UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number 000-30277

ServiceWare Technologies, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code:

(408) 863-5800

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

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

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

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

Common Stock, par value $.01 per share

(Title of Class)

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

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

     The aggregate market value of common equity held by non-affiliates of the registrant as of June 30, 2004, the last business day of the registrant’s most recently completed second quarter, was $18,981,403, computed by reference to the price at which the common equity was last sold on the Over the Counter Bulletin Board on June 30, 2004, as reported in The Wall Street Journal. This figure has been calculated by excluding shares owned beneficially by directors and executive officers as a group from total outstanding shares solely for the purpose of this response.

     The number of shares of the registrant’s Common Stock outstanding as of the close of business on March 16, 2005 was 8,754,785.

DOCUMENTS INCORPORATED BY REFERENCE

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

EXHIBITS INDEX IS LOCATED ON PAGE 70

SERVICEWARE TECHNOLOGIES, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2004

TABLE OF CONTENTS

PART I

      On February 8, 2005, ServiceWare Technologies, Inc. combined with Kanisa Inc. (“Kanisa”) through the merger of a wholly owned subsidiary of ours with and into Kanisa. As a result, Kanisa became our wholly owned subsidiary. Kanisa was founded in 1997 and has pioneered the use of a knowledge management platform for customer services applications. Prior to the merger, Kanisa was a privately held organization and its technology has resulted in broad industry recognition and awards for its products and performance. Upon the consummation of the merger, we relocated our headquarters to Kanisa’s offices in Cupertino, California. Our board of directors has approved renaming our company Knova Software, Inc. We began doing business as Knova Software as of March 21, 2005, even though our stockholders have not yet formally approved the name change. The matter will be voted on by the shareholders in our annual meeting to take place in May 2005.

      As used in this report, the terms “we”, “us”, “our”, “our company” and “Knova” means ServiceWare Technologies, Inc., d/b/a Knova Software, Inc. and its subsidiaries.

Overview

      We are a provider of customer relationship management (CRM) software applications, specifically applications that enable customer service organizations to more effectively resolve service requests and answer questions. Built on knowledge management and search technologies, our service resolution management (SRM) applications optimize the resolution process across multiple service channels, including contact centers, self-service websites, help desk, email and chat. Our SRM applications complement, integrate with, and enhance traditional CRM, contact center, and help desk applications by providing patented knowledge management solutions that improve service delivery. Our customers include some of the largest companies in the world and our products enable them to reduce operating and service delivery costs, improve customer satisfaction, and increase revenues.

      We are principally engaged in the design, development, marketing and support of software applications and services. Substantially all of our revenues are derived from a perpetual license of our software products, the related professional services and the related customer support, otherwise known as maintenance. We license our software in arrangements in which the customer purchases a combination of software, maintenance and/or professional services, such as our training and implementation services. Maintenance, which includes technical support and product updates, is typically sold with the related software license and is renewable at the option of the customer on an annual basis after the first year. Our professional services and technical support organizations provide a broad range of implementation services, training, and technical support to our customers and implementation partners. Our service organization has significant product and implementation expertise and is committed to supporting customers and partners throughout every phase of their adoption and use of our solutions.

Products

      We recently announced our new identity as Knova Software and began selling a single product line of Knova software applications.

      By streamlining processes and providing customer service and technical support personnel, as well as customers and employees, with complete access to enterprise knowledge and content, Knova applications enable organizations to increase customer satisfaction and reduce operating and service delivery costs. For example,

      The following is a description of our products.

      The Knova Application Suite is a suite of knowledge powered service resolution management applications designed to enable companies to better service and retain their customers and employees. Specifically, we believe our Knova Application Suite enables companies we service to improve employee productivity, improve customer service, and increase customer satisfaction and revenue.

      The Knova Application Suite consists of the following business applications:

      The Knova Application Suite is built on and deployed with the Knova Knowledge Platform. The Knova Knowledge Platform features several core technology components and capabilities accessed by Knova applications and used by customers. These include:

      We employ industry-standard technologies to create an object-based open architecture for all of our applications. The architecture is based on the Java 2 Enterprise Edition (J2EE) framework that includes components specifically designed to take advantage of the modern web environment. We also have provided some of our applications based on Microsoft’s .NET framework.

