer or employee is employed by us on the date
of a Change of Control. This right is in addition to any rights such individuals
may have under the 1996 stock option plan.

     Pursuant to Mark Tapling's letter of employment, 75% of Mr. Tapling's
unvested stock options will automatically vest upon the occurrence of a Change
of Control, as defined in the 1996 stock option plan. As of June 1, 2000, 100%
of the options, granted to Mr. Tapling prior to December 31, 1999, would
automatically vest upon the occurrence of a Change of Control. In addition, 75%
of the options granted to Mr. Tapling on January 19, 2000 would vest upon the
occurrence of a Change of Control, with the remaining options to vest
proportionally over the subsequent 12 months. Mr. Tapling is also entitled to a
severance package equal to six months of his base salary should his employment
with us be terminated, whether voluntarily or not, without cause.

     Mark Finkel, who became our Chief Financial Officer in January 2000, will
receive an annual salary of $150,000 per year. In addition, Mr. Finkel was
granted 300,000 options to purchase common stock. Mr. Finkel's stock options are
immediately exercisable, subject to various rights of repurchase by us. Upon the
occurrence of a Change of Control, as defined in the 1996 stock option plan, Mr.
Finkel's shares eligible for repurchase will be reduced by 50% if we are not the
controlling entity. In addition, within 12 months of the occurrence of a Change
of Control, no shares will be eligible for repurchase if Mr. Finkel is
terminated without cause or if his responsibilities significantly change.

     Pursuant to an agreement with our Board of Directors dated January 19,
2000, Rajiv Enand's cash compensation and employee benefits are guaranteed
through June 30, 2001.


     Our former Vice-President of Global Enterprise Services, Susie Sedlacek,
resigned from her position with us as of June 30, 2000. Ms. Sedlacek has agreed
to stay on with us during a transitionary period.


                                       51
<PAGE>   56

                              CERTAIN TRANSACTIONS

     We believe that the terms of each of the transactions described below were
no less favorable to us than could have been obtained from unaffiliated third
parties. The counterparties in many of these transactions only became affiliated
with us as a result of the successful closing of these transactions and the
transactions were highly negotiated.

SALE OF SERIES D PREFERRED STOCK

     In July 1999, we sold 2,400,000 shares of our Series D convertible
preferred stock, par value $1.00 per share and warrants to purchase 360,000
shares of our common stock for an aggregate purchase price of $9,000,000 to a
total of 22 investors. Pursuant to the terms of the warrants, because we failed
to meet certain performance targets for the year ended December 31, 1999, the
warrants became exercisable. All of these investors have waived their right to
exercise their warrants, except for one investor holding warrants to purchase
401 shares. The investors received certain registration rights in connection
with the purchase of the Series D preferred stock. Each share of Series D
convertible preferred stock is convertible into one share of common stock,
subject to adjustment. Each warrant is exercisable at $2.50 per share.

SALE OF SERIES E PREFERRED STOCK

     As consideration for our acquisition of the Molloy Group in July 1999, we
issued 2,647,984 shares of our Series E convertible preferred stock, par value
$1.00 per share, to the former holders of preferred stock and promissory notes
of the Molloy Group, warrants to purchase of 40,473 shares of common stock, and
1,512,307 shares of our common stock to former holders of common stock of the
Molloy Group, including 1,474,743 shares of our common stock to Bruce Molloy,
one of our directors. The total consideration of approximately $14.2 million
plus $445,000 in transaction costs was determined through extensive arms'-
length negotiations among the Molloy Group, C.E. Unterberg, Towbin and us. The
former security holders of the Molloy Group received certain registration rights
in connection with their receipt of our common stock. Under the terms of the
agreement and plan of merger, shares of our common stock and Series E preferred
stock representing approximately 2% of the total consideration issuable to each
former security holder of the Molloy Group were placed in an escrow account
pending determination of certain performance targets relating to the business of
the Molloy Group from July 1, 1999, as if the acquisition had occurred on July
1, 1999. Because these performance targets were not met, the escrowed shares
were returned to us. Each share of Series E convertible preferred stock is
convertible into one share of common stock, subject to adjustment. Of the 40,473
warrants, 23,823 warrants are exercisable at $1.50 per share and 16,650 warrants
are exercisable at $9.00 per share.

SALE OF SERIES F PREFERRED STOCK


     On June 2, 2000, we sold an aggregate of 1,325,000 shares of our Series F
convertible preferred stock, par value $0.01 per share, at a purchase price of
$8.00 per share to a total of nine accredited investors, eight of which were
current stockholders and one of which is a new accredited investor. The eight
current stockholders are CEO Venture Fund III, Birchmere Ventures II, Norwest
Equity Partners V, Lovett Miller Venture Fund II, Geocapital III, PNC Investment
Corp. and two affiliates of C.E. Unterberg, Towbin. The new investor is EDS. The
investors received certain registration rights in connection with the purchase
of the Series F convertible preferred stock. Each share of Series F convertible
preferred stock is convertible into one share of common stock, subject to
adjustment.


WARRANTS

     In April 1999, PolyVentures II, L.P. loaned us $150,000; in May 1999,
Geocapital III, L.P. loaned us $250,000; and in June 1999, Norwest Equity
Partners V loaned us $650,000. These loans were made for short-term working
capital purposes. As partial consideration for these loans, we issued warrants
to purchase 4,000, 6,667 and 17,333 shares of our common stock to each of
PolyVentures II, L.P., Geocapital III, L.P. and Norwest Equity Partners V,
respectively. We used a portion of the proceeds from

                                       52
<PAGE>   57

the sale of our Series D preferred stock in July 1999 to repay these loans in
full. We expect the warrants to be exercised prior to the consummation of this
offering; however, if not exercised, these warrants will expire upon this
offering. Susanne Harrison and Kevin Hall, each of whom are members of our Board
of Directors, are general partners of PolyVentures II, L.P. and Norwest Equity
Partners V, respectively. Each warrant is exercisable at $3.75 per share.


     On June 2, 2000, we granted 233,333 warrants to buy common stock to EDS.
The warrant's purchase price shall be $8.00 per share, provided, however, that
if the closing of our initial public offering occurs on or before December 31,
2000, the warrant's purchase price will be adjusted to equal the price per share
at which we sell shares of common stock to the public in the initial public
offering. The warrants are contingently exercisable based upon us and EDS
executing certain commercial agreements and meeting certain other targets. As of
June 30, 2000, these contingencies had been met for warrants to purchase 150,000
shares of common stock.


TRANSACTIONS INVOLVING C.E. UNTERBERG, TOWBIN


     C.E. Unterberg, Towbin, one of our underwriters, and associated persons and
entities, beneficially own 2,578,962 shares of our common stock, comprising
13.7% of our total outstanding common stock. This ownership interest was
acquired in several transactions that occurred on or prior to July 1999.


     On November 13, 1998, December 2, 1998 and December 4, 1998, the Molloy
Group raised $1,751,310 by entering into a subordinated convertible note
agreement with various entities including C.E. Unterberg, Towbin, L.P. and
related parties. The C.E. Unterberg, Towbin and related parties investment was
$852,833 in the aggregate.

     On April 29, 1999, the Molloy Group raised $500,000 by entering into a
subordinated convertible note agreement with Unterberg Towbin Capital Partners I
for this amount.

     On June 25, 1999, the Molloy Group raised $500,000 by entering into a
subordinated convertible note agreement with Unterberg Towbin Capital Partners I
for this amount.

     On July 13, 1999, the Molloy Group raised $200,000 by entering into a
subordinated convertible bridge note agreement with Unterberg Towbin Capital
Partners I for this amount.

     Prior to our acquisition of the Molloy Group, C.E. Unterberg, Towbin and
related entities purchased $2,974,208 of preferred stock and warrants of the
Molloy Group in several private placements. As a result of our acquisition of
the Molloy Group in July 1999, C.E. Unterberg, Towbin and these entities
received an aggregate of 1,904,266 shares of our Series E convertible preferred
stock in exchange for their preferred stock in the Molloy Group and their
subordinated convertible notes.

     In connection with our acquisition of the Molloy Group, certain entities
associated with C.E. Unterberg, Towbin purchased 277,332 shares of our Series D
convertible preferred stock at a purchase price of $3.75 per share, as well as a
warrant granting the conditional right to purchase 41,598 shares of our common
stock at an exercise price of $2.50 per share. The warrant is currently
exercisable but as of May 19, 2000 had not been exercised. Due to a failure to
meet certain performance criteria, all warrants have been waived.

     In addition, in August 1999 we paid C.E. Unterberg, Towbin $210,000 as a
finder's fee in consideration for its services identifying potential purchasers
of our Series D convertible preferred stock. C.E. Unterberg, Towbin also served
as an advisor to the Molloy Group during our July 1999 acquisition of the Molloy
Group but did not receive compensation for these services. Finally, Thomas
Unterberg has the right to attend meetings of our Board of Directors as an
observer.

     Robert C. Harris Jr., a Senior Managing Director at Bear, Stearns & Co.
Inc., beneficially owns approximately 7,382 shares of our common stock and
warrants to purchase 1,025 shares of our common stock with an exercise price of
$1.50. He also has various interests in Unterberg, Harris Private Equity
Partners L.P. and Unterberg, Harris Interactive Media L.P., which hold shares in
our company. C.E.

                                       53
<PAGE>   58

Unterberg, Towbin, of which Mr. Harris was a partner until February 1998, had
previously invested in the Molloy Group.

     On June 2, 2000, two entities associated with C.E. Unterberg, Towbin
purchased for $3.0 million an aggregate of 375,000 shares of our Series F
convertible preferred stock.

COMPENSATION, CONSULTATION AND SEVERANCE AGREEMENT

     Upon consummation of our acquisition of the Molloy Group in July 1999,
Bruce Molloy, one of our directors, retired from his position as an officer of
the Molloy Group. At the same time, we entered into a compensation, consultation
and severance agreement with Mr. Molloy pursuant to which we agreed to pay Mr.
Molloy $5,000 per week for a period of 18 months as a consulting/severance fee,
and Mr. Molloy agreed to consult with and advise our management and officers in
respect of transition matters, including personnel matters, arising in
connection with our acquisition of the Molloy Group and matters relating to our
technology and strategic planning.

ASSIGNMENT, LICENSE AGREEMENT AND NONCOMPETITION AGREEMENT

     In connection with our acquisition of the Molloy Group in July 1999, Bruce
Molloy sold his rights in certain intellectual property, including the patented
Cognitive Processor, to the Molloy Group. Concurrently, Mr. Molloy entered into
a license agreement with the Molloy Group permitting Mr. Molloy to use that
intellectual property in certain fields which we believe are not competitive
with our business. In addition, Mr. Molloy entered into a Noncompetition
Agreement pursuant to which, until July 23, 2002, he agreed not to, directly or
indirectly:

     - engage in competitive business activities;

     - induce or attempt to influence our employees to terminate their
       employment; and

     - solicit any of our customers or licensees.

LOANS TO OFFICERS

     Certain executive officers were given loans by us to purchase shares of our
common stock in connection with the exercise of their outstanding options. These
officers are personally liable for the principal of 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 did not reduce our cash balance and were made at 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. The respective total number of shares purchased and the amounts loaned
are set forth in the table below.

<TABLE>
<CAPTION>
                                                                NUMBER OF SHARES
STOCKHOLDER                                                   ACQUIRED ON EXERCISE    LOAN AMOUNTS
-----------                                                   --------------------    ------------
<S>                                                           <C>                     <C>
Rajiv Enand.................................................        100,000             $250,000
Mark Tapling................................................        340,000              887,500
Mark Finkel.................................................        300,000              750,000
Lou Venezia.................................................         99,000              119,790
Richard Koloski.............................................         26,220               51,076
Richard Joslin..............................................         61,750              125,395
Susie Sedlacek..............................................         42,500              138,750
</TABLE>

                                       54
<PAGE>   59

STOCK EXERCISES BY EXECUTIVE OFFICERS

     The following table sets forth exercises of options to acquire shares of
our common stock by our executive officers in the current fiscal year. All
purchases of shares of our common stock during 2000 by executive officers were
pursuant to the exercise of their outstanding options.

<TABLE>
<CAPTION>
                                                       PRICE PER     SHARE
STOCKHOLDER                                              SHARE      AMOUNTS      ISSUANCE DATE
-----------                                            ---------    -------    -----------------
<S>                                                    <C>          <C>        <C>
Rajiv Enand..........................................    $2.50      100,000    January 19, 2000
Mark Tapling.........................................     3.60       37,500    January 31, 2000
                                                          1.00        2,500    January 31, 2000
                                                          2.50      300,000    February 29, 2000
Mark Finkel..........................................     2.50      300,000    January 31, 2000
Lou Venezia..........................................     1.21       99,000    January 31, 2000
Richard Koloski......................................     1.21       11,220    January 31, 2000
                                                          2.50       15,000    February 29, 2000
Richard Joslin.......................................     0.94       12,000    January 31, 2000
                                                          0.94        2,250    January 31, 2000
                                                          2.30       15,000    January 31, 2000
                                                          1.00        2,500    January 31, 2000
                                                          2.50       30,000    February 29, 2000
Susie Sedlacek.......................................     5.10       12,500    January 31, 2000
                                                          2.50       30,000    February 29, 2000
</TABLE>

STOCK OPTION GRANTS TO EXECUTIVE OFFICERS

     The following table sets forth grants of options to purchase shares of our
common stock to our executive officers in the current fiscal year.

<TABLE>
<CAPTION>
                                                        PRICE PER     SHARE
STOCKHOLDER                                               SHARE      AMOUNTS     ISSUANCE DATE
-----------                                             ---------    -------    ----------------
<S>                                                     <C>          <C>        <C>
Mark Tapling..........................................    $2.50      300,000    January 19, 2000
Mark Finkel...........................................     2.50      300,000    January 31, 2000
Lisa Neal Graves......................................     6.00      155,000        May 18, 2000
Richard Koloski.......................................     2.50       15,000    January 19, 2000
Richard Joslin........................................     2.50       30,000    January 19, 2000
Susie Sedlacek........................................     2.50       30,000    January 19, 2000
</TABLE>

                                       55
<PAGE>   60

                             PRINCIPAL STOCKHOLDERS

     The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 31, 2000, as adjusted to reflect the
sale of common stock in this offering (assuming no exercise of the underwriters'
over-allotment option) by:

     - each person (or group of affiliated persons) known by us to be the
       beneficial owner of more than five percent of our outstanding common
       stock;

     - each of the Chief Executive Officer and our other four most highly
       compensated executive officers;

     - each of our directors; and


     - all of our directors and the Chief Executive Officer and our executive
       officers as a group.



<TABLE>
<CAPTION>
                                                          SHARES BENEFICIALLY     SHARES BENEFICIALLY
                                                              OWNED PRIOR             OWNED AFTER
                                                           TO OFFERING(1)(2)        OFFERING(1)(2)
                                                         ---------------------    -------------------
NAME OF BENEFICIAL OWNER                                   NUMBER      PERCENT          PERCENT
------------------------                                 ----------    -------    -------------------
<S>                                                      <C>           <C>        <C>
Norwest Equity Partners V, LLP(3)......................   2,582,127     13.6%            11.0%
  Suite 250
  245 Lytton Avenue
  Palo Alto, CA 94301
Kevin Hall(3)(4).......................................   2,612,127     13.8%            11.1%
  c/o Norwest Equity
  Partners V, LLP
  Suite 250
  245 Lytton Avenue
  Palo Alto, CA 94301
Jeffrey Pepper(5)......................................   2,383,614     12.6%            10.2%
  c/o ServiceWare Technologies, Inc.
  333 Allegheny Avenue
  Oakmont, PA 15139
C.E. Unterberg, Towbin L.P.(6)(7)......................   2,578,962     13.7%            11.0%
  10 East 50th Street
  New York, NY 10022
Geocapital III, L.P(8).................................   1,766,788      9.3%             7.5%
  2 Executive Drive
  Fort Lee, NJ 07024
Poly Ventures II, L.P.(9)..............................   1,592,886      8.4%             6.8%
  910 Route 110
  Farmingdale, NY 11735
Susanne Harrison(9)(10)................................   1,622,886      8.6%             6.9%
  c/o Poly Ventures II, L.P.
  910 Route 110
  Farmingdale, NY 11735
Rajiv Enand(11)........................................   1,592,470      8.4%             6.8%
  c/o ServiceWare Technologies, Inc.
  333 Allegheny Avenue
  Oakmont, PA 15139
Bruce Molloy(6)........................................   1,397,662      7.4%             6.0%
  c/o ServiceWare Technologies, Inc.
  333 Allegheny Avenue
  Oakmont, PA 15139
Lovett Miller Venture Fund II, LP(12)..................     729,166      3.9%             3.1%
  c/o Scott Miller, Managing Director
  100 North Tampa Street
  Suite 2675
  Tampa, FL 33602
</TABLE>


                                       56
<PAGE>   61


<TABLE>
<CAPTION>
                                                          SHARES BENEFICIALLY     SHARES BENEFICIALLY
                                                              OWNED PRIOR             OWNED AFTER
                                                           TO OFFERING(1)(2)        OFFERING(1)(2)
                                                         ---------------------    -------------------
NAME OF BENEFICIAL OWNER                                   NUMBER      PERCENT          PERCENT
------------------------                                 ----------    -------    -------------------
<S>                                                      <C>           <C>        <C>
Timothy Wallace(13)....................................      57,000        *                *
  c/o ServiceWare Technologies, Inc.
  333 Allegheny Avenue
  Oakmont, PA 15139
Mark Tapling...........................................     415,000      2.6%             1.8%
Mark Finkel............................................     300,000      1.6%             1.3%
Lou Venezia............................................     281,606      1.5%             1.2%
Richard Koloski........................................      46,047        *                *
Peggy Biddison.........................................      25,000        *                *
All directors and executive officers as a group (13
  persons).............................................   8,452,698     44.7%            35.7%
</TABLE>


---------------
  *  Less than 1%

 (1) The number of shares beneficially owned by each stockholder is determined
     under rules promulgated by the Securities and Exchange Commission, and the
     information is not necessarily indicative of beneficial ownership for any
     other purpose. Under such rules, beneficial ownership includes any shares
     as to which the individual or entity has sole or shared voting power or
     investment power and also any shares which the individual or entity has a
     right to acquire within 60 days of March 31, 2000 through the exercise of
     any stock option, warrant or other right. The inclusion herein of such
     shares, however, does not constitute an admission that the named
     stockholder is a direct or indirect beneficial owner of such shares. Unless
     otherwise indicated, each person or entity named in the table has sole
     voting power and investment power (or shares such power with his or her
     spouse) with respect to all shares of capital stock listed as owned by such
     person or entity.


 (2) Applicable percentage of ownership is based on 18,918,558 shares of common
     stock outstanding on June 30, 2000, assuming conversion of all outstanding
     convertible preferred stock into common stock and exercise of all then
     outstanding options and warrants, and 23,418,558 shares of common stock
     outstanding after the completion of this offering.



 (3) Includes (a) 225,000 shares of common stock currently issued, (b) 1,722,294
     shares of common stock issuable upon conversion of Series C preferred stock
     held by Norwest, (c) 360,000 shares of common stock issuable upon
     conversion of Series D preferred stock held by Norwest, (d) 70,000 shares
     of common stock issuable to Norwest upon issuance to the holders of our
     Series A preferred stock and Series B preferred stock of an aggregate of
     593,080 shares of common stock in payment of dividends accrued on the
     Series A preferred stock and Series B preferred stock through July 29, 1997
     and June 29, 1998, respectively, (d) 17,333 shares of common stock issuable
     upon the exercise of outstanding warrants, and (e) 187,500 shares of common
     stock issuable upon conversion of Series F preferred stock held by Norwest.
     The sole general partner of Norwest is Itasca Partners V, L.L.P., whose
     managing partners are John E. Lindahl and George J. Still, Jr., and whose
     administrative partner is John P. Whaley. As a result of these
     relationships, Itasca, Mr. Lindahl, Mr. Still and Mr. Whaley may be deemed
     to own beneficially the common stock owned by Norwest. Each of Itasca, Mr.
     Lindahl, Mr. Still and Mr. Whaley disclaim beneficial ownership of our
     common stock and other securities owned beneficially by Norwest, other
     than, with respect to Itasca, its beneficial interest in such securities as
     general partner of Norwest and, with respect to Mr. Lindahl, Mr. Still and
     Mr. Whaley, their respective beneficial interests in such securities
     through their interest in Itasca.



 (4) Includes 30,000 shares of common stock issuable upon the exercise of
     options exercisable within 60 days. Mr. Hall may be deemed to own
     beneficially the common stock owned by Norwest because he is affiliated
     with the general partner of Norwest. Mr. Hall disclaims beneficial
     ownership of the common stock and other of our securities owned
     beneficially by Norwest, other than his beneficial interest in such
     securities through his interest in the general partner of Norwest.


                                       57
<PAGE>   62

 (5) Includes an aggregate of 210,000 shares owned by two separate trusts of
     which Mr. Pepper is co-trustee and his children are beneficiaries.

 (6) Includes 4,125 options exercisable within 60 days.


 (7) Includes 602,572 shares held by C.E. Unterberg, Towbin Capital Partners I,
     LP; 499,297 shares and warrants held by Unterberg, Harris Private Equity
     Partners, L.P.; 332,680 shares held by C.E. Unterberg, Towbin L.P.; 312,500
     shares held by C.E. Unterberg, Towbin Private Equity Partners I,L.P.;
     266,666 shares held by Tamar Technology Investors (Delaware) L.P.; 212,399
     shares and warrants held by Thomas I. Unterberg, a managing director of
     C.E. Unterberg, Towbin L.P.; 127,689 shares held by Unterberg, Harris
     Interactive Media LP, CV; 106,646 shares and warrants held by Unterberg,
     Harris Private Equity Partners, CV; 21,065 shares and warrants held by C.E.
     Unterberg, Towbin LLC; 14,044 shares and warrants held by A. Robert Towbin,
     a managing director of C.E. Unterberg, Towbin L.P.; 4,000 shares held by
     Estelle Konviser, a managing director of C.E. Unterberg, Towbin L.P.; 2,666
     shares held by Andrew Blum, a managing director of C.E. Unterberg, Towbin
     L.P.; and an aggregate of 76,738 shares and warrants to purchase 922 shares
     held by three trusts, one limited liability company, one sole
     proprietorship and one 401(k) profit sharing account, all of which have
     beneficiaries or trustees who are affiliated with managing directors of
     C.E. Unterberg, Towbin L.P.



 (8) Includes (a) 47,386 shares of common stock currently issued, (b) 1,264,408
     shares of common stock issuable upon conversion of Series B preferred stock
     held by Geocapital, (c) 133,333 shares of common stock issuable upon
     conversion of Series D preferred stock held by Geocapital, (d) 302,494
     shares of common stock issuable to Geocapital in payment of dividends
     accrued on the Series B preferred stock through June 29, 1998, (e) 26,667
     shares of common stock issuable upon exercise of outstanding warrant, and
     (f) 12,500 shares of common stock issuable upon conversion of Series F
     preferred stock held by Geocapital.


 (9) Includes (a) 45,454 shares of common stock currently issued, (b) 731,169
     shares of common stock issuable upon conversion of Series A preferred stock
     held by Poly Ventures, (c) 481,677 shares of common stock issuable upon
     conversion of Series B preferred stock held by Poly Ventures, (d) 40,000
     shares of common stock issuable upon conversion of Series D preferred stock
     held by Poly Ventures, (e) an aggregate of 290,586 shares of common stock
     issuable to Poly Ventures in payment of dividends accrued on Series A
     preferred stock and Series B preferred stock through July 29, 1997 and June
     29, 1998, respectively, and (f) 4,000 shares of common stock issuable upon
     exercise of outstanding warrants.


(10) Includes 30,000 shares of common stock issuable upon the exercise of
     options exercisable within 60 days. Ms. Harrison may be deemed to own
     beneficially the common stock owned by Poly Ventures because she is a
     general partner of Poly Ventures. Ms. Harrison disclaims beneficial
     ownership of the common stock and other of our securities owned by Poly
     Ventures, other than her beneficial interest in such securities through her
     partnership interest in Poly Ventures.


(11) Includes an aggregate of 119,000 shares owned by two separate trusts of
     which Mr. Enand is co-trustee and his children are beneficiaries.


(12) Includes (a) 666,666 shares of common stock issuable upon conversion of
     Series D preferred stock held by Lovett Miller, and (b) 62,500 shares of
     common stock issuable upon conversion of Series F Preferred stock held by
     Levett Miller.


(13) Consists of shares issuable upon the exercise of options exercisable within
     60 days.

                                       58
<PAGE>   63

                          DESCRIPTION OF CAPITAL STOCK

     Upon the completion of this offering, we will be authorized to issue 100
million shares of common stock, par value $0.01 per share, and five million
shares of undesignated preferred stock, par value $0.01 per share. The following
description of our capital stock does not purport to be complete and is subject
to, and qualified in its entirety by, our Certificate of Incorporation, as
amended, and our Bylaws, which we have included as exhibits to the registration
statement of which this prospectus forms a part.

COMMON STOCK


     As of June 30, 2000, there were 18,918,558 shares of common stock
outstanding, held of record by approximately 130 stockholders. These amounts
assume:



     - the conversion of all outstanding shares of preferred stock into
       10,632,737 shares of common stock, and


     - the exercise of 68,473 outstanding warrants that would otherwise expire
       upon the consummation of this offering and conversion of accrued
       dividends on preferred stock into 677,480 shares of common stock, which
       is to occur upon completion of this offering.


     In addition, as of June 30, 2000, there were 2,680,560 shares of common
stock subject to outstanding options. Upon completion of this offering, there
will be 23,418,558 shares of common stock outstanding, assuming no additional
exercise of outstanding stock options or warrants.


     Each share of common stock entitles its holder to one vote on all matters
to be voted upon by stockholders. Subject to preferences that may apply to any
outstanding preferred stock, holders of common stock may receive ratably any
dividends that our Board of Directors may declare out of funds legally available
for that purpose. In the event of our liquidation, dissolution or winding up,
the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities and any liquidation preference of
preferred stock that may be outstanding. The common stock has no preemptive
rights, conversion rights or other subscription rights, or redemption or sinking
fund provisions. All outstanding shares of common stock are fully paid and
non-assessable, and the shares of common stock that we will issue upon
completion of this offering will be fully paid and non-assessable.

PREFERRED STOCK


     Prior to this offering, we had six series of convertible preferred stock:
Series A, Series B, Series C, Series D, Series E and Series F. As of June 30,
2000, the number of outstanding shares of each series of our preferred stock
was:


     - 243,723 shares of Series A;

     - 1,058,574 shares of Series B;

     - 1,111,111 shares of Series C;


     - 2,400,000 shares of Series D;



     - 2,647,984 shares of Series E; and



     - 1,325,000 shares of Series F


     Upon the closing of this offering, all outstanding shares of our Series A
preferred stock and accrued dividends payable in common stock, Series B
preferred stock and accrued dividends payable in common stock, Series C
preferred stock after giving effect to certain anti-dilution adjustments, Series
D preferred

                                       59
<PAGE>   64


stock, Series E preferred stock and Series F preferred stock will be converted
into the following number of shares of common stock:


     - Series A: 731,169 shares

     - Series B: 1,806,290 shares

     - Series C: 1,722,294 shares

     - Series D: 2,400,000 shares

     - Series E: 2,647,984 shares


     - Series F: 1,325,000 shares


     These classes of preferred stock will be canceled and thereafter, our Board
of Directors will have the authority, without further action by the
stockholders, to issue up to five million shares of preferred stock in one or
more series and to designate the rights, preferences, privileges and
restrictions of each such series. The issuance of preferred stock could have the
effect of restricting dividends on the common stock, diluting the voting power
of the common stock, impairing the liquidation rights of the common stock, or
delaying or preventing a change of control without further action by the
stockholders. We have no present plans to issue any shares of preferred stock
after the completion of this offering.

WARRANTS


     As of June 30, 2000, there were warrants outstanding to purchase 389,021
shares of our common stock. We expect the warrants to be exercised prior to the
consummation of this offering; however, to the extent not exercised, warrants to
purchase 68,473 shares of our common stock shall expire. The other warrants to
purchase 320,548 shares of our common stock expire at various dates through
December 10, 2006.


REGISTRATION RIGHTS


     After conversion of our existing preferred stock and the conversion of
dividends into common shares the holders of 17,423,984 shares of common stock
and warrants to purchase 348,548 shares of our common stock are entitled to
require us to register the sales of their shares under the Securities Act
pursuant to the terms of an agreement between us and the holders of these
securities. Subject to limitations specified in this agreement, these
registration rights include the following:


     - an unlimited number of piggyback registration rights that require us to
       register sales of a holder's shares when we undertake a public offering,
       subject to the discretion of the managing underwriter of the offering to
       decrease the amount that holders may register;

     - two demand registration rights that holders may exercise no sooner than
       six months after this offering, which require us to register sales of a
       holder's shares; and

     - an unlimited number of rights to require us to register sales of shares
       on Form S-3, a short form of registration statement permitted to be used
       by some companies, which holders may exercise if they request
       registration following such time as we qualify for the use of this form
       of registration with the Securities and Exchange Commission.

     We will bear all registration expenses with respect to piggyback and demand
registrations if these registration rights are exercised, other than
underwriting discounts and commissions, however Form S-3 registration expenses
will be paid pro rata by the holders whose securities are included in such Form
S-3 registration. These registration rights terminate as to a holder's shares
when that holder may sell all such shares within two successive three-month
periods without registration under the Securities Act.

                                       60
<PAGE>   65

CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS

     Our Certificate of Incorporation, as amended, and Bylaws, which will be
effective upon the closing of this offering, divide the Board of Directors into
three classes as nearly equal in size as possible, with each class serving a
three-year term. The terms are staggered, so that one-third of the Board of
Directors is to be elected each year. The classification of our Board of
Directors is as follows:

     - Susanne Harrison and Rajiv Enand are Class I directors with their terms
       of office expiring in 2001;

     - Timothy Wallace and Kevin Hall are Class II directors with their terms
       expiring in 2002; and

     - Bruce Molloy and Mark Tapling are Class III directors with their terms of
       office expiring in 2003.

     The classification of the Board of Directors could have the effect of
making it more difficult than otherwise for a third party to acquire control of
us, because it would typically take more than a year for a majority of the
stockholders to elect a majority of our Board of Directors. In addition, our
Amended and Restated Certificate of Incorporation and Bylaws provide that any
action required or permitted to be taken by our stockholders at an annual or
special meeting may be taken only if it is properly brought before the meeting,
and may not be taken by written action in lieu of a meeting. The Bylaws also
provide that special meetings of the stockholders may be called only by the
Board of Directors, the Chairman of the Board of Directors or the Chief
Executive Officer. Under our Bylaws, stockholders wishing to propose business to
be brought before a meeting of stockholders must comply with various advance
notice requirements. Finally, our Amended and Restated Certificate of
Incorporation and Bylaws do not permit stockholders to take any action without a
meeting.

DELAWARE ANTI-TAKEOVER PROVISIONS

     We are subject to Section 203 of the Delaware General Corporation Law,
which regulates acquisitions of some Delaware corporations. In general, Section
203 prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person becomes an interested stockholder, unless:

     - the Board of Directors approved the business combination or the
       transaction in which the person became an interested stockholder prior to
       the date the person attained this status;

     - upon consummation of the transaction that resulted in the person becoming
       an interested stockholder, the person owned at least 85% of the voting
       stock outstanding at the time the transaction commenced, excluding shares
       owned by persons who are directors and also officers; or

     - at or after the date the person became an interested stockholder, the
       Board of Directors approved the business combination and the stockholders
       other than the interested stockholder authorized the transaction at an
       annual or special meeting of stockholders.

     A "business combination" generally includes a merger, asset or stock sale
or other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with the person's affiliates and associates, owns, or within three years prior
to the determination of interested stockholder status did own, 15% or more of a
corporation's voting stock.

LISTING

     We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "SVCW".

TRANSFER AGENT AND REGISTRAR

     ChaseMellon Shareholder Services will serve as transfer agent and registrar
for the common stock.

                                       61
<PAGE>   66

                        SHARES ELIGIBLE FOR FUTURE SALE


     Prior to this offering, there has been no public market for our securities.
Upon completion of this offering, based upon the number of shares outstanding at
June 30, 2000 and assuming no exercise of outstanding options or warrants that
do not expire on consummation of this offering, there will be 23,416,060 shares
of common stock outstanding. Of these shares, the 4,500,000 shares sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act, except that any shares purchased by our "affiliates,"
as that term is defined in Rule 144 under the Securities Act, may generally only
be sold in compliance with the limitations of Rule 144 described below.



     The remaining 18,918,558 shares of common stock are deemed "restricted
securities" under Rule 144. Of the restricted securities, approximately 219,000
shares of common stock, which are not subject to 180-day lock-up restrictions,
will be eligible for immediate sale in the public market pursuant to Rule 144
under the Securities Act, subject to holding periods and other requirements of
Rule 144. Approximately 78,474 additional shares of common stock, which are not
subject to lock-up restrictions, will be eligible for sale in the public market
in accordance with Rule 144 or Rule 701 under the Securities Act beginning 90
days after the effective date of the registration statement, subject to holding
periods and other requirements of Rule 144. Upon expiration of the lock-up
restrictions 180 days after the date of this prospectus, approximately
18,621,084 additional shares of common stock will be available for sale in the
public market, subject to the provisions of Rule 144 under the Securities Act,
subject to holding periods and other requirements of Rule 144.



LOCK-UP RESTRICTIONS



     We and our executive officers, directors and the majority of our current
stockholders who own more than 40,000 shares of our common stock, who own in the
aggregate 18,621,084 shares of common stock, including the conversion of all
outstanding shares of preferred stock into common stock, the exercise of all
outstanding warrants that would otherwise expire upon the consummation of this
offering and conversion of accrued dividends on preferred stock into common
stock, have agreed not to, directly or indirectly, offer, sell, contract to
sell, grant any option to purchase, pledge or otherwise dispose of, or, in any
manner, transfer all or a portion of the economic consequences associated with
the ownership of any shares of common stock or any securities convertible into
or exercisable or exchangeable for common stock beneficially owned during the
180-day period following the date of this prospectus, subject to limited
exceptions, without the prior written consent of Bear, Stearns & Co. Inc. Bear,
Stearns & Co. Inc., on behalf of the underwriters, may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up restrictions.


RULE 144


     In general, under Rule 144 as currently in effect, after the expiration of
the lock-up restrictions, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:



     - one percent of the number of shares of common stock then outstanding,
       which will equal approximately 235,000 shares immediately after this
       offering; and


     - the average weekly trading volume of our common stock during the four
       calendar weeks preceding the sale.

     Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice and the availability of current public information about
us.

RULE 144(k)

     Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least

                                       62
<PAGE>   67

two years, may sell these shares without complying with the manner of sale,
public information, volume limitation or notice requirements of Rule 144.

RULE 701

     Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written compensatory
plan or contract to resell such shares in reliance upon Rule 144, but without
compliance with certain restrictions. Rule 701 provides that affiliates may sell
their Rule 701 shares under Rule 144 90 days after the effective date of the
registration statement without complying with the holding period requirement and
that non-affiliates may sell such shares in reliance on Rule 144 90 days after
the effective date of the registration statement without complying with the
holding period, public information, volume limitation or notice requirements of
Rule 144.

OPTIONS


     We intend to file a registration statement on Form S-8 under the Securities
Act to register approximately 6.5 million shares of common stock issuable under
our stock incentive plans and our stock purchase plan approximately 90 days
after the effectiveness of the registration statement of which this prospectus
forms a part. Shares issued upon the exercise of stock options after the
effective date of the Form S-8 registration statements will be eligible for
resale in the public market without restriction, subject to Rule 144 limitations
applicable to affiliates and the lock-up agreements noted above, if applicable.


REGISTRATION RIGHTS


     The holders of 17,423,984 shares of our common stock that will be
outstanding after this offering and the holders of warrants to purchase 348,548
shares of our common stock are entitled to require us to register the sale of
their shares under the Securities Act.


EFFECT OF SALES OF SHARES

     Prior to this offering, there has been no public market for our common
stock, and no prediction can be made as to the effect, if any, that market sales
of shares of our common stock or the availability of shares for sale will have
on the market price of our common stock prevailing from time to time.
Nevertheless, sales of significant numbers of shares of our common stock in the
public market could adversely affect the market price of our common stock and
could impair our future ability to raise capital through an offering of our
equity securities.

                                       63
<PAGE>   68

             MATERIAL U.S. TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

GENERAL

     We intend to offer a portion of this offering outside of the United States.
This section summarizes the material U.S. federal tax consequences to holders of
common stock that are non-U.S. holders. In general, you are a non-U.S. holder if
you are:

     - an individual who is a nonresident alien of the U.S.;

     - a corporation organized or created under non-U.S. law; or

     - an estate or trust that is not taxable in the U.S. on its worldwide
       income.

     If a partnership holds common stock, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. If you are a partner of a partnership holding common stock, we
suggest that you consult your tax advisor.

     This discussion does not address all aspects of U.S. federal taxation, and
in particular is limited in the following ways:

     - the discussion assumes that you hold your common stock as a capital asset
       (that is, for investment purposes), and that you do not have a special
       tax status;

     - the discussion does not consider tax consequences that depend upon your
       particular tax situation in addition to your ownership of the common
       stock;

     - the discussion does not consider special tax provisions that may be
       applicable to you if you have relinquished U.S. citizenship or residence;

     - the discussion is based on current law, and changes in the law may change
       the tax treatment of the common stock; and

     - the discussion does not cover state, local or foreign law.

     We have not requested a ruling from the Internal Revenue Service, or IRS,
on the tax consequences of owning the common stock. As a result, the IRS could
disagree with portions of this discussion.

     We suggest that you consult your tax advisors about the tax consequences of
holding and disposing of the common stock in your particular situation.

DIVIDENDS

     We do not anticipate paying cash dividends on the common stock in the
foreseeable future. See "Dividend Policy." If we pay you dividends, such
dividends generally will be subject to U.S. withholding tax at a 30% rate or, if
a tax treaty applies, a lower rate specified by the treaty.

     Under current U.S. Treasury regulations, dividends paid before January 1,
2001 to an address outside the U.S. are presumed to be paid to a resident of the
country of address, unless the payer has knowledge to the contrary, for purposes
of withholding and determining the applicability of a tax treaty rate. Under
U.S. Treasury regulations applicable to dividends paid after December 31, 2000,
however, you will be required to satisfy certain certification requirements in
order to establish your entitlement to a lower applicable treaty withholding
rate.

     You may claim an exemption from withholding on the ground that the
dividends are effectively connected with a U.S. trade or business. To claim this
exemption, you must satisfy certain certification requirements. However,
dividends exempt from U.S. withholding because they are effectively connected
generally are subject to U.S. federal income tax on a net income basis at the
regular graduated tax rates. These rules might be altered by an applicable tax
treaty. If you are a corporation, any effectively connected dividends received
by you may, under certain circumstances, be subject to an additional branch
profits tax at a 30% rate, or a lower rate specified by an applicable income tax
treaty.

                                       64
<PAGE>   69

     You should consult your own tax advisor concerning the effect, if any, of
the rules affecting post-December 31, 2000 dividends on your possible investment
in common stock.

     You may obtain a refund of any excess amounts withheld by filing an
appropriate claim for refund along with the required information with the IRS.

GAIN ON DISPOSITION OF COMMON STOCK

     You generally will not be subject to U.S. federal income tax on a sale or
other disposition of the common stock unless one of the following applies:

     - the gain is effectively connected with a trade or business you conduct in
       the U.S. or, under a treaty, the gain is attributable to a permanent
       establishment you have in the U.S. In this case, you generally will be
       taxed on your net gain on the sale under the regular graduated U.S.
       federal income tax rates. If you are a foreign corporation, you may be
       subject to an additional branch profits tax at a 30% rate, unless an
       applicable income tax treaty provides for a lower rate.

     - you are an individual and are present in the U.S. for 183 or more days in
       the taxable year of the disposition and certain other conditions are met.
       In this case, you generally will be subject to a flat 30% tax on your
       gain from the sale.

     - we are or have been a U.S. real property holding corporation for U.S.
       federal income tax purposes at any time during the shorter of the
       five-year period ending on the date of the disposition or the period
       during which you held the common stock, and certain other conditions
       apply. We believe that we never have been, are not currently, and are not
       likely in the future to become, a U.S. real property holding corporation
       for U.S. federal income tax purposes.