      Our solutions run on leading operating systems and databases and we are continually updating our software to run on common environments. Currently we support existing customers on Windows, Solaris and NT operating environments and a wide range of J2EE-compliant application servers.

      Our technology is also based on the popular Extensible Markup Language (XML) and Simple Object Access Protocol (SOAP) framework. The use of XML and SOAP standards enable our products to be more easily integrated with enterprise systems and web services.

Strategy

      Our objective is to become the leading provider of service resolution management applications that enable our customers to reduce service and operating costs, improve customer satisfaction, and thereby increase revenues. To achieve our goal, we intend to:

Services

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

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

Customers

      We maintain a referenceable and active customer list of over 150 customers. We have traditionally marketed our products and services to Global 2000 call centers and help desks in a wide range of vertical industries. No customer accounted for greater than 10% of total revenues in 2004. The following is a partial list of our customers, many of which have been added as a result of the merger with Kanisa.

Sales & Marketing

      We sell our solutions primarily through our direct sales force. We have sales personnel throughout the United States and in the United Kingdom. Our direct sales activity is supplemented by several channel relationships, including relationships with Amdocs, HP, Capgemini, eVergance, and Merlin Information Systems.

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

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

Strategic Alliances

      We have established strategic alliances in several categories to extend our market reach, to augment our sales and marketing initiatives, to supplement our implementation and deployment capabilities, and enhance our product capabilities. Alliance categories include:

Research and Development

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

      We renewed our agreement with EPAm Systems on April 1, 2002. This agreement states that consulting services will be provided in accordance with specific work orders. Payment for these services is billed as the

work is incurred or at a fixed fee agreed upon for the work order. As of December 31, 2004, the agreement remains in effect.

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

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

Competition

      Competition in our marketplace is rapidly evolving and intense, and we expect competition to intensify further in the future as current competitors expand their product offerings and new competitors enter the market. Current competitors include in-house developed applications and providers of commercially available CRM, search and knowledge management solutions, including Kana Software, Inc., eGain Communications Corporation, Inquira, Inc., iPhrase Technologies, Inc., SupportSoft, and Art Technology Group, Inc.

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

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

Intellectual Property

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

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

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

Employees

      As of March 16, 2005, we had 106 employees consisting of 28 in sales, 37 in professional services and support, 20 in research and development, 9 in marketing, and 12 in general and administration. Of these employees, 59 were previously employed by Kanisa. We strive to maintain a work environment that fosters professionalism, excellence, and cooperation among our employees.

Forward-looking Statements

      Certain statements contained in this annual report on Form 10-K constitute ”forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different than any expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue”, “intends”, or the negative of these terms or other comparable terminology.

      We often use these types of statements when discussing:

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

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

Internet Address and SEC Reports

      We maintain a website with the address www.knova.com. We have not incorporated by reference into this Annual Report on Form 10-K the information on our website, and the information on our website should not be considered to be a part of this document. Our website address is included in this document for reference only. We make available free of charge (other than an investor’s own Internet access charges) through our website our Annual Report on Form  10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, through a link to the EDGAR database, as soon as reasonably practicable after we electronically file, or furnish material to the Securities and Exchange Commission (the “SEC”). We also include on our website our corporate governance guidelines and the charters for each of the major committees of our board of directors. In addition, we intend to disclose on our website any amendments to, or waivers from, our code of business conduct and ethics that are required to be publicly disclosed pursuant to rules of the SEC.

Business History

      We were initially incorporated as a Pennsylvania corporation in January 1991 as ServiceWare, Inc. In July 1999, we acquired the Molloy Group, Inc., a provider of knowledge powered software for strengthening customer relationships, including its rights to the Cognitive Processor. In May 2000, we changed our name to ServiceWare Technologies, Inc. and reincorporated as a Delaware corporation. In August 2000, we closed our

initial public offering. Prior to July 2001, we had two reportable business segments: software and content. In July 2001, we completed the sale of our content business. In response to poor financial performance and the economic downturn, during 2001 we announced strategic corporate restructuring programs pursuant to which we significantly reduced costs and focused our business exclusively on revenue growth opportunities in our software business. As part of the restructuring plans, approximately 180 employees were laid off during 2001.