FEDERAL ESTATE TAX

     If you are an individual who owns or is treated as owning common stock at
the time of your death, you will be required to include the value of the common
stock in your gross estate for U.S. federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

     We must report annually to the IRS the amount of dividends paid to you and
the tax withheld with respect to the dividends. These requirements apply even if
withholding was not required on payments to you. Pursuant to an applicable tax
treaty, that information may also be made available to the tax authorities in
your country of residence.

     Backup withholding tax generally may be imposed at the rate of 31% on
certain payments to persons that fail to furnish certain required information.
Backup withholding generally will not apply to dividends paid before January 1,
2001 to non-U.S. holders. Final U.S. Treasury regulations, which generally will
apply to dividends paid after December 31, 2000, will affect the procedures to
be followed by a non-U.S. holder in establishing its foreign status.

     As a general matter, information reporting and backup withholding will not
apply to a payment to you by or through a foreign office of a foreign broker of
the proceeds of a sale of common stock effected outside the U.S. However,
information reporting requirements, but not backup withholding, will apply to
such a payment if the broker:

     - is a U.S. person;

     - is a foreign person that derives 50% or more of its gross income for
       certain periods from the conduct of a trade or business in the U.S.;

     - is a controlled foreign corporation as defined in the Internal Revenue
       Code; or

                                       65
<PAGE>   70

     - is a foreign partnership with certain U.S. connections (for payments made
       after December 31, 2000).

     Information reporting requirements will not apply in the above cases if the
broker has documentary evidence in its records that you are a non-U.S. holder
and certain conditions are met or you otherwise establish an exemption.

     Payment of the proceeds of a sale of common stock by or through a U.S.
office of a broker is subject to both backup withholding and information
reporting unless you certify to the payer in the manner required as to your
non-U.S. status under penalties of perjury or otherwise establish an exemption.

     Amounts withheld under the backup withholding rules do not constitute a
separate U.S. federal income tax. Rather, any amounts withheld under the backup
withholding rules will be refunded or allowed as a credit against your U.S.
federal income tax liability, if any, provided the required information or
appropriate claim for refund is filed with the IRS.

     The foregoing discussion is only a summary of certain U.S. federal income
and estate tax consequences of the ownership, sale or other disposition of
common stock by non-U.S. holders. You are urged to consult your own tax advisor
with respect to the particular tax consequences to you of ownership and
disposition of the common stock, including the effect of any state, local,
foreign or other tax laws and any applicable income or estate tax treaties.

                                       66
<PAGE>   71

                                  UNDERWRITING

     Subject to the terms and conditions of an underwriting agreement between us
and the underwriters named below, who are represented by Bear, Stearns & Co.
Inc., SG Cowen Securities Corporation, Wit SoundView Corporation and C.E.
Unterberg, Towbin, the underwriters have severally agreed to purchase from us
the following respective number of shares of common stock less the underwriting
discounts and commissions set forth on the cover page of this prospectus.

<TABLE>
<CAPTION>
                                                              NUMBER OF
UNDERWRITER                                                    SHARES
-----------                                                   ---------
<S>                                                           <C>
Bear, Stearns & Co. Inc.....................................
SG Cowen Securities Corporation.............................
Wit SoundView Corporation...................................
C.E. Unterberg, Towbin......................................
                                                              --------
          Total.............................................
                                                              ========
</TABLE>

     The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of common stock set forth above, other than shares of
our common stock covered by the over-allotment option described below, if they
purchase any of the shares. Those obligations are subject, however, to various
conditions, including the approval of legal matters by their counsel.

     We have agreed to indemnify the underwriters against various liabilities,
including liabilities under the Securities Act, and, where such indemnification
is unavailable, to contribute to payments that the underwriters may be required
to make in respect of such liabilities.

     The underwriters propose to offer the shares of our common stock directly
to the public initially at the public offering price set forth on the cover page
of this prospectus and to selected dealers at such price less a concession not
to exceed $     per share. The underwriters may allow, and such selected dealers
may reallow, a concession not to exceed $     per share. After the commencement
of this offering, the public offering price and the concessions may be changed
by the underwriters.

     We have granted to the underwriters an option to purchase in the aggregate
up to 675,000 additional shares to be sold in this offering at the public
offering price less the underwriting discount set forth on the cover page of
this prospectus. The underwriters may exercise this option solely to cover
over-allotments, if any. The option may be exercised in whole or in part at any
time within 30 days after the date of this prospectus. To the extent the option
is exercised, the underwriters will be severally committed, subject to several
conditions, including the approval of legal matters by their counsel, to
purchase the additional shares of common stock in proportion to their respective
purchase commitments as indicated in the preceding table.

     The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The following table shows the underwriters' discounts to be paid to the
underwriters by us. Such amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares.

<TABLE>
<CAPTION>
                                                      PER SHARE                    TOTAL
                                                ----------------------    ------------------------
                                                 WITHOUT       WITH        WITHOUT         WITH
                                                  OVER-        OVER-        OVER-         OVER-
                                                ALLOTMENT    ALLOTMENT    ALLOTMENT     ALLOTMENT
                                                ---------    ---------    ----------    ----------
<S>                                             <C>          <C>          <C>           <C>
Underwriting discounts and commissions payable
  by us.......................................    $            $          $             $
</TABLE>

     C.E. Unterberg, Towbin, one of our underwriters, is an affiliate of our
company. See "Principal Stockholders." The offering, therefore, is being
conducted in accordance with the applicable provisions of Rule 2720 of the
National Association of Securities Dealers, Inc. Conduct Rules. Rule 2720
requires that the initial public offering price of the shares of common stock
not be higher than that recommended by a "qualified independent underwriter"
meeting certain standards. Accordingly, Bear, Stearns & Co. Inc. is

                                       67
<PAGE>   72

assuming the responsibilities of acting as the qualified independent underwriter
in pricing the offering and conducting due diligence. The initial public
offering price of the shares of common stock will be no higher than recommended
by Bear, Stearns & Co. Inc.

     From time to time, C.E. Unterberg, Towbin has provided financial services
to us and, in connection with our acquisition of the Molloy Group in July 1999,
to the Molloy Group as well. Additionally in July 1999 we paid C.E. Unterberg,
Towbin $210,000 as a finder's fee in consideration for its services identifying
potential purchasers of our Series D convertible preferred stock. C.E.
Unterberg, Towbin also served as an advisor to the Molloy Group during our July
1999 acquisition of the Molloy Group, but did not receive compensation for these
services. Robert C. Harris Jr., a Senior Managing Director of Bear, Stearns &
Co. Inc. and former partner of C.E. Unterberg, Towbin is the beneficial owner of
approximately 30,000 shares of our common stock.

     We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $1,637,395. The offering of the
shares is made for delivery, when, as and if accepted by the underwriters and
subject to prior sale and to withdrawal, cancellation or modification of the
offering without notice. The underwriters reserve the right to reject an order
for the purchase of our shares in whole or in part.

     Wit SoundView Corporation's affiliate, Wit Capital Corporation, is making
available a prospectus in electronic format on its Internet Web site. In
addition, all dealers purchasing shares from Wit SoundView in this offering have
agreed to make a prospectus in electronic format available on Web sites
maintained by each of them. Other than the electronic version of this
prospectus, the information on Wit Capital's Web site and any information
contained on any other Web site maintained by Wit Capital or any dealer
purchasing shares from it is not part of this prospectus or the registration
statement of which this prospectus forms a part, has not been approved and/or
endorsed by us or any underwriter in its capacity as underwriter and should not
be relied on by prospective investors.

     At our request, the underwriters have reserved for sale at the initial
public offering price up to      % of the number of shares of common stock to be
sold in this offering to persons associated with us, such as associates of some
of our employees and selected employees of companies with which we are
developing or have commercial relationships. The number of shares available for
sale to the general public will be reduced to the extent any reserved shares are
purchased. Any reserved shares not so purchased will be offered by the
underwriters on the same basis as the other shares offered hereby and will not
be subject to resale restrictions.


     We and our executive officers, directors and our current shareholders who
own more than 40,000 shares of our common stock, who own in the aggregate
18,621,084 shares of common stock, including the conversion of all outstanding
shares of preferred stock into common stock, the exercise of all outstanding
warrants that would otherwise expire upon the consummation of this offering and
conversion of accrued dividends on preferred stock into common stock, have
agreed not to, directly or indirectly, offer, sell, contract to sell, grant any
option to purchase, pledge or otherwise dispose of, or, in any manner, transfer
all or a portion of the economic consequences associated with the ownership of
any shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock beneficially owned during the 180-day period
following the date of this prospectus, subject to limited exceptions, without
the prior written consent of Bear, Stearns & Co. Inc.


     Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price has been determined
through negotiations among us and the representatives of the underwriters. The
primary factors considered in determining the public offering price were:

     - our financial and operating history and condition;

     - market valuations of other companies engaged in activities similar to
       ours;

     - our prospects and prospects for the industry in which we do business in
       general;

     - our management;

     - prevailing equity market conditions; and

     - the demand for securities considered comparable to ours.
                                       68
<PAGE>   73

     In order to facilitate this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock during and after this offering. Specifically, the underwriters may
over-allot or otherwise create a short position in our common stock for their
own account by selling more shares of common stock than have been sold to them
by us. The underwriters may elect to cover any such short position by purchasing
shares of common stock in the open market or by exercising the over-allotment
option granted to them. In addition, the underwriters may stabilize or maintain
the price of our common stock by bidding for or purchasing shares of common
stock in the open market and may impose penalty bids, under which selling
concessions allowed to syndicate members or other broker-dealers participating
in this offering are reclaimed if shares of common stock previously distributed
in this offering are repurchased in connection with stabilization transactions
or otherwise. The effect of these transactions may be to stabilize or maintain
the market price of our common stock at a level above that which might otherwise
prevail in the open market. The imposition of a penalty bid may also affect the
price of our common stock to the extent that it discourages resales of our
common stock. No representation is made as to the magnitude or effect of any
such stabilization or other transactions. Such transactions may be effected on
the Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.

     We have applied to have our common stock listed on the Nasdaq National
Market under the symbol "SVCW."

                                 LEGAL MATTERS

     The validity of the common stock offered by this prospectus will be passed
upon by Morgan, Lewis & Bockius LLP, New York, New York. Certain legal matters
related to this offering will be passed upon for the underwriters by Paul,
Hastings, Janofsky & Walker LLP, New York, New York.

                                    EXPERTS

     Our consolidated financial statements at December 31, 1998 and 1999 for
each of the three years in the period ended December 31, 1999, appearing in this
prospectus and registration statement of which this prospectus forms a part have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report appearing elsewhere herein, and are included in reliance upon such report
given on the authority of Ernst & Young LLP as experts in accounting and
auditing.

                      WHERE YOU CAN FIND MORE INFORMATION

     We have filed with the Securities and Exchange Commission a registration
statement, of which this prospectus forms a part, on Form S-1 with respect to
the common stock being offered by this prospectus. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules thereto. For further information with respect to us and
the shares of common stock offered hereby, reference is made to the registration
statement, including the exhibits and schedules thereto. Statements contained in
this prospectus as to the contents of any contract or other document referred to
herein are materially complete, however, where such contract is an exhibit to
the registration statement, each such statement is supplemented by the
provisions of such exhibit, to which such reference is hereby made. You may read
and copy any document we file at the Public Reference Section of the Securities
and Exchange Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and the Securities and Exchange Commission's Regional Offices located at
500 West Madison Street, Suite 1400, Chicago, IL 60661, and 7 World Trade
Center, 13th Floor, New York, NY 10048.

     As a result of this offering, we will become subject to information and
reporting requirements of the Securities Exchange Act of 1934 and, in accordance
therewith, will file periodic reports, proxy statements and other information
with the Securities and Exchange Commission.

                                       69
<PAGE>   74

     The Securities and Exchange Commission maintains a World Wide Web site that
contains reports, including our registration statement on Form S-1, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission. The address of the
Securities and Exchange Commission's Web site is http://www.sec.gov.

     In addition, an electronic version of this prospectus is available on Wit
SoundView Corporation's regular Web site, http://www.witcapital.com and on our
Web site, http://www.serviceware.com. Other than the electronic version of this
prospectus, the information on our Web site and on Wit SoundView Corporation's
Web site is not a part of this prospectus.

                                       70
<PAGE>   75

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                           <C>
SERVICEWARE TECHNOLOGIES, INC.
  Report of Independent Auditors............................    F-2
  Consolidated Balance Sheets...............................    F-3
  Consolidated Statements of Operations.....................    F-4
  Consolidated Statements of Shareholders' Equity (Capital
     Deficiency)............................................    F-5
  Consolidated Statements of Cash Flows.....................    F-7
  Notes to Consolidated Financial Statements................    F-8

MOLLOY GROUP, INC.
  Report of Independent Auditors............................   F-24
  Balance Sheets............................................   F-25
  Statements of Operations..................................   F-26
  Statements of Changes in Stockholders' Equity (Capital
     Deficiency)............................................   F-27
  Statements of Cash Flows..................................   F-28
  Notes to Financial Statements.............................   F-29
</TABLE>

                                       F-1
<PAGE>   76

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
ServiceWare Technologies, Inc.

     We have audited the accompanying consolidated balance sheets of ServiceWare
Technologies, Inc. (formerly ServiceWare.com, Inc), as of December 31, 1998 and
1999, and the related consolidated statements of operations, shareholders'
equity (capital deficiency), and cash flows for each of the three years in the
period ended December 31, 1999. 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 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 audits provide a reasonable basis
for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ServiceWare Technologies, Inc. at December 31, 1998 and 1999, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.

                                          Ernst & Young LLP

Pittsburgh, Pennsylvania
January 28, 2000

                                       F-2
<PAGE>   77

                         SERVICEWARE TECHNOLOGIES, INC.

                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                    DECEMBER 31,                  MARCH 31,
                                                              -------------------------   -------------------------
                                                                 1998          1999          2000          2000
                                                              -----------   -----------   -----------   -----------
                                                                                                        (UNAUDITED)
                                                                                          (UNAUDITED)    PRO FORMA
<S>                                                           <C>           <C>           <C>           <C>
ASSETS
Current assets
  Cash and cash equivalents.................................  $   890,952   $ 6,623,033   $ 4,016,043
  Accounts receivable, less allowance for doubtful accounts
    of $241,788 in 1998, $312,206 in 1999 and $282,205 as of
    March 31, 2000..........................................    3,246,364     3,282,745     5,086,940
  Other current assets......................................      483,147       456,533       770,826
                                                              -----------   -----------   -----------
Total current assets........................................    4,620,463    10,362,311     9,873,809
Long term assets
  Purchased technology, net of amortization of $259,199 in
    1999 and $407,312 as of March 31, 2000..................           --     1,518,168     1,370,055
Property and equipment:
  Office furniture, equipment, and leasehold improvements...      916,346     1,162,078     1,189,067
  Computer equipment........................................    2,237,040     3,468,761     3,821,998
                                                              -----------   -----------   -----------
  Total property and equipment..............................    3,153,386     4,630,839     5,011,065
  Less accumulated depreciation.............................   (1,467,053)   (2,635,341)   (2,948,391)
                                                              -----------   -----------   -----------
  Property and equipment, net...............................    1,686,333     1,995,498     2,062,674
  Intangible assets, net of accumulated amortization of
    $2,203,580 in 1999 and $3,467,221 as of March 31,
    2000....................................................           --    12,695,588    11,431,947
  Other long term assets....................................       50,000       162,338       144,214
Total long term assets......................................    1,736,333    16,371,592    15,008,890
                                                              -----------   -----------   -----------
Total assets................................................  $ 6,356,796   $26,733,903   $24,882,699
                                                              ===========   ===========   ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities
  Revolving line of credit..................................  $ 1,450,000   $ 1,250,000   $ 1,250,000
  Accounts payable..........................................      755,939       426,883       753,572
  Accrued compensation and benefits.........................      487,671     1,324,840     1,024,373
  Deferred revenue -- licenses and subscriptions............    3,406,863     7,055,972     7,489,234
  Deferred revenue -- services..............................    1,548,065     2,030,300     2,224,334
  Other current liabilities.................................      790,661     1,036,459     1,503,249
                                                              -----------   -----------   -----------
Total current liabilities...................................    8,439,199    13,124,454    14,244,762
Long term debt, less current portion........................      204,167     2,930,328     2,930,328
Other long term liabilities.................................       14,038        18,207        11,668
                                                              -----------   -----------   -----------
Total liabilities...........................................    8,657,404    16,072,989    17,186,758
Shareholders' equity (capital deficiency)
  Series A convertible preferred stock, $1 par; 243,723
    shares authorized, issued and outstanding in 1998, 1999
    and 2000................................................      501,316       348,261       348,261            --
  Series B convertible preferred stock, $1 par; 1,058,574
    shares authorized, issued and outstanding in 1998, 1999
    and 2000................................................    1,918,666     1,978,475     1,978,475            --
  Series C convertible preferred stock, $1 par; 1,111,111
    shares authorized, issued and outstanding in 1998, 1999
    and 2000................................................    1,720,779     1,720,779     1,720,779            --
  Series D convertible preferred stock, $1 par; 2,400,000
    shares authorized, issued and outstanding in 1998, 1999
    and 2000................................................           --     7,952,907     7,952,907            --
  Series E convertible preferred stock, $1 par; 3,000,000
    shares authorized, 2,647,984 shares, issued and
    outstanding in 1998, 1999 and 2000......................           --     9,929,944     9,929,944            --
  Common stock and additional paid in capital, no par value
    actual, $0.01 par value proforma; 13,000,000 authorized
    in 1998 and 25,000,000 shares authorized in 1999 and
    2000; 4,629,125, 6,388,713, 7,415,068 and 18,047,805
    shares issued and outstanding in 1998, 1999, 2000 and
    pro forma...............................................      779,460     5,263,743    10,054,228    42,534,594
  Deferred compensation.....................................           --            --    (1,987,075)   (1,987,075)
  Warrants..................................................           --       856,734       856,734       856,734
  Note receivable from common shareholders..................           --      (199,999)   (2,547,510)   (2,547,510)
  Deficit...................................................   (7,220,829)  (17,189,930)  (20,610,802)  (20,610,802)
                                                              -----------   -----------   -----------   -----------
Total shareholders' equity (capital deficiency).............   (2,300,608)   10,660,914     7,695,941    18,245,941
                                                              -----------   -----------   -----------   -----------
Total liabilities and shareholders' equity (capital
  deficiency)...............................................  $ 6,356,796   $26,733,903   $24,882,699   $35,432,699
                                                              ===========   ===========   ===========   ===========
</TABLE>


              See accompanying notes to the financial statements.
                                       F-3
<PAGE>   78

                         SERVICEWARE TECHNOLOGIES, INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                          YEAR ENDED DECEMBER 31,            THREE MONTHS ENDED MARCH 31,
                                  ----------------------------------------   -----------------------------
                                     1997          1998           1999           1999            2000
                                  -----------   -----------   ------------   -------------   -------------
                                                                                      (UNAUDITED)
<S>                               <C>           <C>           <C>            <C>             <C>
REVENUES
  Licenses and subscriptions....  $ 9,249,904   $11,283,614   $ 13,311,177    $ 2,733,448     $ 5,442,358
  Services......................      436,285     1,639,623      4,340,698        746,552       1,520,133
                                  -----------   -----------   ------------    -----------     -----------
Total revenues..................    9,686,189    12,923,237     17,651,875      3,480,000       6,962,491
COST OF REVENUES
  Cost of licenses and
    subscriptions...............      126,413       371,769        981,657        119,446         448,076
  Cost of services..............      501,571     1,057,354      3,506,085        692,127       1,562,900
                                  -----------   -----------   ------------    -----------     -----------
Total cost of revenues..........      627,984     1,429,123      4,487,742        811,573       2,010,976
                                  -----------   -----------   ------------    -----------     -----------

GROSS MARGIN....................    9,058,205    11,494,114     13,164,133      2,668,427       4,951,515

OPERATING EXPENSES
  Sales and marketing...........    4,325,681     7,198,572     11,582,553      2,512,549       4,021,717
  Research and development......    4,400,191     5,298,241      6,848,842      1,549,620       1,972,969
  General and administrative....    1,880,551     2,800,768      2,418,292        413,139         717,498
  Intangible assets
    amortization................           --            --      2,203,580             --       1,263,641
  Stock based compensation......           --            --             --                        390,275
                                  -----------   -----------   ------------    -----------     -----------
Total operating expenses........   10,606,423    15,297,581     23,053,267      4,475,308       8,366,100
                                  -----------   -----------   ------------    -----------     -----------

LOSS FROM OPERATIONS............   (1,548,218)   (3,803,467)    (9,889,134)    (1,806,881)     (3,414,585)

OTHER INCOME (EXPENSE)
  Interest expense..............      (12,408)      (73,061)      (221,771)       (39,460)       (100,747)
  Other (net)...................       52,533        60,083         48,558          3,630          94,460
                                  -----------   -----------   ------------    -----------     -----------
Other (expense) income, net.....       40,125       (12,978)      (173,213)       (35,830)         (6,287)
                                  -----------   -----------   ------------    -----------     -----------
NET LOSS........................   (1,508,093)   (3,816,445)   (10,062,347)    (1,842,711)     (3,420,872)
Less preferred dividend
  amounts.......................      (59,499)     (124,050)       (94,586)       (47,293)             --
                                  -----------   -----------   ------------    -----------     -----------
NET LOSS APPLICABLE TO COMMON
  STOCK.........................  $(1,567,592)  $(3,940,495)  $(10,156,933)   $(1,890,004)    $(3,420,872)
                                  ===========   ===========   ============    ===========     ===========
NET LOSS PER COMMON SHARE, BASIC
  AND DILUTED...................  $     (0.34)  $     (0.85)  $      (1.88)   $     (0.41)    $     (0.49)
                                  ===========   ===========   ============    ===========     ===========

SHARES USED IN COMPUTING PER
  SHARE AMOUNTS.................    4,609,051     4,621,794      5,401,652      4,637,007       6,948,272
                                  ===========   ===========   ============    ===========     ===========
</TABLE>

              See accompanying notes to the financial statements.
                                       F-4
<PAGE>   79

                         SERVICEWARE TECHNOLOGIES, INC.

      CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
                                                                    CONVERTIBLE PREFERRED STOCK
                                          --------------------------------------------------------------------------------
                                               SERIES A               SERIES B                 SERIES C          SERIES D
                                          ------------------   ----------------------   ----------------------   ---------
                                          SHARES     AMOUNT     SHARES       AMOUNT      SHARES       AMOUNT      SHARES
                                          -------   --------   ---------   ----------   ---------   ----------   ---------
<S>                                       <C>       <C>        <C>         <C>          <C>         <C>          <C>
Balance at January 1, 1997..............  243,723   $377,577   1,058,574   $1,980,000   1,111,111   $1,720,779          --
  Exercise of stock options.............       --         --          --           --          --           --          --
  Dividends and interest on Series A
    redeemable convertible preferred
    stock...............................       --     59,499          --           --          --           --          --
  Accretion of Series B redeemable
    convertible preferred stock.........                                      405,000          --           --          --
  Net loss..............................       --         --          --           --          --           --          --
                                          -------   --------   ---------   ----------   ---------   ----------   ---------
Balance at January 1, 1998..............  243,723    437,076   1,058,574    2,385,000   1,111,111    1,720,779          --
  Exercise of stock options.............       --         --          --           --          --           --          --
  Dividends and interest on redeemable
    convertible preferred stock.........       --     64,240          --       59,810          --           --          --
  Adjustment to accretion of Series B
    redeemable convertible preferred
    stock...............................       --         --          --     (526,144)         --           --          --
  Net loss..............................       --         --          --           --          --           --          --
                                          -------   --------   ---------   ----------   ---------   ----------   ---------
Balance at December 31, 1998............  243,723    501,316   1,058,574    1,918,666   1,111,111    1,720,779          --
  Issuance of Series D convertible
    preferred stock and warrants, net of
    $271,251 issuance costs.............       --         --          --           --          --           --   2,400,000
  Issuance of Series E convertible
    preferred stock, common stock,
    warrants and options to acquire The
    Molloy Group........................       --         --          --           --          --           --          --
  Reversal of Series A redemption
    premium.............................       --   (187,832)         --           --          --           --          --
  Exercise of stock options.............       --         --          --           --          --           --          --
  Dividends on preferred stock..........       --     34,777          --       59,809          --           --          --
  Issuance of warrant -- credit
    facility............................       --         --          --           --          --           --          --
  Net loss..............................       --         --          --           --          --           --          --
                                          -------   --------   ---------   ----------   ---------   ----------   ---------
Balance at December 31, 1999............  243,723    348,261   1,058,574    1,978,475   1,111,111    1,720,779   2,400,000
  Exercise of stock options
    (unaudited).........................       --         --          --           --          --           --          --
  Stock based compensation
    (unaudited).........................       --         --          --           --          --           --          --
  Amortization of stock based
    compensation (unaudited)............       --         --          --           --          --           --          --
  Net loss (unaudited)..................       --         --          --           --          --           --          --
                                          -------   --------   ---------   ----------   ---------   ----------   ---------
Balance at March 31, 2000 (unaudited)...  243,723   $348,261   1,058,574   $1,978,475   1,111,111   $1,720,779   2,400,000
                                          =======   ========   =========   ==========   =========   ==========   =========

<CAPTION>
                                              CONVERTIBLE PREFERRED STOCK
                                          -----------------------------------
                                           SERIES D           SERIES E
                                          ----------   ----------------------
                                            AMOUNT      SHARES       AMOUNT
                                          ----------   ---------   ----------
<S>                                       <C>          <C>         <C>
Balance at January 1, 1997..............  $       --          --   $       --
  Exercise of stock options.............          --          --           --
  Dividends and interest on Series A
    redeemable convertible preferred
    stock...............................          --          --           --
  Accretion of Series B redeemable
    convertible preferred stock.........          --          --           --
  Net loss..............................          --          --           --
                                          ----------   ---------   ----------
Balance at January 1, 1998..............          --          --           --
  Exercise of stock options.............          --          --           --
  Dividends and interest on redeemable
    convertible preferred stock.........          --          --           --
  Adjustment to accretion of Series B
    redeemable convertible preferred
    stock...............................          --          --           --
  Net loss..............................          --          --           --
                                          ----------   ---------   ----------
Balance at December 31, 1998............          --          --           --
  Issuance of Series D convertible
    preferred stock and warrants, net of
    $271,251 issuance costs.............   7,952,907          --           --
  Issuance of Series E convertible
    preferred stock, common stock,
    warrants and options to acquire The
    Molloy Group........................          --   2,647,984    9,929,944
  Reversal of Series A redemption
    premium.............................          --          --           --
  Exercise of stock options.............          --          --           --
  Dividends on preferred stock..........          --          --           --
  Issuance of warrant -- credit
    facility............................          --          --           --
  Net loss..............................          --          --           --
                                          ----------   ---------   ----------
Balance at December 31, 1999............   7,952,907   2,647,984    9,929,944
  Exercise of stock options
    (unaudited).........................          --          --           --
  Stock based compensation
    (unaudited).........................          --          --           --
  Amortization of stock based
    compensation (unaudited)............          --          --           --
  Net loss (unaudited)..................          --          --           --
                                          ----------   ---------   ----------
Balance at March 31, 2000 (unaudited)...  $7,952,907   2,647,984   $9,929,944
                                          ==========   =========   ==========
</TABLE>

              See accompanying notes to the financial statements.

                                       F-5
<PAGE>   80

                         SERVICEWARE TECHNOLOGIES, INC.

      CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)

<TABLE>
<CAPTION>
                                                                                          NOTE                          TOTAL
                                   COMMON STOCK AND                                    RECEIVABLE                   SHAREHOLDERS'
                              ADDITIONAL PAID IN CAPITAL                                  FROM                         EQUITY
                              ---------------------------     DEFERRED                   COMMON                       (CAPITAL
                                SHARES         AMOUNT       COMPENSATION   WARRANTS   SHAREHOLDERS     DEFICIT       DEFICIENCY)
                              -----------   -------------   ------------   --------   ------------   ------------   -------------
<S>                           <C>           <C>             <C>            <C>        <C>            <C>            <C>
Balance at January 1,
  1997......................   4,601,505     $   754,577    $         --   $     --   $        --    $ (1,833,886)  $  2,999,047
  Exercise of stock
    options.................      11,270           6,918              --         --            --              --          6,918
  Dividends and interest on
    Series A redeemable
    convertible preferred
    stock...................          --              --              --         --            --         (59,499)            --
  Accretion of Series B
    redeemable convertible
    preferred stock.........          --              --              --         --            --        (405,000)            --
  Net loss..................          --              --              --         --            --      (1,508,093)    (1,508,093)
                               ---------     -----------    ------------   --------   -----------    ------------   ------------
Balance at January 1,
  1998......................   4,612,775         761,495              --         --            --      (3,806,478)     1,497,872
  Exercise of stock
    options.................      16,350          17,965              --         --            --              --         17,965
  Dividends and interest on
    redeemable convertible
    preferred stock.........          --              --              --         --            --        (124,050)            --
  Adjustment to accretion of
    Series B redeemable
    convertible preferred
    stock...................          --              --              --         --            --         526,144             --
  Net loss..................          --              --              --         --            --      (3,816,445)    (3,816,445)
                               ---------     -----------    ------------   --------   -----------    ------------   ------------
Balance at December 31,
  1998......................   4,629,125         779,460              --         --            --      (7,220,829)    (2,300,608)
  Issuance of Series D
    convertible preferred
    stock and warrants, net
    of $271,251 issuance
    costs...................          --              --              --    775,842            --              --      8,728,749
  Issuance of Series E
    convertible preferred
    stock, common stock,
    warrants and options to
    acquire The Molloy
    Group...................   1,512,307       4,209,882              --     34,492            --              --     14,174,318
  Reversal of Series A
    redemption premium......          --              --              --         --            --         187,832             --
  Exercise of stock
    options.................     247,281         274,401              --         --      (199,999)             --         74,402
  Dividends on preferred
    stock...................          --              --              --         --            --         (94,586)            --
  Issuance of warrant -
    credit facility.........          --              --              --     46,400            --              --         46,400
  Net loss..................          --              --              --         --            --     (10,062,347)   (10,062,347)
                               ---------     -----------    ------------   --------   -----------    ------------   ------------
Balance at December 31,
  1999......................   6,388,713     $ 5,263,743              --   $856,734   $  (199,999)   $(17,189,930)  $ 10,660,914
  Exercise of stock options
    (unaudited).............   1,039,555       2,413,135              --         --    (2,347,511)             --         65,624
  Stock based compensation
    (unaudited).............          --       2,377,350      (2,377,350)        --            --              --             --
  Amortization of stock
    based compensation
    (unaudited).............          --              --         390,275         --            --              --        390,275
  Net loss (unaudited)......          --              --              --         --            --      (3,420,872)    (3,420,872)
                               ---------     -----------    ------------   --------   -----------    ------------   ------------
Balance at March 31, 2000
  (unaudited)...............   7,428,268     $10,054,228    $ (1,987,075)  $856,734   $(2,547,510)   $(20,610,802)  $  7,695,941
                               =========     ===========    ============   ========   ===========    ============   ============
</TABLE>

              See accompanying notes to the financial statements.

                                       F-6
<PAGE>   81

                         SERVICEWARE TECHNOLOGIES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                     THREE MONTHS ENDED
                                               YEAR ENDED DECEMBER 31,                    MARCH 31,
                                       ----------------------------------------   -------------------------
                                          1997          1998           1999          1999          2000
                                       -----------   -----------   ------------   -----------   -----------
                                                                                         (UNAUDITED)
<S>                                    <C>           <C>           <C>            <C>           <C>
Cash flows from operating activities
  Net loss...........................  $(1,508,093)  $(3,816,445)  $(10,062,347)  $(1,842,711)  $(3,420,872)
Adjustments to reconcile net loss to
  net cash provided by (used in)
  operations:
  Depreciation and amortization......      441,793       794,626      3,701,033       263,194     1,740,467
  Stock based compensation...........           --            --             --            --       390,275
  Changes in operating assets and
    liabilities, net of effects from
    purchase of Molloy Group:
    Accounts receivable..............   (1,814,246)     (162,003)       782,765     1,449,439    (1,804,195)
    Other current assets.............     (197,482)     (158,367)       105,565         3,308      (296,162)
    Accounts payable.................        2,437       426,305     (1,022,089)        7,782       326,689
    Accrued compensation and
      benefits.......................      365,769       120,576        495,095      (101,292)     (300,467)
    Other liabilities................      234,983       229,657       (233,010)     (159,392)      502,227
    Deferred revenue.................    2,794,623     1,121,223      3,098,524       465,249       627,296
                                       -----------   -----------   ------------   -----------   -----------
Net cash provided by (used in)
  operating activities...............      319,784    (1,444,428)    (3,134,464)       85,577    (2,234,742)
Cash flows from investing activities
  Property and equipment
  acquisitions.......................     (395,107)   (1,136,400)    (1,080,927)     (355,503)     (395,889)
Payments for purchase of Molloy
  group, net of cash acquired........           --            --       (346,016)           --            --
Payment for rights to the
  "ServiceWare" name.................           --            --        (75,000)           --            --
                                       -----------   -----------   ------------   -----------   -----------
Net cash used in investing
  activities.........................     (395,107)   (1,136,400)    (1,501,943)     (355,503)     (395,889)
Cash flows from financing activities
  Repayments of principal of capital
  lease obligation...................     (108,580)     (217,516)      (243,535)      (60,826)      (41,982)
Repayments of principal of term
  loan...............................           --       (54,035)      (686,688)           --            --
Repayments of principal of line of
  credit.............................           --       (29,166)    (1,800,000)                         --
Repayments of principal of equipment
  line...............................           --            --       (205,556)      (29,167)           --
Repayments of principal of bridge
  loans..............................           --            --     (1,800,000)           --            --
Proceeds from borrowings under
  revolving line of credit...........           --     1,450,000      4,100,000            --            --
Proceeds from borrowings under
  equipment line.....................           --       350,000        401,116            --            --
Proceeds from bridge loans...........                         --      1,800,000            --            --
Proceeds from stock option
  issuances..........................        6,918        17,965         74,402         1,618        65,624
Net proceeds from Series D Preferred
  stock issuance.....................           --            --      8,728,749            --            --
                                       -----------   -----------   ------------   -----------   -----------
Net cash provided by (used in)
  financing activities...............     (101,662)    1,517,248     10,368,488       (88,375)       23,642
                                       -----------   -----------   ------------   -----------   -----------
Increase (decrease) in cash and cash
  equivalents........................     (176,985)   (1,063,580)     5,732,081      (358,301)   (2,606,989)
Cash and cash equivalents at
  beginning of period................    2,131,517     1,954,532        890,952       890,952     6,623,033
                                       ===========   ===========   ============   ===========   ===========
Cash and cash equivalents at end of
  period.............................  $ 1,954,532   $   890,952   $  6,623,033   $   532,651   $ 4,016,043
                                       ===========   ===========   ============   ===========   ===========
Supplemental disclosures of cash flow
  information:
  Cash paid for interest.............  $    12,408   $    73,061   $    232,967   $    39,460   $    94,947
                                       ===========   ===========   ============   ===========   ===========
</TABLE>

              See accompanying notes to the financial statements.
                                       F-7
<PAGE>   82

                         SERVICEWARE TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION OF THE COMPANY

     ServiceWare Technologies, Inc., (the "Company") is a leading provider of
software and content solutions that businesses use to provide an Internet-based
e-service platform to their customers, partners, suppliers and employees.

     The Company's eService Suite includes software and content products which
enable its customers to develop and manage a knowledge base of service-related
information. Its solutions also permit the dissemination of knowledge through
multiple communication channels, such as telephone, e-mail, chat and Web-based
self-service. Additionally, its Internet-based knowledge portal,
RightAnswers.com(TM), enables customers to access a continuously updated
knowledge base of content obtained from leading technology companies as well as
the Company's internally produced knowledge content. The Company also offers
integration, training, consulting and maintenance services that enable its
customers to realize the benefits of its eService Suite.

     The Company's products (the "Products") include:

     eService Architect.  The eService Architect provides a robust set of
     knowledge tools that allows customers' subject matter experts and system
     administrators to administer, design, manage and maintain knowledge bases.

     eService Professional.  The eService Professional provides a Web-based
     application interface for use by customer service professionals to more
     easily navigate through the knowledge base, view various components of the
     knowledge base as well as capture and revise additional knowledge.

     eService Site.  The eService Site allows customers to provide Web-based
     self-service to their end-users.

     RightAnswers.com.  RightAnswers.com is an Internet-based knowledge portal
     that enables customers to access a continuously updated database of
     problem-solution pairs in a cost effective and timely manner.
     RightAnswers.com is also sold in a CD-ROM version.

     The Products were not marketed in their current form prior to 2000.
     eService Architect, eService Professional and eService Site are derived
     from Knowledge Bridge, which was a product of the Molloy Group prior to its
     acquisition, and includes the functionality of Knowledge-Pak Architect and
     Knowledge-Pak Viewer, which were ServiceWare products. The predecessor of
     RightAnswers.com was sold on CD-ROM as Knowledge-Pak Desktop Suite.
     Knowledge-Pak Desktop Suite was often sold together with Knowledge-Pak
     Architect and Knowledge-Pak Viewer. All of these various products have been
     integrated in the eService Suite.

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.

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 98-4,
Deferral of the Effective Date of a Provision of SOP 97-2. The Company derives
its revenues from licenses and subscriptions for its Products sold directly to
end-users and indirectly through distributors as well as from the provision of
related services, including installation and training, consulting, customer
support and maintenance contracts Revenues are recognized only if

                                       F-8
<PAGE>   83
                         SERVICEWARE TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


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-elements arrangements, we
recognize 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 and subscriptions revenues

     Licenses and subscriptions revenues include fees for perpetual licenses and
periodic subscription licenses. The Company recognizes revenues on license fees
after a non-cancelable license agreement has been signed, the product has been
delivered, the fee is fixed, determinable and collectable, and there is
vendor-specific objective evidence to support the allocation of the total fee to
elements of a multiple-element arrangement. The Company recognizes revenues on
periodic subscription licenses over the subscription term. Product returns and
sales allowances (which have not been significant through March 31, 2000) are
estimated and provided for at the time of sale.

     Due to the significant delay in receiving sales reports from distributors,
the Company recognizes licenses revenues from distributors when the sales
reports are received because at the time of delivery the fees are not fixed or
determinable and collection is not probable. Accordingly, Annual Subscription
Agreement (ASA) sales included in these reports are recognized on a
straight-line basis over the remaining term of the contract beginning in the
period that the report is received. If certain multi-element arrangements are
not able to be allocated the entire arrangement is deferred and revenue is
recognized over the period of the last undelivered element.

     Subscriptions revenues are derived from the sale of Annual Subscriptions
Agreements for the RightAnswers.com products. These agreements provide for
periodic access to the RightAnswers.com web-site or the right to receive the CD
based version of RightAnswers.com for the term of the agreement. Subscription
revenues are recognized on a straight-line basis over the term of the contract.
Payments for subscriptions revenues are normally received in advance and are
non-refundable.

  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
non-refundable.

     Revenues for installation and training, system integration projects,
consulting and building customized knowledge bases services are recognized as
the services are performed.

  Cost of revenues

     Cost of license and subscription revenues consists primarily of the
expenses related to royalties, the cost of media on which a product is
delivered, product fulfillment costs, amortization of purchased technology and
salaries, benefits, direct expenses and allocated overhead costs related to
product fulfillment and the costs associated with maintaining our Web site.
                                       F-9
<PAGE>   84
                         SERVICEWARE TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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, ASAs, maintenance services,
professional services, and unearned inventory sale revenue from distributors,
all of which generally have been paid for in advance.

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.

OTHER CURRENT ASSETS

     Other current assets consists 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
(generally two to 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 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 statement of operations.

INTANGIBLE ASSETS

     Intangible assets resulted primarily from the acquisition of Molloy Group
(Note 3) and consist of the following identifiable assets:

<TABLE>
<CAPTION>
                                                                              AMORTIZATION
DESCRIPTION                                                      AMOUNT          PERIOD
-----------                                                   ------------    ------------
<S>                                                           <C>             <C>
Assembled workforce.........................................  $  1,041,900      2 years
Customer list...............................................     1,043,543      4 years
Noncompetition agreement....................................       345,174      3 years
Goodwill....................................................    12,393,551      3 years
                                                              ------------
Total intangible assets resulting from the Molloy
  acquisition...............................................    14,824,168
Payment for rights to the "ServiceWare" name................        75,000      3 years
                                                              ------------
Total intangible assets.....................................    14,899,168
Less accumulated amortization...............................    (2,203,580)
                                                              ------------
Intangible assets, net......................................  $ 12,695,588
                                                              ============
</TABLE>

     Intangible assets are recorded at cost, net of accumulated amortization.
Amortization is computed using the straight-line method over the estimated
useful lives of the related assets (two to four years).