      In February 2005, we merged with Kanisa, Inc., a privately held company based in Cupertino, California. Kanisa is a provider of service resolution management applications that automate the problem resolution process across multiple customer service channels. Kanisa was founded in 1997 and originally incorporated as a Delaware corporation as Papyrus Technology, Inc. Kanisa changed its name from Papyrus Technology, Inc. to Kanisa, Inc. in November 1997. In 2002, Kanisa acquired the assets of Quiq, Inc., a provider of software solutions for customer communities and peer-support forums. In July 2003, Kanisa acquired Jeeves Solutions, the enterprise search division of Ask Jeeves (Nasdaq: ASKJ).

      Financial information regarding revenues and long lived assets attributable to the United States versus international operations is found in Note 15 to our consolidated financial statements in Item 8 below.

Additional Factors that May Affect Future Results

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

      As of December 31, 2004, we had an accumulated deficit of $78.2 million. In addition, Kanisa has incurred losses since its inception. Although, we achieved profitability on a quarterly basis for the first time in second quarter 2004 and were also profitable in third and fourth quarters 2004, we incurred a net loss of $1.7 million for the year ended December 31, 2004. Transition expenses to be incurred in connection with the combination of our operations with Kanisa will likely contribute to net losses in 2005. Thereafter, we will need to increase our revenues and control expenses to avoid continued losses. In addition, our history of losses may cause some of our potential customers to question our viability, which might hamper our ability to make sales.

      Although we presently have adequate cash resources for our near term needs, our ability to continue as a business in our present form will ultimately depend on our ability to generate sufficient revenues or to obtain additional debt or equity financing. From time to time, we consider and discuss various financing alternatives and expect to continue such efforts to raise additional funds to support our operational plan as needed. However, we cannot be certain that additional financing will be available to us on favorable terms when required, or at all.

      In the past, we have funded our operating losses and capital expenditures through proceeds from equity offerings and debt. Changes in equity markets within the past several years have adversely affected our ability to raise equity financing and have adversely affected the markets for debt financing for companies with a history of losses such as ours. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to those of the rights of our common stock and, in light of our current market capitalization, our stockholders may experience substantial dilution. Further, the issuance of debt securities could increase the risk or perceived risk of our company. If we are not able to obtain necessary capital, we may need to dramatically change our business strategy and direction, including pursuing options to sell or merge our business.

      Although we do not have any outstanding debt other than trade debt incurred in the ordinary course of business, we may need to, in the future, raise additional money through bank financing or debt instruments. Our ability to retire or to refinance any future indebtedness will depend on our ability to generate cash flow in the future. Our cash flow from operations may be insufficient to repay this indebtedness at scheduled maturity. If we are unable to repay or refinance our debt when due, we could be forced to dispose of assets under circumstances that might not be favorable to realizing the highest price for the assets or to default on our obligations with respect to this indebtedness.

      We recently acquired our subsidiary Kanisa Inc. We will not achieve the anticipated benefits of this acquisition unless we are successful in combining our operations and integrating our products. Integration will be a complex, time consuming and expensive process and will result in disruption of our operations and revenues if not completed in a timely and efficient manner. We are in the process of combining various aspects of our organizations through the common use of:

      There may be substantial difficulties, costs and delays involved in integrating Kanisa into our business. These could include:

      As we integrate the ServiceWare and Kanisa products into a single product platform, we will need to ultimately transition our customers onto the new platform. This transition could cause interruptions or inconvenience for our customers and potentially result in a loss of renewals and continuing revenues for us.

      Further, we cannot assure you that we will realize any of the anticipated benefits and synergies of the combination. Any one or all of the factors identified above could cause increased operating costs, lower than anticipated financial performance, or the loss of customers, employees or business partners. The failure to integrate Kanisa successfully would have a material adverse effect on our business, financial condition and results of operations.