                                      F-10
<PAGE>   85
                         SERVICEWARE TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     On an ongoing basis, when there are indicators of impairment such as
declining revenues or recurring losses, the Company evaluates the carrying value
of intangibles resulting from business acquisitions. If such indicators are
apparent, the Company compares the carrying value of the intangibles to the
estimated future undiscounted cash flows expected to be generated from the
businesses acquired over the remaining life of the intangible. If the
undiscounted cash flows are less than the carrying value of the intangibles, the
cash flows will be discounted to present value and the intangibles will be
reduced to this amount. There was no impairment for the year ended December 31,
1999.

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 enterprises directly and through third-party
distributors (Distributors), and the Company's customer base is dispersed across
many different geographic areas throughout North America, parts of Europe, the
South Pacific / Australia, and Japan. The Company performs ongoing credit
evaluations of its customers' financial condition, and generally no collateral,
such as letters of credit and bank guarantees, is required. The Company
maintains adequate reserves for potential credit losses and such losses have
been minimal and within management's estimates.

     One direct sales customer accounted for 15% of total revenues in 1997 and
24% of total accounts receivable at December 31, 1997.

     The Company recognized approximately $5,096,000, $6,253,000, and
$7,771,000, in product revenues related to Distributor sales in 1997, 1998, and
1999, respectively. In any given year, the revenue from a single Distributor may
be material to total revenue and/or total accounts receivable. For the years
ended December 31, 1997, 1998 and 1999, a single Distributor, two distributors
and a different single distributor accounted for approximately 12%, 15% and 17%
of total revenues and 13%, 14% and 0% of total accounts receivable,
respectively.

PRODUCT CONCENTRATION

     The Company currently derives the majority of its revenue from the
licensing of its Products and related services. These products and services are
expected to account for the majority of the Company's revenue for the
foreseeable future. Consequently, a reduction in demand for these products or a
decline in sales of these products, would adversely affect operating results.

RESEARCH AND DEVELOPMENT

     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 1997, 1998, and 1999, 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 Molloy (see Note 3). The value of the purchased technology was
capitalized and is being amortized on a straight line basis over 3 years.

                                      F-11
<PAGE>   86
                         SERVICEWARE TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 1997, 1998, and 1999 were approximately $562,000,
$675,000, and $1,039,000, respectively.

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 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 and has provided the required pro forma disclosures (see Note 7).

STATEMENT OF CASH FLOWS

     Noncash transactions for the years ended December 31, 1997, 1998, and 1999
include capital lease additions of approximately $395,000, $65,000 and $182,000,
respectively.

USE OF ESTIMATES

     The preparation of the Company's financial statements in conformity with
generally accepted accounting principles 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.

NET LOSS PER SHARE

     In accordance with SFAS No. 128, basic and dilutive net loss per share have
been computed using the weighted-average number of shares of common stock
outstanding during the period.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions. The adoption
of this pronouncement for fiscal year 2000 is not expected to materially affect
the Company's revenue recognition policies.

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because the
Company does not currently hold any derivative instruments and does not engage
in hedging activities, the adoption of SFAS No. 133 is not expected to have a
significant impact on its financial position, results of operations or cash
flows. The Company will be required to implement SFAS No. 133, as amended, for
the year ending December 31, 2001.

     In December 1999, the Staff of the Securities and Exchange Commission
released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," to
provide guidance on the recognition, presentation and disclosure of revenues in
financial statements. Management believes the Company's revenue recognition
practices are in conformity with SAB No. 101.

                                      F-12
<PAGE>   87
                         SERVICEWARE TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

UNAUDITED PRO FORMA SHAREHOLDERS EQUITY (CAPITAL DEFICIENCY)


     The Board of Directors has authorized the Company to file a Registration
Statement with the Securities and Exchange Commission permitting the Company to
sell shares of Common Stock in an initial public offering ("IPO"). If the IPO is
consummated as presently anticipated, all shares of Series A, Series B, Series
C, Series D, and Series E Preferred stock ("Preferred Shares") will
automatically convert into 9,307,737 shares of the Company's Common Stock at a
various conversion ratios as discussed in Note 7. The unaudited pro forma
shareholders equity reflects the June 2000 issuance of 1,325,000 shares of
Series F Preferred Stock for $8.00 per share less issuance costs and the
subsequent conversion of all of the Preferred Shares into Common Stock as if
such conversion had occurred on March 31, 2000.


UNAUDITED INTERIM FINANCIAL INFORMATION

     The accompanying unaudited balance sheet as of March 31, 2000 and related
consolidated statements of operations and cash flows for the three months ended
March 31, 1999 and 2000, and the unaudited consolidated statement of
shareholders' equity for the three months ended March 31, 2000 have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The interim financial statements include all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation of
the results of interim periods. Operating results for the three month period
ended March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.

3. ACQUISITION

     On July 23, 1999, the Company acquired the outstanding preferred stock,
common stock, and warrants and stock options to purchase common stock of Molloy
Group, Inc. (Molloy), a leading provider of knowledge-empowered software for
strengthening customer relationships. The acquisition was effected by issuing
2,647,984 shares of Series E Preferred Stock ($9,929,944), 1,512,307 shares of
common stock ($3,780,768), and 40,473 warrants ($34,492) and 393,950 options
($429,114) to purchase common stock. The options and warrants were valued using
the Black-Scholes pricing model with the following assumptions: volatility of
0.6, dividend yield 0.0%, assumed forfeiture rate of 0.0%, an expected life of 3
years for options and 2 years for warrants, and an average risk-free interest
rate of 5.40%. Total consideration was approximately $14.2 million plus $445,000
in transaction costs. This transaction was accounted for as a purchase in
accordance with Accounting Principles Board Opinion No. 16, Business
Combinations. The consideration in excess of the fair value of assets acquired
and liabilities assumed in the merger of $16.6 million is classified as
purchased technology and intangible assets and is being amortized over two to
four years.

     The estimated fair value of the assets acquired and liabilities assumed of
Molloy are as follows:

<TABLE>
<CAPTION>
DESCRIPTION                                                 AMOUNT
-----------                                               -----------
<S>                                                       <C>
Current assets..........................................  $   903,184
Property and equipment..................................      475,663
Purchased technology....................................    1,777,367
Intangibles.............................................   14,824,168
Other long term assets..................................       80,298
Current liabilities.....................................    3,468,996
Other long term liabilities.............................       51,905
</TABLE>

                                      F-13
<PAGE>   88
                         SERVICEWARE TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following unaudited pro forma statements of operations give effect to
the Molloy acquisition as if the acquisition occurred on January 1, 1998. Basic
and diluted net loss per share has been calculated utilizing the basic and
diluted weighted average of ServiceWare, Inc. shares outstanding during the
years adjusted for 1,512,307 shares of common stock issued July 23, 1999 for the
Molloy acquisition assuming these shares were outstanding as of the beginning of
the years presented.

<TABLE>
<CAPTION>
                                                          FOR THE YEAR ENDED DECEMBER 31,
                                                          --------------------------------
                                                               1998              1999
                                                            PRO FORMA         PRO FORMA
                                                          --------------    --------------
<S>                                                       <C>               <C>
Revenue.................................................   $ 16,093,986      $ 20,305,946
Net loss................................................   $(13,507,433)     $(14,337,826)
                                                           ------------      ------------
Net loss applicable to common stock.....................   $(13,631,483)     $(14,432,412)
                                                           ============      ============
Basic and diluted net loss per share....................   $      (2.22)     $      (2.31)
Shares used in computing per share amounts..............      6,134,101         6,246,863
</TABLE>

     The above amounts are based upon certain assumptions and estimates which
the Company believes are reasonable. The pro forma results do not reflect
anticipated cost savings and do not necessarily represent results which would
have occurred if the Molloy acquisition had taken place at the date and on the
basis assumed above.

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying amounts of the Company's financial instruments consisting
principally of cash and cash equivalents, accounts receivable and payable, debt,
and note receivable from common shareholder approximate their fair values at
December 31, 1998 and 1999.

5. ALLOWANCE FOR DOUBTFUL ACCOUNTS

     Activity in the allowance for doubtful accounts is as follows:

<TABLE>
<CAPTION>
                                                            BALANCE
                                                            --------
<S>                                                         <C>
Balance, December 31, 1996................................  $ 19,457
Net charge to expense.....................................    79,106
Amounts written off.......................................        --
                                                            --------
Balance, December 31, 1997................................    98,563
Net charge to expense.....................................   150,875
Amounts written off.......................................    (7,650)
                                                            --------
Balance, December 31, 1998................................   241,788
Net charge to expense.....................................    90,420
Amounts written off.......................................   (20,002)
                                                            --------
Balance, December 31, 1999................................  $312,206
                                                            ========
</TABLE>

6. DEBT

     In December 1999, the Company entered into a new credit facility with a
bank. This facility consists of three notes, a revolving loan facility, a
convertible equipment loan, and a term loan. The outstanding balances from the
previous revolving credit facility discussed below were transferred to the new
notes.

                                      F-14
<PAGE>   89
                         SERVICEWARE TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The amount available under the revolving credit note is $7,500,000 less
principal outstanding on the term loan and matures on December 10, 2001. Any
amounts drawn under the facility bear interest at the Base Rate plus 0.50%.
"Base Rate" is defined as the lesser of the bank's prime rate or the Federal
Fund's Effective Rate plus 2%. The availability of credit is based on a
percentage of eligible accounts receivable. At December 31, 1999, $1,520,658 was
available for use and $1,250,000 was outstanding on the revolving credit note.

     The amount available under the convertible equipment note was $750,000 on
December 31, 1999. On June 8, 2000, outstanding amounts under this line will be
converted to single term loan which matures on June 1, 2003. Any amounts drawn
under the facility bear interest at the Base Rate plus 0.75%. The availability
of advances on this line is based on a percentage of invoice amounts for
equipment acquisitions. At December 31, 1999, nothing had been drawn and
$516,394 was outstanding on the new equipment line from the previous equipment
line (see discussion below). Of this amount, $86,066 is classified as other
current liabilities and $430,328 is classified as long term debt. Principal
repayments of this loan will be made upon conversion of the loan in 36 equal
installments beginning July 1, 2000.

     The term loan is $2,500,000 and is due in two equal installments on June
10, 2001 and December 10, 2001. Any amounts drawn under the facility bear
interest at the Base Rate plus 2.25%. The total proceeds of the loan were
available on December 10, 1999. At December 31, 1999, $2,500,000 was outstanding
on the term loan.

     In September 1998, the Company amended and restated its revolving credit
facility with a bank. This facility consisted of two lines, a revolving credit
line and an equipment line.

     The revolving credit line was $3,000,000 and matured in September 1999. Any
amounts drawn under the facility bore interest at the Base Rate plus 0.75%.
"Base Rate" is defined as the greater of the bank's prime rate or the Federal
Funds rate plus 2%. The availability of credit was based on a percentage of
eligible accounts receivable. At December 31, 1998, $1,303,559 was available for
use and $1,450,000 was outstanding on the revolving credit line.

     The equipment line was $750,000 and matures in September 2001. Any amounts
drawn under the facility bore interest at the Base Rate plus 1.0%. The
availability of advances on this line were based on a percentage of invoice
amounts for equipment acquisitions. At December 31, 1998, $350,000 had been
drawn and $320,833 was outstanding on the equipment line.

     The Base Rate is variable and was 8.50% and 7.75% at December 31, 1999 and
1998, respectively.

     The December 1999 revolving credit agreement contains covenants that
require the Company to, among other things, maintain a minimum tangible net
worth and provide certain financial reports to the bank. In addition, the
agreement restricts the Company's ability to pay cash dividends without the
bank's consent. The Company's accounts receivable, inventory, equipment, and
cash are pledged as collateral.

     In conjunction with the new credit facility the Company issued 80,000
warrants to buy common stock. Additionally, the Company issued 6,814 and 28,000
warrants in connection with bridge loans in the amount of $750,000 and
$1,050,000 to its bank and Series A, B and C Shareholders, respectively. The

                                      F-15
<PAGE>   90
                         SERVICEWARE TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

bridge loans were repaid with the proceeds from the Sale of Series D Convertible
preferred stock. Using the Black-Scholes pricing model described in note 8 the
value of warrants was $46,400.

     Aggregate maturities of debt are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S>                                                        <C>
2000.....................................................  $   86,066
2001.....................................................   2,672,131
2002.....................................................     172,131
2003.....................................................      86,066
                                                           ----------
                                                            3,016,394
Less current portion.....................................      86,066
                                                           ----------
Long term debt, less current portion.....................  $2,930,328
                                                           ==========
</TABLE>

7. SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)

     The Company has two classes of capital stock consisting of Common Stock and
Preferred Stock. There are five series of Preferred Stock as discussed below.

SERIES A CONVERTIBLE PREFERRED STOCK

     On July 25, 1994, the Company sold 243,723 shares of Series A Preferred
Stock for approximately $250,000. The proceeds from this sale were used for
working capital, marketing, closing expenses, and existing liabilities. The
holders of Series A are entitled to receive dividends of $.082 per share from
July 29, 1994 through June 30, 1999, payable when and if declared by the Board
of Directors. The accrued dividends may be paid (at the option of the holder) in
cash or shares of Common Stock for dividends accruing for the first three years
and cash thereafter through June 30, 1999. The holders of Series A are also
entitled to dividends paid on the Common Stock as if the Series A was converted
into the Common Stock. Each share of Series A is currently convertible into
three shares of Common Stock, to be adjusted proportionally for future stock
splits, stock dividends, etc.

     Prior to July 23, 1999, Series A had redemption privileges such that on
July 29, 1999 and thereafter, any holder of Series A representing at least 50%
of all of the shares of Series A outstanding or any holder with the consent of
the majority Series A holders, could require the Company to redeem the remaining
Series A at the redemption price plus a redemption premium, if applicable. The
redemption price was equal to the original issuance, plus any accrued dividends
unpaid, plus a redemption premium equal to interest on the original conversion
price compounded at 12% per annum from July 25, 1994. The Company has accounted
for the cumulative annual dividends and redemption premium through periodic
accretion to Series A through June 30, 1999. On July 23, 1999, the redemption
privileges were revoked and the dividend accrual was limited through June 30,
1999. At December 31, 1999, the Company has recorded the value of Series A to be
the original issuance plus the accrued dividends. No dividends have been
declared or paid as of December 31, 1999.

SERIES B CONVERTIBLE PREFERRED STOCK

     On June 29, 1995, the Company sold 1,058,574 shares of Series B Preferred
Stock for approximately $1.5 million. The proceeds from this sale were used for
working capital purposes and to repurchase 180,000 shares of Common Stock for
$1.417 per share. The holders of Series B are entitled to receive dividends of
$.113 per share from June 29, 1995 through June 30, 1999, payable when and if
declared by the Board of Directors. Such dividends accrued, whether or not
earned or declared, and are cumulative

                                      F-16
<PAGE>   91
                         SERVICEWARE TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and payable upon liquidation, business combination, or redemption or conversion
of the Series B into Common Stock. The accrued dividends can be paid (at the
option of the holder) in cash or shares of Common Stock for dividends accruing
for the first three years and cash thereafter through June 30, 1999. The holders
of Series B are also entitled to dividends declared on the Common Stock as if
the Series B was converted into the Common Stock. Each share of Series B is
currently convertible into approximately 1.706 shares of Common Stock, to be
adjusted proportionally for future stock splits, stock dividends, etc.

     Prior to July 23, 1999, Series B had redemption privileges such that on
June 29, 2002, 2003 and 2004, any holder of Series B representing at least a
majority of all of the shares of Series B outstanding could require the Company
to redeem one-third, one-half of the remaining Series B shares and all of the
Series B shares, respectively, outstanding on the applicable redemption date at
the redemption price. The redemption price was equal to the greater of the
original issuance, plus any accrued dividends unpaid or the fair market value of
the Series B shares as determined at that date. The Company has accreted Series
B in accordance with these terms through June 30, 1999. On July 23, 1999, the
redemption privileges were revoked and the dividend accrual was limited through
June 30, 1999. At December 31, 1999, the Company has recorded the value of
Series B to be the original issuance plus the accrued dividends. No dividends
have been declared or paid as of December 31, 1999.

SERIES C CONVERTIBLE PREFERRED STOCK

     On April 24, 1996, the Company sold 500,051 shares of Series C Preferred
Stock and the contingent right to receive 320,095 shares of Common Stock
(subsequently issued) for $2.5 million less $18,116 for transaction costs. The
proceeds from this sale were used for general working capital purposes. Each
share of Series C is currently convertible into 1.550 shares of Common Stock, to
be adjusted proportionally for future stock splits, stock dividends, etc.

     In connection with the sale of Series C shares to Norwest Equity Partners V
(Norwest) on April 24, 1996, the Company's common shareholders approved the
reclassification of 611,060 shares of Common Stock sold by certain shareholders
to Norwest into Series C.

     There are no dividends or interest provisions related to Series C, however,
the terms of the Series C Preferred Stock include antidilution provisions with
respect to stock dividends that have accrued to the Series A and Series B
shareholders.

SERIES D CONVERTIBLE PREFERRED STOCK

     On July 23, 1999, the Company sold 2,400,000 shares of Series D Preferred
Stock and the contingent right to exercise 360,000 warrants to buy common stock
for $9 million less $271,251 for transaction costs. The exercise price of the
warrants are $2.50, and they are exercisable if certain performance targets are
not met. The proceeds from this sale were used for general working capital
purposes. Each share of Series D is currently convertible into one share of
Common Stock, to be adjusted proportionally for future stock splits, stock
dividends, etc.

     The estimated fair value of the warrants granted of $775,842 was recorded
on December 31, 1999, the date when the performance criteria were deemed
satisfied (see Note 8).

     There are no dividends or interest provisions related to Series D.

SERIES E CONVERTIBLE PREFERRED STOCK

     On July 23, 1999, the Company issued 2,647,984 shares of Series E Preferred
Stock in connection with the acquisition of The Molloy Group (see Note 3). Each
share of Series E is currently convertible into one share of Common Stock, to be
adjusted proportionally for future stock splits, stock dividends, etc.

                                      F-17
<PAGE>   92
                         SERVICEWARE TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     There are no dividends or interest provisions related to Series E.

  Conversion, Voting, Liquidation Preference and Other Rights of Preferred Stock
Holders

     The Preferred Stock may be converted to Common Stock at any time by the
holder and will be mandatorily converted to Common Stock upon the closing of the
Company's initial public offering of shares of Common Stock pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
subject to a minimum per share price and gross proceeds. Each Preferred Stock
holder has the right to vote as if their shares of Preferred Stock had been
converted to Common Stock at the then current conversion rate.

     The terms of the Preferred Stock provide for preferences upon liquidation
and other rights. In general, the Preferred Stock holders have a preference at
liquidation equal to the issuance price, plus any accrued, unpaid dividends
whether or not declared for Series A and Series B. The remaining assets, if any,
would be distributed ratably to the Common Stock holders. The holders of
Preferred Stock are also parties to various agreements with the Company which
contain, among other provisions, preemptive rights, the exclusive selection of
one director to the Board of Directors, and other rights.

COMMON STOCK

     The Company has reserved the following number of shares of Common Stock as
of December 31, 1999:

<TABLE>
<CAPTION>
SHARES             PURPOSE OF ISSUANCE
----------         -------------------
<C>         <S>
   731,169  Upon conversion of Series A
 1,806,290  Upon conversion of Series B
 1,722,294  Upon conversion of Series C
 2,400,000  Upon conversion of Series D
 2,647,984  Upon conversion of Series E
 3,659,599  Upon exercise of stock options
   515,288  Upon exercise of warrants
----------
13,482,624  Total
==========
</TABLE>

STOCK OPTION PLAN

     Effective January 1996, the Company's Board of Directors approved the
ServiceWare, Inc. Amended and Restated Stock Option Plan (the Plan) which
amended and restated the ServiceWare, Inc. 1994 Stock Option/Stock Issuance
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 4,000,000 shares of the Company's Common Stock may be issued pursuant
to the Plan. The exercise price of incentive stock options is equal to the
estimated fair market value of the Company's Common Stock at the date of the
grant as determined by management and the Board of Directors for the years ended
December 31, 1997, 1998 and 1999. The exercise price of nonqualified options is
also determined by the Board of Directors. Options generally vest over a three
to four 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.

     The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
its plans. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards
                                      F-18
<PAGE>   93
                         SERVICEWARE TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

under these plans consistent with the methodology prescribed under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and loss per share would have been
increased by approximately $72,000, $154,000 and $398,000 or $0.02, $0.04 and
$0.01 per share in 1997, 1998 and 1999, respectively. The average fair value of
the options granted is estimated as $0.42 during 1997, $0.57 during 1998, and
$0.61 during 1999 on the date of grant using the Black-Scholes pricing model
with the following assumptions: volatility 0.6, dividend yield 0.0%, assumed
forfeiture rate of 4.2% for 1999 and 3.5% for 1998 and 1997, an expected life of
3 years, and average risk-free interest rates of 6.13%, 4.60%, and 5.40% for
1997, 1998 and 1999, respectively.

     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.

     The following table summarizes option activity for the years ended December
31, 1997, 1998, and 1999:

<TABLE>
<CAPTION>
                                                  OPTIONS        OPTION PRICE       WEIGHTED AVERAGE
                                                OUTSTANDING     RANGE PER SHARE      EXERCISE PRICE
                                                -----------    -----------------    ----------------
<S>                                             <C>            <C>                  <C>
Balance, December 31, 1996....................   1,208,975     $0.0110 - $2.3000        $1.3459
Options granted...............................     268,600     $2.3000 - $3.6000        $2.4684
Options exercised.............................      11,270     $0.3330 - $2.3000        $0.7154
Options forfeited.............................      90,205     $0.3330 - $2.3000        $1.6826
                                                 ---------
Balance, December 31, 1997....................   1,376,100     $0.0110 - $3.6000        $1.5247
Options granted...............................     742,700     $3.6000 - $5.1000        $4.5595
Options exercised.............................      16,350     $0.3330 - $2.3000        $1.0999
Options forfeited.............................     411,044     $0.9400 - $5.1000        $2.3512
                                                 ---------
Balance, December 31, 1998....................   1,691,406     $0.0110 - $5.1000        $2.6605
Options granted...............................   1,979,120     $1.0000 - $5.1000        $1.6029
Options exercised.............................     247,281     $0.0110 - $5.1000        $1.1100
Options forfeited.............................     775,835     $0.1670 - $5.1000        $2.6215
                                                 ---------
Balance, December 31, 1999....................   2,647,410     $0.0560 - $5.1000        $1.8858
                                                 =========
Options granted...............................     790,940     $2.50                    $2.5000
Options granted...............................     112,000     $7.00                    $7.0000
Options exercised.............................   1,039,555     $0.9400 - $5.1000        $2.3367
Options forfeited.............................      98,387     $0.9400 - $7.0000        $3.2189
                                                 ---------
Balance, March 31, 2000.......................   2,453,408     $0.0560 - $7.0000        $2.0950
                                                 ---------
</TABLE>

                                      F-19
<PAGE>   94
                         SERVICEWARE TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The options outstanding as of December 31, 1999 have been segregated into
ranges for additional disclosure as follows:

<TABLE>
<CAPTION>
                           OPTIONS OUTSTANDING                                       OPTIONS EXERCISABLE
                   ------------------------------------                      ------------------------------------
                        OPTIONS        WEIGHTED AVERAGE
    RANGE OF       OUTSTANDING AS OF      REMAINING       WEIGHTED AVERAGE   EXERCISABLE AS OF   WEIGHTED AVERAGE
 EXERCISE PRICES   DECEMBER 31, 1999   CONTRACTUAL LIFE    EXERCISE PRICE    DECEMBER 31, 1999    EXERCISE PRICE
-----------------  -----------------   ----------------   ----------------   -----------------   ----------------
<S>                <C>                 <C>                <C>                <C>                 <C>
 $0.000 - $0.5100        196,500             4.9              $0.3125             196,500            $0.3125
$0.5101 - $1.0200        850,100             9.0              $0.9930              75,937            $0.9269
$1.0201 - $1.5300        383,460             8.7              $1.2100             249,909            $1.2100
$2.0401 - $2.5500        890,000             9.2              $2.4644             141,525            $2.3707
$3.5701 - $4.0800        160,000             8.1              $3.6000              40,600            $3.6000
$4.5901 - $5.1000        167,350             8.5              $5.1000              44,650            $5.1000
                       ---------             ---              -------             -------            -------
                       2,647,410             8.6              $1.8858             749,121            $1.5266
                       =========             ===              =======             =======            =======
</TABLE>

8. WARRANTS

     The following table summarizes warrant activity for the year ended December
31, 1999:

<TABLE>
<CAPTION>
                                                            WARRANTS       WARRANT PRICE
                                                           OUTSTANDING    RANGE PER SHARE
                                                           -----------    ---------------
<S>                                                        <C>            <C>
Balance, December 31, 1998...............................         --
Warrants granted.........................................    515,288       $1.50 - $9.00
Warrants exercised.......................................         --
Warrants forfeited.......................................         --
                                                             -------
Balance, December 31, 1999...............................    515,288       $1.50 - $9.00
                                                             =======
</TABLE>

     The valuation of warrants was calculated using the Black-Scholes pricing
model with the following assumptions: volatility of 0.6, dividend yield 0.0%,
assumed forfeiture rate of 0.0%, an expected life of 2 years, and an average
risk-free interest rate of 5.40%. The holders of the warrants have the right to
exercise at anytime until the expiration of the warrant which is 3 to 6 years
from the date of grant.

9. NOTE RECEIVABLE FROM COMMON SHAREHOLDER

     On January 24, 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 is due January 2001.

10. OPERATING LEASES

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

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S>                                                        <C>
2000.....................................................  $1,291,750
2001.....................................................   1,355,806
2002.....................................................     733,471
2003.....................................................     151,018
                                                           ----------
                                                           $3,532,045
                                                           ==========
</TABLE>

                                      F-20
<PAGE>   95
                         SERVICEWARE TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Total rent expense under all operating leases amounted to approximately
$442,674, $585,891, and $975,796 in 1997, 1998 and 1999, respectively.

11. 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:

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                       ---------------------------------------
                                                         1997          1998           1999
                                                       ---------    -----------    -----------
<S>                                                    <C>          <C>            <C>
Income tax benefit computed at statutory federal
  income tax rate....................................  $(512,752)   $(1,297,591)   $(3,402,661)
State income taxes, net of federal tax benefit, if
  any................................................    (99,534)      (251,885)      (660,517)
Other (principally goodwill and meals and
  entertainment).....................................     14,908         57,139        794,208
Federal deferred tax asset valuation allowance
  Adjustment.........................................    597,378      1,492,337      3,268,970
                                                       ---------    -----------    -----------
Total benefit for income taxes.......................  $      --    $        --    $        --
                                                       =========    ===========    ===========
</TABLE>

     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:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                       ---------------------------------------
                                                         1997          1998           1999
                                                       ---------    -----------    -----------
<S>                                                    <C>          <C>            <C>
Deferred tax assets (liabilities)
  Accounts receivable................................  $  39,000    $    97,000    $   125,000
  Property and equipment.............................    (43,000)        (8,000)        16,000
  Intangible assets..................................         --             --     (1,423,000)
  Deferred revenue...................................    370,000         17,000             --
  Loss carryforward..................................    517,000      2,270,000      8,280,000
                                                       ---------    -----------    -----------
Total net deferred tax assets........................    883,000      2,376,000      6,998,000
Valuation allowance..................................   (883,000)    (2,376,000)    (6,998,000)
                                                       ---------    -----------    -----------
Net deferred tax asset...............................  $      --    $        --    $        --
                                                       =========    ===========    ===========
</TABLE>

     Management has recorded a valuation allowance against the deferred tax
assets until such time that the Company demonstrates an ability to consistently
produce taxable income.

     At December 31, 1999, the Company had a net operating loss carryforwards
with expiration dates as follows:

<TABLE>
<CAPTION>
                                                                  NET OPERATING
EXPIRATION DATES                                                     LOSSES
----------------                                                  -------------
<S>                                                               <C>
2000-2005...................................................       $        --
2006-2010...................................................         2,667,333
2011-2019...................................................        18,056,222
                                                                   -----------
          Total.............................................       $20,723,555
                                                                   ===========
</TABLE>

                                      F-21
<PAGE>   96
                         SERVICEWARE TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. NET LOSS PER SHARE

     Basic and diluted net loss per share has been computed as described above.
The following table sets forth the computation of basic and diluted earnings per
share:

<TABLE>
<CAPTION>
                                                                               THREE MONTHS ENDED
                                         YEAR ENDED DECEMBER 31,                    MARCH 31,
                                 ----------------------------------------   -------------------------
                                    1997          1998           1999          1999          2000
                                 -----------   -----------   ------------   -----------   -----------
                                                                                    UNAUDITED
<S>                              <C>           <C>           <C>            <C>           <C>
Numerator:
  Net loss.....................  $(1,508,093)  $(3,816,445)  $(10,062,347)  $(1,842,711)  $(3,420,872)
  Series A and Series B
     dividends.................      (59,499)     (124,050)       (94,586)      (47,293)           --
                                 -----------   -----------   ------------   -----------   -----------
  Numerator for basic and
     diluted net loss per
     share -- income available
     to common stockholders....  $(1,567,592)  $(3,940,495)  $(10,156,933)  $(1,890,004)  $(3,420,872)
Denominator:
  Denominator for basic and
     diluted earnings per
     share -- weighted average
     shares....................    4,609,051     4,621,794      5,401,652     4,637,007     6,948,272
                                 ===========   ===========   ============   ===========   ===========
Basic and diluted net loss
  per share....................  $     (0.34)  $     (0.85)  $      (1.88)  $     (0.41)  $     (0.49)
                                 ===========   ===========   ============   ===========   ===========
</TABLE>

     Dilutive securities include options, warrants, and preferred stock as if
converted. Potentially dilutive securities totaling 5,635,853, 5,951,159,
12,470,435, and 12,276,435 for the years ended December 31, 1997, 1998, 1999 and
the three months ended March 31, 2000, and the period ended March 31, 2000
respectively, were excluded from historical basic and diluted loss per share
because of their antidilutive effect.

13. 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 did not contribute to the Plan in 1997,
1998, or 1999.

14. SUBSEQUENT EVENTS (UNAUDITED)

     From January 1, 2000 to March 31, 2000, the Company granted 902,940 stock
option to employees, which vest over four years. The Company recorded $2,127,350
as deferred compensation for these grants during the quarter ended March 31,
2000. Additionally, the Company changed the vesting period for 100,000 stock
options originally granted in October 1999 to the Chairman of the Board of the
Company to vest immediately. The Company recorded $250,000 of stock-based
compensation during the quarter ended March 31, 2000 due to the modification of
this award. The Company recorded stock-based compensation of $390,275 during the
three months ended March 31, 2000 related to these grants.

     From January 1, 2000 to March 31, 2000, certain executives and the Chairman
of the Board of the Company were issued full recourse promissory notes by the
Company totaling $2,347,511 in connection with the exercise of their outstanding
options. The notes bear interest at the applicable federal rate.

                                      F-22
<PAGE>   97
                         SERVICEWARE TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     On March 24, 2000, the Company changed its name from ServiceWare, Inc. to
ServiceWare.com, Inc. On May 18, 2000, the Company changed its name from
ServiceWare.com, Inc. to ServiceWare Technologies, Inc.

     On April 28, 2000, the Board approved and authorized the Company to enter
into the ServiceWare Technologies, Inc. 2000 Stock Incentive Plan (the "Plan").
Two million shares of common stock were reserved for issuance under the Plan,
plus any shares of common stock previously reserved for stock options granted
under the 1996 stock option plan which are forfeited prior to exercise.


     On June 2, 2000, the Company sold an aggregate of 1,325,000 shares of our
Series F Convertible Preferred Stock, par value $0.01 per share, at a purchase
price of $8.00 per share. The investors received certain registration rights in
connection with the purchase of Series F. Each share of Series F is immediately
convertible into one share of common stock, subject to adjustment. To the extent
the estimated initial public offering price exceeds $8.00 per share a value will
be allocated to a beneficial conversion feature equal to the difference between
the estimated initial public offering price and $8.00 per share. This intrinsic
value will be recorded as a dividend during the three months ended June 30,
2000.



     On June 2, 2000, the Company granted 233,333 warrants to buy common stock
to EDS. The exercise price of the warrants is $8.00 per share, provided,
however, if the closing of the Company's initial public offering occurs on or
before December 31, 2000, the exercise price of the warrants will be adjusted to
equal the initial public offering price. The warrants are contingently
exercisable based upon the Company and EDS executing certain commercial
agreements and meeting certain other targets. In accordance with EITF 96-18, no
fair value was assigned to the warrants on the date of issuance as they require
counterparty performance. On the date counterparty performance is complete a
value will be assigned to the warrants using the Black-Scholes option pricing
model. The expiration date for 133,000 of the warrants is 18 months after the
global release of our eService Suite version 3.0. The expiration date for the
remaining 100,000 warrants is June 30, 2003.


                                      F-23
<PAGE>   98

                         REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of
  Molloy Group, Inc.

     We have audited the accompanying balance sheets of Molloy Group, Inc. as of
September 30, 1997 and 1998, and the related statements of operations, changes
in stockholders' equity (capital deficiency) and cash flows for the years then
ended. 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 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 audits provide a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Molloy Group, Inc. as of
September 30, 1997 and 1998, 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.

                                          Ernst & Young LLP

Pittsburgh, Pennsylvania
March 30, 2000

                                      F-24
<PAGE>   99

                               MOLLOY GROUP, INC.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                     SEPTEMBER 30
                                                              --------------------------
                                                                 1997           1998
                                                              -----------    -----------
<S>                                                           <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $   169,249    $    61,204
  Accounts receivable, net of allowance for doubtful
     accounts of $23,625 and $9,721.........................    2,002,770        594,898
  Prepaid expenses..........................................       53,029         25,959
  Prepaid taxes.............................................        9,200         64,002
                                                              -----------    -----------
Total current assets........................................    2,234,248        746,063
                                                              -----------    -----------
Software development costs, less accumulated amortization of
  $67,737 and $292,588......................................      388,326      1,328,839
Property and equipment:
  Computer equipment........................................      551,118        668,788
  Office furniture, equipment and leasehold improvements....      316,023        425,792
                                                              -----------    -----------
                                                                  867,141      1,094,580
  Less accumulated depreciation.............................      352,488        579,721
                                                              -----------    -----------
                                                                  514,653        514,859
                                                              -----------    -----------
Deposits....................................................      131,188         78,123
                                                              -----------    -----------
Total assets................................................  $ 3,268,415    $ 2,667,883
                                                              ===========    ===========
LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY
Current liabilities:
  Accounts payable..........................................  $   667,651    $   523,122
  Accrued expenses..........................................      377,018        458,775
  Current portion of capital lease obligations..............       80,471        130,171
  Line of credit............................................      375,000        803,336
  Current portion of long-term debt.........................       64,868             --
  Note payable officer......................................           --        352,814
  Subordinated convertible note.............................    1,500,000             --
  Deferred revenue..........................................      818,054        505,775
                                                              -----------    -----------
Total current liabilities...................................    3,883,062      2,773,993
                                                              -----------    -----------
Capital lease obligations, net of current portion...........      156,722        140,179
Long-term debt, net of current portion......................       94,955             --
                                                              -----------    -----------
Total long-term liabilities.................................      251,677        140,179
                                                              -----------    -----------
Stockholders' equity (capital deficiency):
  Preferred stock: $1,000,000 shares authorized -- Series A,
     par value $.0001, 323,077 shares issued and
     outstanding............................................           32             32
  Series B, par value $.0001, 0 and 111,800 shares issued
     and outstanding, respectively..........................           --             12
  Common stock, par value $.0001, 7,000,000 shares
     authorized, 4,643,715 shares issued and outstanding....          464            464
  Warrants..................................................       25,175         25,175
  Deferred compensation.....................................     (329,838)      (724,799)
  Additional paid-in capital................................    1,444,306      5,430,514
  Accumulated stockholders' deficit.........................   (2,006,463)    (4,977,687)
                                                              -----------    -----------
Total stockholders' equity (capital deficiency).............     (866,324)      (246,289)
                                                              -----------    -----------
Total liabilities and stockholders' equity (capital
  deficiency)...............................................  $ 3,268,415    $ 2,667,883
                                                              ===========    ===========
</TABLE>

                            See accompanying notes.
                                      F-25
<PAGE>   100

                               MOLLOY GROUP, INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                         YEAR ENDED SEPTEMBER 30,     NINE MONTHS ENDED JUNE 30,
                                        --------------------------    --------------------------
                                           1997           1998           1998           1999
                                        -----------    -----------    -----------    -----------
                                                                             (UNAUDITED)
<S>                                     <C>            <C>            <C>            <C>
Revenue:
  Product revenue.....................  $ 2,669,404    $ 1,693,737    $ 1,512,937    $ 1,665,472
  Maintenance revenue.................    1,082,320      1,233,904        906,722        690,257
  Training and consulting revenue.....      670,796      1,213,536        942,641        635,597
                                        -----------    -----------    -----------    -----------
Total revenue.........................    4,422,520      4,141,177      3,362,300      2,991,326
                                        -----------    -----------    -----------    -----------
Cost and expenses:
  Costs of products and services
     sold.............................    1,264,864      1,537,477        994,824        818,504
  Selling and marketing expenses......    2,859,200      2,547,804      2,039,021      1,486,604
  Product development expenses........      985,864        862,413        483,232      1,272,339
  General and administrative
     expenses.........................    1,908,693      1,780,382      1,465,331      1,544,364
  Stock-based compensation............       53,412        120,288         76,617        134,775
                                        -----------    -----------    -----------    -----------
Total costs and expenses..............    7,072,033      6,848,364      5,059,025      5,256,586
                                        -----------    -----------    -----------    -----------
Loss from operations..................   (2,649,513)    (2,707,187)    (1,696,725)    (2,265,260)
Interest expense......................      141,497        264,037        231,507        252,225
                                        -----------    -----------    -----------    -----------
Loss before income tax benefit........   (2,791,010)    (2,971,224)    (1,928,232)    (2,517,485)
Income tax (benefit) expense..........     (240,885)            --             --             --
                                        -----------    -----------    -----------    -----------
Net loss..............................  $(2,550,125)   $(2,971,224)   $(1,928,232)   $(2,517,485)
                                        ===========    ===========    ===========    ===========
</TABLE>

                            See accompanying notes.
                                      F-26
<PAGE>   101

                               MOLLOY GROUP, INC.

       STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
                                        SERIES A     SERIES B
                                        PREFERRED    PREFERRED    COMMON                  DEFERRED        ADDITIONAL
                                          STOCK        STOCK      STOCK     WARRANTS    COMPENSATION    PAID-IN CAPITAL
                                        ---------    ---------    ------    --------    ------------    ---------------
<S>                                     <C>          <C>          <C>       <C>         <C>             <C>
Balance September 30, 1996..........       $32          $--        $461     $25,175      $      --        $  961,062
Issuance of common stock............        --           --           3          --             --            99,994
Stock-based compensation............        --           --          --          --       (383,250)          383,250
Amortization of stock-based
  compensation......................        --           --          --          --         53,412                --
Net loss............................                     --          --                                           --
                                           ---          ---        ----     -------      ---------        ----------
Balance September 30, 1997..........        32           --         464      25,175       (329,838)        1,444,306
Issuance of preferred stock.........        --            2          --          --             --           750,010
Conversion of notes.................        --           10          --          --             --         2,720,949
Stock-based compensation............        --           --          --          --       (515,249)          515,249
Amortization of stock-based
  compensation......................        --           --          --          --        120,288                --
Net loss............................        --           --          --          --             --                --
                                           ---          ---        ----     -------      ---------        ----------
Balance at September 30, 1998.......        32           12         464      25,175       (724,799)        5,430,514
Amortization of stock-based
  compensation (unaudited)..........        --           --          --          --        134,775                --
Net loss (unaudited)................        --           --          --          --             --                --
                                           ---          ---        ----     -------      ---------        ----------
Balance at June 30, 1999
  (unaudited).......................       $32          $12        $464     $25,175      $(590,024)       $5,430,514
                                           ===          ===        ====     =======      =========        ==========

<CAPTION>
                                       RETAINED
                                       EARNINGS
                                       (DEFICIT)        TOTAL
                                      -----------    -----------
<S>                                   <C>            <C>
Balance September 30, 1996..........  $   543,662    $ 1,530,392
Issuance of common stock............           --         99,997
Stock-based compensation............           --             --
Amortization of stock-based
  compensation......................           --         53,412
Net loss............................   (2,550,125)    (2,550,125)
                                      -----------    -----------
Balance September 30, 1997..........   (2,006,463)      (866,324)
Issuance of preferred stock.........           --        750,012
Conversion of notes.................                   2,720,959
Stock-based compensation............           --             --
Amortization of stock-based
  compensation......................           --        120,288
Net loss............................   (2,971,224)    (2,971,224)
                                      -----------    -----------
Balance at September 30, 1998.......   (4,977,687)      (246,289)
Amortization of stock-based
  compensation (unaudited)..........           --        134,775
Net loss (unaudited)................   (2,517,485)    (2,517,485)
                                      -----------    -----------
Balance at June 30, 1999
  (unaudited).......................  $(7,495,172)   $(2,628,999)
                                      ===========    ===========
</TABLE>

                            See accompanying notes.

                                      F-27
<PAGE>   102

                               MOLLOY GROUP, INC.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                           YEAR ENDED SEPTEMBER 30     NINE MONTHS ENDED JUNE 30
                                          --------------------------   --------------------------
                                             1997           1998          1998           1999
                                          -----------    -----------   -----------    -----------
                                                                              (UNAUDITED)
<S>                                       <C>            <C>           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................  $(2,550,125)   $(2,971,224)  $(1,928,232)   $(2,517,485)
Adjustments to reconcile net loss to net
  cash used by operating activities:
  Depreciation..........................      188,282        227,233       161,083        143,040
  Amortization of software costs........       67,737        224,851        67,623        352,333
  Stock-based compensation..............       53,412        120,288        76,617        134,775
  Deferred income taxes.................     (241,085)            --            --             --
  Accrued interest on convertible
     note...............................           --        212,500            --             --
Adjustments to reconcile net loss to net
  cash used in operations:
  Accounts receivable...................     (403,723)     1,407,872       669,229       (481,586)
  Other current assets..................      (39,132)       (27,732)      (56,767)        81,055
  Deposits..............................     (104,104)        53,066            --             --
  Accounts payable......................      494,980       (144,529)     (450,782)        17,193
  Accrued expenses......................      168,858         81,757       220,783         99,203
  Deferred revenue......................      287,629       (312,279)      (78,003)       862,470
                                          -----------    -----------   -----------    -----------
Net cash used by operating activities...   (2,077,271)    (1,128,197)   (1,318,449)    (1,309,002)
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant, and equipment..........     (173,903)       (83,152)      (47,268)      (109,477)
Capitalized software development
  costs.................................     (287,138)    (1,165,364)     (805,469)      (826,979)
                                          -----------    -----------   -----------    -----------
Net cash used by investing activities...     (461,041)    (1,248,516)     (852,737)      (936,456)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from officer loan..............           --        352,814            --             --
Principal payments on capital lease
  obligations...........................      (59,856)      (111,130)      (96,164)       (78,344)
Repayments on line of credit and
  long-term debt........................     (100,000)      (534,823)     (254,579)    (1,415,794)
Proceeds from long-term debt............      159,823             --            --      1,873,062
Proceeds from note payable -- line of
  credit................................           --        803,336       803,336             --
Proceeds from issuance of preferred
  stock.................................       99,997        750,012       750,012             --
Proceeds from convertible note..........    1,500,000      1,008,459     1,008,459      2,385,000
                                          -----------    -----------   -----------    -----------
Net cash provided by financing
  activities............................    1,599,964      2,268,668     2,211,064      2,763,924
                                          -----------    -----------   -----------    -----------
Net decrease in cash....................     (938,348)      (108,045)       39,878        518,466
Cash beginning of year..................    1,107,597        169,249       169,249         61,204
                                          -----------    -----------   -----------    -----------
Cash end of year........................  $   169,249    $    61,204   $   209,127    $   579,670
                                          ===========    ===========                  ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid...........................  $   155,115    $   273,784   $   252,759    $   236,048
Income taxes paid.......................  $        --    $     1,000   $        --    $        --
</TABLE>

                            See accompanying notes.
                                      F-28
<PAGE>   103

                               MOLLOY GROUP, INC.

                         NOTES TO FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

     The primary business activity of Molloy Group, Inc. (Molloy or the Company)
is the design, development, sales and service of advanced software products. The
Company also provides support services for the commercial applications of the
software.

USE OF ESTIMATES

     The preparation of the Company's financial statements in conformity with
generally accepted accounting principles 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 revenues and expenses during
the reporting periods. Actual results could differ from those estimates.

CONCENTRATION OF CREDIT RISK

     For the years ended September 30, 1997 and September 30, 1998, two
customers and one customer represented approximately 10% and 35% of total
revenues, respectively.

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.

PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the related assets which
range from three to twenty years. The cost of major renewals or betterments that
extend the useful lives of the property and equipment are capitalized as assets.
Amortization of assets recorded under capital leases is included in depreciation
expense. General repairs and maintenance are charged to income when incurred.

INCOME TAXES

     Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and tax bases of assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment with the adjustment being recorded through income tax expense in the
year of the change.

REVENUE RECOGNITION

     Revenue is recognized on the sale of software products when products have
been delivered and invoiced in accordance with SOP 91-1.

     Revenue from the sale of extended support and maintenance service contracts
is recorded as deferred revenue and recognized on a straight-line basis over the
term of the contract. Costs against those contracts are expense as incurred.

                                      F-29
<PAGE>   104
                               MOLLOY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     Revenue from the sale of training and consulting services is billed in
advance of the performance of the services. These billings are classified as
unearned revenue with revenue being recognized when the performance of the
services are complete.

SOFTWARE DEVELOPMENT COSTS

     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.

     All costs incurred prior to establishing the technological feasibility of
software products to be sold are accounted for as research and development costs
and are expensed in the period incurred. The Company recorded $67,737 and
$224,851 of amortization expense related to software development costs in 1997
and 1998, respectively.

ADVERTISING

     The Company expenses advertising as incurred. Advertising expense totaled
$295,839 and $134,541 for the years ended September 30, 1997 and 1998,
respectively.

STOCK-BASED COMPENSATION

     The Company has elected to follow Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for stock options and awards. Accordingly, compensation costs for
stock options and awards are measured as the excess, if any, of the fair value
of the Company's stock at the date of grant over the exercise price of the stock
option or award.

STATEMENT OF CASH FLOWS

     Noncash transactions for the years ended September 30, 1997 and 1998
include capital lease additions of approximately $199,387 and $144,287,
respectively.

     Preferred stock was issued upon the conversion of $2,508,459 of convertible
notes and $212,500 of accrued interest.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     In October 1997, the AICPA issued Statement of Position 97-2 (SOP 97-2),
"Software Revenue Recognition," which changes the requirements for revenue
recognition effective for transactions that the Company will enter into
beginning October 1, 1998. Beginning on October 1, 1998 revenue will be
recognized on the sale of software products when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable and
collectibility is considered probable. The adoption of this pronouncement is not
expected to materially affect the Company's revenue recognition policies.

     In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." The
adoption of this pronouncement is not expected to materially affect the
Company's revenue recognition policies.

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities.
                                      F-30
<PAGE>   105
                               MOLLOY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Because the Company does not currently hold any derivative instruments and does
not engage in hedging activities, the adoption of SFAS No. 133 is not expected
to have a significant impact on its financial position, results of operations or
cash flows. The Company will be required to adopt SFAS No. 133, as amended, for
the year ending December 31, 2001.

INTERIM FINANCIAL INFORMATION

     The accompanying statements of operations and cash flows for the nine
months ended June 30, 1998 and 1999, and the consolidated statement of
shareholders' equity for the nine months ended June 30, 1999 ("interim financial
statements") have been prepared by the Company in accordance with generally
accepted accounting principles for interim financial information and with
Article 10 of Regulation S-X. Accordingly, they do not included all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The interim financial statements include all
adjustments, consisting of only normal recurring adjustments, considered
necessary for a fair presentation of the results of interim periods. Operating
results for the nine-month period ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the fiscal year ended
September 30, 1999.

2. CAPITAL LEASES

     The Company leases certain equipment under capital leases expiring in
various years through the year 2002. The assets are depreciated over the lower
of their related lease terms or their estimated productive lives. Depreciation
of assets under capital leases is included in depreciation expense for the years
ended September 30, 1997 and 1998.

     The following is a schedule of the future minimum lease payments under
capital leases by year together with the present value of the net minimum lease
payments:

<TABLE>
<CAPTION>
                                                          YEAR ENDING
                                                          SEPTEMBER 30
                                                          ------------
<S>                                                       <C>
1999..................................................      $155,989
2000..................................................       124,870
2001..................................................        18,751
2002..................................................         1,922
                                                            --------
Total minimum lease payments..........................       301,532
Less amount representing interest.....................        31,182
                                                            --------
Present value of net minimum lease payments...........       270,350
Less current portion..................................       130,171
                                                            --------
Total long-term capital lease obligation..............      $140,179
                                                            ========
Capital leases classified as property and equipment
  consist of:
Computer equipment....................................      $282,575
Less accumulated depreciation.........................       136,743
                                                            --------
                                                            $145,832
                                                            ========
</TABLE>

     Interest rates on capitalized leases vary from 4.03% to 22.10% and are
imputed based on the lower of the Company's incremental borrowing rate at the
inception of each lease or the lessor's implicit rate of return.

     Certain capital leases provided for purchase options. Generally, purchase
options are at a price lower than the expected fair value of the property at the
expiration of the lease term.

                                      F-31
<PAGE>   106
                               MOLLOY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. COMMITMENTS

     The Company leases its office under a noncancelable operating lease.

     Minimum future lease obligations under such noncancelable operating lease
as of September 30, 1998 are as follows:

<TABLE>
<CAPTION>
                                                          YEAR ENDING
                                                          SEPTEMBER 30
                                                          ------------
<S>                                                       <C>
1999..................................................     $  512,989
2000..................................................        548,941
2001..................................................        584,232
2002..................................................        186,744
                                                           ----------
                                                           $1,832,906
                                                           ==========
</TABLE>

     Total rent expense for the years ended September 30, 1997 and 1998 was
$335,334 and $513,189, respectively.

4. NOTE PAYABLE OFFICER

     During 1998, the Company entered into a note payable agreement with one of
its officers which is due March 31, 1999. The note payable bears an interest
rate of 15% with interest and principal due at maturity. The balance due at
September 30, 1998 was $352,814.

5. LINE OF CREDIT

     In February 1998, the Company entered into a $2,000,000 line of credit
agreement with a bank which initially expired in February 1999 and contains
provisions for automatic one-year renewals. The line of credit agreement bears
an interest rate of prime plus 2.5% subject to an interest rate flow of 9% with
minimum monthly fees of $7,500. The balance due as of September 30, 1998 was
$803,336.

     The line of credit is secured by substantially all of the Company's assets.
All payments on the Company's accounts receivable are remitted to a lock box at
the lending institution and are used to pay the outstanding balance on the line
of credit.

     The Company also maintained a line of credit which was secured by
substantially all of the Company's assets and personally guaranteed by the
Company's President. Interest on the line of credit was charged at prime plus
 .25%. The balance at September 30, 1997 was $375,000. The line of credit was
repaid in 1998.

6. LONG-TERM DEBT

     The Company had a note payable to a bank with an interest rate of 8.25%
payable in 36 monthly installments of $6,288.

     The following summarizes the amounts related to the note:

<TABLE>
<CAPTION>
                                                                 1997     1998
                                                               --------   ----
<S>                                                            <C>        <C>
Balance due at September 30................................    $159,823    $--
Less current portion.......................................      64,868    --
                                                               --------    --
Long-term portion of note payable at September 30..........    $ 94,955    $--
                                                               ========    ==
</TABLE>

7. SUBORDINATED CONVERTIBLE NOTE

     The Company entered into a subordinated convertible note agreement with an
investor bearing interest at 10% per annum. This note was convertible into
preferred stock if a sale of any class of stock in excess of $750,000 occurred.
The balance of the convertible note was $1,500,000 at September 30, 1997.
                                      F-32
<PAGE>   107
                               MOLLOY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Also, during 1998 an additional subordinated convertible note was issued to an
investor for $1,000,000. As more fully described in Note 13, in September 1998,
the principal and interest related to the subordinated convertible notes were
converted into 87,606 shares of Series B Noncumulative Convertible Preferred
Stock.

8. INCOME TAXES

     The provision for income tax expense (benefit) consists of the following as
of September 30:

<TABLE>
<CAPTION>
                                                                1997      1998
                                                              ---------   ----
<S>                                                           <C>         <C>
Federal:
  Current...................................................  $      --    $--
  Deferred..................................................   (187,451)   --
State
  Current...................................................         --    --
  Deferred..................................................    (53,434)   --
                                                              ---------    --
                                                              $(240,885)   $--
                                                              =========    ==
</TABLE>

     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:

<TABLE>
<CAPTION>
                                                       1997          1998
                                                     ---------    -----------
<S>                                                  <C>          <C>
Income tax benefit computed at statutory federal
  income tax rate................................    $ 948,943    $ 1,009,825
State income taxes, net of federal tax benefit,
  if any.........................................      165,786        176,422
Non-deductible items.............................      (36,056)       (69,337)
Federal deferred tax asset valuation allowance
  adjustment.....................................     (837,788)    (1,116,910)
                                                     ---------    -----------
Total benefit for income taxes...................    $ 240,885    $        --
                                                     =========    ===========
</TABLE>

     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 are as follows:

<TABLE>
<CAPTION>
                                                         1997          1998
                                                      ----------    ----------
<S>                                                   <C>           <C>
Deferred tax assets (liabilities)...................  $ (446,305)   $  103,852
  Software development costs........................    (155,098)     (530,738)
  Deferred revenue..................................     326,731       202,007
  Accrued expenses..................................      43,166        39,940
  Net operating losses..............................   1,069,294     2,139,637
                                                      ----------    ----------
Total net deferred tax assets.......................     837,788     1,954,698
                                                      ----------    ----------
Valuation allowance.................................     837,788     1,954,698
                                                      ----------    ----------
Net deferred tax asset..............................  $       --    $       --
                                                      ==========    ==========
</TABLE>

     Management has recorded a valuation allowance against the deferred tax
assets until such time that the Company demonstrates an ability to consistently
produce taxable income.

                                      F-33
<PAGE>   108
                               MOLLOY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     The Company has net operating loss carryovers to offset future income tax.
If not used, these carryovers will expire as follows:

<TABLE>
<CAPTION>
                                                           YEAR ENDING
                                                          SEPTEMBER 30,
                                                          -------------
<S>                                                       <C>
2011..................................................     $  282,126
2012..................................................      2,395,125
2018..................................................      2,679,878
                                                           ----------
Total.................................................     $5,357,129
                                                           ==========
</TABLE>

9. STOCK-BASED COMPENSATION PLANS

     In November 1996, the Company approved the 1996 Stock Plan (the Plan). The
Plan was intended to provide the Company the ability to grant incentive stock
options (ISOs) to employees of the Company, to provide an opportunity for
employees and vendors to purchase stock in the Company through the exercise of
Nonqualified Stock Options (NQSOs) and to provide the Company an opportunity to
award shares of stock in the Company at the discretion of the Company's board of
directors. The Plan provides for the Company to issue ISOs, NQSOs and stock
awards such that the aggregate number of shares upon exercise is limited to
881,470 shares. The exercise price and the vesting period of the ISOs and NQSOs
is established by the board of directors.

     Pro forma information regarding net loss for options granted is required by
SFAS No. 123, "Accounting for Stock-Based Compensation," and has been determined
as if the Company had accounted for its employee stock options under the fair
value method of SFAS No. 123. The fair value for these option grants was
estimated at the dates of grant using a Black-Scholes option pricing model with
the following assumptions:

<TABLE>
<CAPTION>
                                                            1997       1998
                                                           -------    -------
<S>                                                        <C>        <C>
Risk-free interest rate..................................     6.25%      6.25%
Dividend yield...........................................        0%         0%
Volatility factor........................................       .6         .6
Weighted-average expected life of options................  3 years    3 years
Options granted..........................................  388,500    356,500
Weighted-average fair market value of options granted
  during the year........................................     1.71       1.74
</TABLE>

     Had compensation cost for the Company's stock option plans been determined
based upon the fair value at the grant date for awards under the plan consistent
with the methodology prescribed by SFAS No. 123, the Company's net loss would
have been increased by approximately $115,000 and $211,000 in 1997 and 1998,
respectively.

                                      F-34
<PAGE>   109
                               MOLLOY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes option activity for the years ended
September 30, 1997 and 1998:

<TABLE>
<CAPTION>
                                                                                  WEIGHTED-
                                                   OPTIONS      OPTION PRICE       AVERAGE
                                                 OUTSTANDING     PER SHARE      EXERCISE PRICE
                                                 -----------    ------------    --------------
<S>                                              <C>            <C>             <C>
Balance at September 30, 1996..................         --            --               --
Options granted................................    388,500         $1.50            $1.50
Options forfeited..............................     14,000         $1.50            $1.50
                                                   -------
Balance at September 30, 1997..................    374,500         $1.50            $1.50
Options granted................................    356,500         $1.50            $1.50
Options forfeited..............................    143,000         $1.50            $1.50
                                                   -------
Balance at September 30, 1998..................    588,000         $1.50            $1.50
                                                   =======
</TABLE>

10. 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 the provisions
of the Plan, participants may contribute up to 15% of their eligible
compensation to the Plan. No contributions were made to the Plan in 1997 or
1998.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying amounts of the Company's financial instruments consisting
principally of cash and cash equivalents, accounts receivable, accounts payable
and debt approximate their fair values at September 30, 1997 and 1998.

12. STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)

     The Company has two classes of capital stock outstanding consisting of
Common Stock, par value $.0001, and preferred stock. There are two series of
preferred stock: Series A, Noncumulative Preferred Stock, par value $.0001
(Series A Preferred Stock) and Series B, Noncumulative Convertible Preferred
Stock, par value $.001 (Series B Preferred Stock), as discussed below.

COMMON STOCK

     The Company has authorized 7,000,000 shares of common stock of which
4,643,715 was issued and outstanding as of September 30, 1997 and 1998. In
December 1996, the Company issued 33,334 shares of common stock for $99,997.

     The Company has reserved the following number of shares of common stock:

<TABLE>
<CAPTION>
SHARES                                         PURPOSE OF ISSUANCE
------                                    ------------------------------
<S>                                       <C>
1,118,000...............................  Upon conversion of Series B
 588,000................................  Upon exercise of stock options
 111,538................................  Upon exercise of warrants
</TABLE>

SERIES A PREFERRED STOCK

     In September 1996, the Company sold 323,077 shares of Series A Preferred
Stock with 61,538 detachable warrants for approximately $969,000. Each warrant
entitles the holder thereof to one share of common stock of the Company at an
exercise price of $3.00 per share. (See discussion of warrants below.)

                                      F-35
<PAGE>   110
                               MOLLOY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series A Preferred Stock shall
be entitled to receive, prior and in preference to any distribution of any of
the assets of the Company to the holders of common stock by reason of their
ownership thereof, an amount per share equal to $3.00 (subject to adjustment for
stock splits, combinations, reclassifications or similar events affecting such
shares) for each outstanding share of Series A Preferred Stock plus an amount
equal to all dividends declared but unpaid. If, upon the occurrence of such an
event, the assets and funds thus distributed among the holders of the Series A
Preferred Stock shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amounts, then the entire assets and funds of the
Company legally available for distribution shall be distributed ratably among
the holders of the Series A Preferred Stock in proportion to the preferential
amount each such holder is otherwise entitled to receive in respect to such
shares.

     Series A Preferred Stock shall be convertible, at the option of the holder
thereof, at any time after the date of issuance into the number of fully-paid
and nonassessable shares of common stock as is convertible on a one-to-one
basis.

SERIES B PREFERRED STOCK

     In May 1998, the Company sold 24,194 shares of Series B Preferred Stock at
an offering price of $31.00 per share. Each share is convertible into common
stock at a ratio of $3.10 per share or ten shares of common stock for each share
of Series B Preferred Stock. Proceeds from the sale of the 24,194 shares was
approximately $750,000.

     In September 1998, the amounts related to the Company's subordinated
convertible notes were converted into 87,606 shares of Series B Preferred Stock
at a conversion rate of approximately $24.17 per share.

WARRANTS

     In addition to the 61,538 detachable warrants related to the Series A
Preferred Stock as described above, the Company also issued 50,000 warrants to
an employee in September 1996, each of which entitles the holder thereof to one
share of common stock of the Company at an exercise price of $4.00 per share.

     As of September 30, 1998, the Company has 61,538 warrants outstanding at an
exercise price of $3.00 per share and 50,000 warrants with an exercise price of
$4.00 per share. There were no warrants to purchase shares exercised during the
years ended September 30, 1997 and 1998.

13. SUBSEQUENT EVENTS -- UNAUDITED

     On November 13, 1998 and in two subsequent tranches on December 2, 1998 and
December 4, 1998, the Company raised $1,751,210 by entering into subordinated
convertible note agreements with various entities, including C.E. Unterberg
Towbin, LP, Thomas I. Unterberg, Unterberg Towbin Capital Partners I, Marjorie
and Clarence E. Unterberg Foundation, Inc. (Unterberg Affiliates) for this
amount. The Unterberg Affiliates investment was $852,833 in the aggregate.

     On April 29, 1999, the Company raised $500,000 by entering into a
subordinated convertible bridge note agreement with Unterberg Towbin Capital
Partners I for this amount.

     On June 25, 1999, the Company raised $500,000 by entering into a
subordinated convertible bridge note agreement with Unterberg Towbin Capital
Partners I for this amount.

     On July 13, 1999, the Company raised $200,000 by entering into a
subordinated convertible bridge note agreement with Unterberg Towbin Capital
Partners I for this amount.

                                      F-36
<PAGE>   111
                               MOLLOY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     On July 23, 1999 ServiceWare, Inc. (ServiceWare) acquired the outstanding
preferred stock, common stock, warrants and stock options of the Molloy Group,
Inc. (Molloy). The acquisition was executed through the issuance of stock,
warrants and options of ServiceWare to Molloy valued at $14.2 million plus
transaction costs of $445,000.

                                      F-37
<PAGE>   112

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

     YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
NEITHER SERVICEWARE TECHNOLOGIES, INC. NOR ANY UNDERWRITER HAS AUTHORIZED ANYONE
TO PROVIDE PROSPECTIVE INVESTORS WITH INFORMATION DIFFERENT FROM THAT CONTAINED
IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN
OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE SUCH OFFER OR SALE IS
NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS
OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR ANY SALE OF OUR STOCK.
                            ------------------------

                               TABLE OF CONTENTS
                            ------------------------


<TABLE>
<CAPTION>
                                        PAGE
                                        ----
<S>                                     <C>
Prospectus Summary....................    1
Summary Consolidated Financial
  Information.........................    3
Risk Factors..........................    4
Corporate Information.................   16
Use of Proceeds.......................   16
Dividend Policy.......................   17
Dilution..............................   18
Capitalization........................   19
Selected Historical Financial Data....   20
Unaudited Pro Forma Consolidated
  Financial Data......................   21
Management's Discussion and Analysis
  of Financial Condition and Results
  of Operations.......................   23
Business..............................   32
Management............................   43
Certain Transactions..................   52
Principal Stockholders................   56
Description of Capital Stock..........   59
Shares Eligible for Future Sale.......   62
Material U.S. Tax Considerations for
  Non-U.S. Holders....................   64
Underwriting..........................   67
Legal Matters.........................   69
Experts...............................   69
Where You Can Find Additional
  Information.........................   69
Index to Financial Statements.........  F-1
</TABLE>


Until                , 2000 (25 days after the date of this prospectus), all
dealers that effect transactions in the common stock offered hereby, whether or
not participating in this distribution, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.

------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
                                4,500,000 SHARES

                               [SERVICEWARE LOGO]
                                  COMMON STOCK
                            ------------------------

                                   PROSPECTUS
                            ------------------------
                            BEAR, STEARNS & CO. INC.

                                    SG COWEN

                                 WIT SOUNDVIEW

                             C.E. UNTERBERG, TOWBIN
                                          , 2000
------------------------------------------------------
------------------------------------------------------
<PAGE>   113

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

     The following table sets forth the expenses payable by us in connection
with the offering (other than underwriting compensation). All of such amounts
(except the SEC registration fee and the NASD filing fee) are estimated.

<TABLE>
<S>                                                             <C>
SEC Registration Fee........................................    $   22,770
NASD filing fee.............................................         6,125
Nasdaq National Market Listing Fee..........................        95,000
Accounting Fees and Expenses................................       500,000
Legal Fees and Expenses.....................................       500,000
Printing Expenses...........................................       300,000
Blue Sky Qualification Fees and Expenses....................        10,000
Transfer Agent's Fee........................................         3,500
Miscellaneous...............................................       200,000
                                                                ----------
          Total.............................................    $1,637,395
                                                                ==========
</TABLE>

---------------
* To be completed by amendment.

ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS

     Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL")
permits a corporation, in its certificate of incorporation, to limit or
eliminate, subject to certain statutory limitations, the liability of directors
to the corporation or its stockholders for monetary damages for breaches of
fiduciary duty, except for liability (a) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (b) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (c) under Section 174 of the DGCL, or (d) for any transaction from which
the director derived an improper personal benefit. Article VII of the
registrant's Amended and Restated Certificate of Incorporation, to be in effect
upon consummation of the offering of the securities to which this registration
statement relates, provides that the personal liability of directors of the
registrant is eliminated to the fullest extent permitted by Section 102(b)(7) of
the DGCL.

     Under Section 145 of the DGCL, a corporation has the power to indemnify
directors and officers under certain prescribed circumstances and subject to
certain limitations against certain costs and expenses, including attorneys'
fees actually and reasonably incurred in connection with any action, suit or
proceeding, whether civil, criminal, administrative or investigative, to which
any of them is a party by reason of being a director or officer of the
corporation if it is determined that the director or officer acted in accordance
with the applicable standard of conduct set forth in such statutory provision.
Article VII of the registrant's Amended and Restated Bylaws, to be in effect
upon consummation of the offering of the securities to which this registration
statement relates, provides that the registrant will indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding by reason of the fact that he is or was
(or to the extent permitted under Delaware law, has agreed to be) a director,
officer, employee or agent of the registrant, or is or was serving (or, to the
extent permitted under Delaware law, has agreed to serve) at the request of the
registrant as a director, officer, employee or agent of another entity, against
certain liabilities, costs and expenses. Article VII further permits the
registrant to maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the registrant, or is or was serving at
the request of the registrant as a director, officer, employee or agent of
another entity, against any liability asserted against such person and incurred
by such person in any such capacity or arising out of his status as such,
whether or not the

                                      II-1
<PAGE>   114

registrant would have the power to indemnify such person against such liability
under the DGCL. The registrant expects to maintain directors' and officers'
liability insurance.

ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES.

     We have sold and issued the following securities since January 1997:

          1. We issued and sold 1,314,456 shares of our common stock to
     employees for an aggregate purchase price of $2,708,170 pursuant to the
     exercise of options under our 1996 stock option plan.

          2. In July 1999, we sold an aggregate of (a) 2,400,000 shares of our
     Series D preferred stock, and (b) common stock warrants for the purchase of
     360,000 shares of our common stock in the aggregate, for an aggregate
     purchase price of $9.0 million to a group of 22 investors.

          3. In connection with our acquisition of Molloy Group, Inc. in July
     1999, we issued 2,647,984 shares of our Series E preferred stock to the
     former holders of preferred stock of the Molloy Group, Inc. (b) common
     stock warrants for the purchase of 40,473 shares of our common stock in the
     aggregate and (c) 1,512,307 shares of our common stock to former holders of
     common stock of the Molloy Group, Inc.

          4. In April, May and June 1999, PolyVentures II, L.P., Geocapital III,
     L.P. and Norwest Equity Partners V loaned us $150,000, $250,000 and
     $650,000, respectively, for short term working capital purposes. As partial
     consideration for these loans, we issued warrants to purchase 4,000, 6,667
     and 17,333 shares of our common stock to each of PolyVentures II, L.P.,
     Geocapital III, L.P. and Norwest Equity Partners V, respectively.

          5. We issued to PNC Bank warrants to purchase 6,814 shares of our
     common stock as part of the consideration for a bridge loan in the amount
     of $0.75 million which was repaid with the proceeds from the sale of our
     Series D convertible preferred stock.


          6. On June 2, 2000, we sold an aggregate of 1,325,000 shares of our
     Series F convertible preferred stock, par value $0.01 per share, at a
     purchase price of $8.00 per share to a total of nine accredited investors,
     eight of which are current stockholders and one of which is a new
     accredited investor. The eight current stockholders are CEO Venture Fund
     III, Birchmere Ventures II, Norwest Equity Partners V, Lovett Miller
     Venture Fund II, Geocapital III, PNC Investment Corp. and two affiliates of
     C.E. Unterberg, Towbin. The new investor is EDS. The investors received
     certain registration rights in connection with the purchase of the Series F
     convertible preferred stock. Each share of Series F convertible preferred
     stock is automatically convertible into one share of common stock upon the
     completion of this offering, subject to adjustment.


          7. On June 2, 2000, two entities associated with C.E. Unterberg,
     Towbin purchased for $3.0 million an aggregate of 375,000 shares of our
     Series F convertible preferred stock.

          8. On June 2, 2000, we granted 233,333 warrants to buy common stock to
     EDS. The warrant's purchase price shall be $8.00 per share, provided,
     however, that if the closing of our initial public offering occurs on or
     before December 31, 2000, the warrant's purchase price will be adjusted to
     equal the price per share at which we sell shares of common stock to the
     public in the initial public offering. The warrants are contingently
     exercisable based upon us and EDS executing certain commercial agreements
     and meeting certain other targets.

     The issuances described in Item 15(1) were deemed exempt from registration
under the Securities Act in reliance upon Rule 701 promulgated under the
Securities Act or Section 4(2) of the Securities Act. The issuances of the
securities described in item 15(2) and 15(3) were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such Act as
transactions by an issuer not involving any public offering. In addition, the
recipients of securities in each such transactions represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were affixed
to the share certificates

                                      II-2
<PAGE>   115

issued in such transactions. All recipients had adequate access, through their
relationships with us, to information about us.

ITEM 16.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

     (a) The following exhibits are filed as part of this registration
statement:


<TABLE>
<C>       <S>
   **1.0  Form of Underwriting Agreement between the Registrant and
          the Underwriters.
   **3.1  Form of Certificate of Incorporation, as amended, of the
          Registrant to be filed prior to completion of this offering.
    *3.2  Form of Bylaws of the Registrant to be filed prior to
          completion of this offering.
    *4.1  Registration Rights Agreement dated July 23, 1999.
    *5.1  Form of Opinion of Morgan, Lewis & Bockius LLP as to the
          validity of the securities being offered.
   *10.1  Loan Agreement, dated December 10, 1999, between the
          Registrant and PNC Bank.
   *10.2  Agreement and Plan of Merger, dated July 13, 1999, between
          the Registrant and the parties thereto in connection with
          the acquisition of the Molloy Group.
   *10.3  Commercial Lease Agreement, dated May 31, 1995, as amended,
          between the Registrant and Sibro Enterprises, for property
          located in Oakmont, Pennsylvania.
   *10.4  First Amendment of Lease, dated June 30, 1998, between the
          Registrant and PW/MS OP SUB I, LLC., for property located in
          Piscataway, New Jersey
   *10.5  2000 Stock Incentive Plan of Registrant.
   *10.6  Employee Stock Purchase Plan of Registrant.
   *10.7  ServiceWare, Inc. Amended and Restated Stock Option Plan.
  *+10.8  Software Remarketing Agreement, dated August 3, 1999,
          between the Registrant and Tivoli Systems, Inc.
  *+10.9  Microsoft Corporation Serviceware Knowledge Base License
          Agreement, dated June 29, 1998, between the Registrant and
          Microsoft Corporation.
  *+10.10 Microsoft Knowledge Base Non-Exclusive License Agreement,
          dated June 29, 1998, between the Registrant and Microsoft
          Corporation, as amended.
  *+10.11 Microsoft Knowledge Base Non-Exclusive License Agreement for
          Subscription Services, dated March 3, 1999, between the
          Registrant and Microsoft Corporation.
   *10.12 Loan Agreements between the Registrant and certain of the
          Registrant's officers during the first quarter of 2000.
   *10.13 Employment letter of Mark Tapling, dated July 22, 1999.
   *10.14 Employment letter of Mark Finkel, dated January 18, 2000.
   *10.15 Compensation letter of Rajiv Enand, dated January 19, 2000.
   *10.16 Compensation, Consultation and Severance Agreement, dated
          July 23, 1999, between the Registrant and Bruce Molloy.
   *10.17 License Agreement and Assignment, each dated July 23, 1999,
          between the Registrant and Bruce Molloy.
 **+10.18 Master Alliance Agreement, dated June 30, 2000, between the
          Registrant and Electronic Data Systems Corporation.
 **+10.19 Master Software License Agreement, dated June 30, 2000,
          between the Registrant and Electronic Data Systems
          Corporation.
  **10.20 Common Stock Purchase Warrant of the Registrant in favor of
          Electronic Data Systems Inc.
</TABLE>


                                      II-3
<PAGE>   116

<TABLE>
<C>       <S>
  **10.21 Warrant Purchase Agreement, dated June 2, 2000 between the
          Registrant and Electronic Data Systems.
  **23.1  Consent of Ernst & Young LLP to Amendment No. 4 to the
          Registration Statement dated July 12, 2000.
   *24.1  Power of Attorney.
   *27.1  Financial Data Schedule.
   *99.1  Consent of International Data Corporation dated March 28,
          2000.
   *99.2  Consent of Jupiter Communications dated March 28, 2000.
   *99.3  Consent of Forrester Research, Inc. dated June 5, 2000.
</TABLE>


---------------
+ We have applied for confidential treatment with respect to certain portions of
  these documents.


 * Previously filed.



** Filed herewith.


     (b) Financial statement schedules have been omitted because they are
inapplicable, are not required under applicable provisions of Regulation S-X, or
the information that would otherwise be included in such schedules is contained
in our financial statements or accompanying notes.

ITEM 17.  UNDERTAKINGS.

     (a) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.

     (b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

     (c) The undersigned registrant hereby undertakes that:

          (1) For the purposes determining any liability under the Securities
     Act of 1933, the information omitted from the form of prospectus filed as
     part this registration statement in reliance upon Rule 430A and contained
     in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
     or (4) or 497(h) under the Securities Act shall be deemed to be part of
     this registration statement as of the time it was declared effective.

          (2) For the purpose of determining any liability under the Securities
     Act of 1933, each post-effective amendment that contains a form of
     prospectus shall be deemed to be a new registration statement relating to
     the securities offered therein, and the offering of such securities at that
     time shall be deemed to be the initial bona fide offering thereof.

                                      II-4
<PAGE>   117

                                   SIGNATURES


     Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, the State of
New York, on the 13th day of July, 2000.


                                          ServiceWare Technologies, Inc.

                                          By: /s/     MARK TAPLING
                                            ------------------------------------
                                              Name: Mark Tapling
                                              Title: President and Chief
                                              Executive Officer

     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.


<TABLE>
<CAPTION>
                     SIGNATURE                                     TITLE                       DATE
                     ---------                                     -----                       ----
<C>                                                  <S>                                   <C>
                 /s/ MARK TAPLING                    President and Chief Executive         July 13, 2000
---------------------------------------------------  Officer
                   Mark Tapling

                  /s/ MARK FINKEL                    Vice President and Chief Financial    July 13, 2000
---------------------------------------------------  Officer
                    Mark Finkel

                  /s/ RAJIV ENAND                    Director                              July 13, 2000
---------------------------------------------------
                    Rajiv Enand

                  /s/ KEVIN HALL*                    Director                              July 13, 2000
---------------------------------------------------
                    Kevin Hall

               /s/ SUSANNE HARRISON*                 Director                              July 13, 2000
---------------------------------------------------
                 Susanne Harrison

                 /s/ BRUCE MOLLOY*                   Director                              July 13, 2000
---------------------------------------------------
                   Bruce Molloy

               /s/ TIMOTHY WALLACE*                  Director                              July 13, 2000
---------------------------------------------------
                  Timothy Wallace
                  ---------------

               *By: /s/ RAJIV ENAND
   ---------------------------------------------
                    Rajiv Enand
                 Attorney-in-fact
</TABLE>


                                      II-5
<PAGE>   118

                                 EXHIBIT INDEX


<TABLE>
<C>       <S>
   **1.0  Form of Underwriting Agreement between the Registrant and
          the Underwriters.

   **3.1  Form of Amended and Restated Certificate of Incorporation of
          the Registrant to be filed prior to completion of this
          offering.
    *3.2  Form of Bylaws of the Registrant to be filed prior to
          completion of this offering.
    *4.1  Registration Rights Agreement dated July 23, 1999.
    *5.1  Form of Opinion of Morgan, Lewis & Bockius LLP as to the
          validity of the securities being offered.
   *10.1  Loan Agreement, dated December 10, 1999, between the
          Registrant and PNC Bank.
   *10.2  Agreement and Plan of Merger, dated July 13, 1999, between
          the Registrant and the parties thereto in connection with
          the acquisition of the Molloy Group.
   *10.3  Commercial Lease Agreement, dated May 31, 1995, as amended,
          between the Registrant and Sibro Enterprises, for property
          located in Oakmont, Pennsylvania.
   *10.4  First Amendment of Lease, dated June 30, 1998, between the
          Registrant and PW/MS OP SUB I, LLC., for property located in
          Piscataway, New Jersey
   *10.5  2000 Stock Incentive Plan of Registrant.
   *10.6  Employee Stock Purchase Plan of Registrant.
   *10.7  ServiceWare, Inc. Amended and Restated Stock Option Plan.
  *+10.8  Software Remarketing Agreement, dated August 3, 1999,
          between the Registrant and Tivoli Systems, Inc.
  *+10.9  Microsoft Corporation Serviceware Knowledge Base License
          Agreement, dated June 29, 1998, between the Registrant and
          Microsoft Corporation.
  *+10.10 Microsoft Knowledge Base Non-Exclusive License Agreement,
          dated June 29, 1998, between the Registrant and Microsoft
          Corporation, as amended.
  *+10.11 Microsoft Knowledge Base Non-Exclusive License Agreement for
          Subscription Services, dated March 3, 1999, between the
          Registrant and Microsoft Corporation.
   *10.12 Loan Agreements between the Registrant and certain of the
          Registrant's officers during the first quarter of 2000.
   *10.13 Employment letter of Mark Tapling, dated July 22, 1999.
   *10.14 Employment letter of Mark Finkel, dated January 18, 2000.
   *10.15 Compensation letter of Rajiv Enand, dated January 19, 2000.
   *10.16 Compensation, Consultation and Severance Agreement, dated
          July 23, 1999, between the Registrant and Bruce Molloy.
   *10.17 License Agreement and Assignment, each dated July 23, 1999,
          between the Registrant and Bruce Molloy.
 **+10.18 Master Alliance Agreement, dated June 30, 2000, between the
          Registrant and Electronic Data Systems Corporation.
 **+10.19 Master Software License Agreement, dated June 30, 2000,
          between the Registrant and Electronic Data Systems
          Corporation.
  **10.20 Common Stock Purchase Warrant of the Registrant in favor of
          Electronic Data Systems Inc.
  **10.21 Warrant Purchase Agreement, dated June 2, 2000 between the
          Registrant and Electronic Data Systems.
  **23.1  Consent of Ernst & Young LLP to Amendment No. 3 to the
          Registration Statement dated June 15, 2000.
</TABLE>

<PAGE>   119

<TABLE>
<C>       <S>
   *24.1  Power of Attorney.
   *27.1  Financial Data Schedule.
   *99.1  Consent of International Data Corporation dated March 28,
          2000.
   *99.2  Consent of Jupiter Communications dated March 28, 2000.
   *99.3  Consent of Forrester Research, Inc. dated June 5, 2000.
</TABLE>


---------------
+ We have applied for confidential treatment with respect to certain portions of
  these documents.


*  Previously filed.



** Filed herewith.



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