      Pursuant to the Merger Agreement entered into with Kanisa, Bruce Armstrong, the chief executive officer of Kanisa, has become our chief executive officer and Mark Angel, chief technology officer of Kanisa, has become our chief technology officer after the merger. In addition, our headquarters were relocated to Kanisa’s offices in Cupertino, California, following the merger. We cannot assure you that our new senior officers will be effective in managing our company or will successfully work with our current organization, customers and business partners.

      The success of the merger will depend in part on the retention of personnel critical to the business and operations of the combined company due to, for example, their technical skills or management expertise. Some of our employees may not want to continue to work for the combined company. In addition, competitors may seek to recruit employees during the integration. If we are unable to retain personnel that are critical to our successful integration and future operation, we could face disruptions in our operations, loss of existing customers, loss of key information, expertise or know-how, and unanticipated additional recruitment and training costs. In addition, the loss of key personnel could diminish the anticipated benefits of the merger.

      The market price of our common stock may decline as a result of the merger if:

      The market price of our common stock could also decline as a result of unforeseen factors related to the merger or other factors described in this section.

      In connection with our combination with Kanisa, we incurred substantial costs. These include fees to investment bankers, legal counsel, independent accountants and consultants, as well as costs associated with workforce reductions. If the benefits of the combination do not exceed the associated costs, including any dilution to our stockholders resulting from the issuance of shares of our common stock in the transaction, our financial results, including earnings per share, could suffer, and the market price of our common stock could decline.

      Our business requires the employment of highly skilled personnel, especially experienced software developers. The inability to recruit and retain experienced software developers in the future could result in delays in developing new versions of our software products or could result in the release of deficient software products. Any such delays or defective products would likely result in lower sales. We may also experience difficulty in hiring and retaining sales personnel, product managers and professional services employees.

      A significant percentage of our product development work, and some of our implementation services, is performed by a third-party development organization located in Minsk, Belarus. Unpredictable developments in the political, economic and social conditions in Belarus, or our failure to maintain or renew our business relationship with this organization on terms similar to those which exist currently, could reduce or eliminate

product development and implementation services. If access to these services were to be unexpectedly eliminated or significantly reduced, our ability to meet development objectives vital to our ongoing strategy would be hindered or we may be required to incur significant costs to find suitable replacements, and our business could be seriously harmed.

      We manage our expense levels based on our expectations regarding future revenues and our expenses are relatively fixed in the short term. Therefore, if revenue levels are below expectations in a particular quarter, operating results and net income are likely to be disproportionately adversely affected because our expenses are relatively fixed. In addition, a significant percentage of our revenues is typically derived from large orders from a limited number of customers, so it is difficult to estimate accurately the timing of future revenues. Our revenues are unpredictable and in our last eight quarters have fluctuated up and down between a low of $1.8 million in first quarter 2004 and a high of $4.0 million in third quarter 2004.

      Our historical results may not be indicative of future performance as a result of the significant changes to our business that will result from the merger with Kanisa.

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

      Quarterly results may also be skewed in the near future as a result of the assimilation of the ServiceWare and Kanisa businesses.

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

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

      Our knowledge powered service resolution management application, Knova Application Suite, includes our Knova Contact Center, Knova Self-Service, Knova Forums, and Knova Service Desk software products. Our past and expected future revenues consist primarily of license fees for these software solutions and fees for related services. Factors adversely affecting the demand for these products and our products in general, such as competition, pricing or technological change, could materially adversely affect our business, financial

condition, operating results, and the value of our stock price. Our future financial performance will substantially depend on our ability to sell current versions of our entire suite of products and our ability to develop and sell enhanced versions of our products.

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

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

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

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

      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 our products do not cause these problems, 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.

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

      We compete in the emerging markets for knowledge management and service resolution management solutions and changes in these markets could adversely affect our revenues and profitability. We face competition from many firms offering a variety of products and services. In the future, because there are relatively low barriers to entry in the software industry, we expect to experience additional competition from new entrants into the knowledge management and service resolution management solutions market. It is also possible that alliances or mergers may occur among our competitors and that these newly consolidated companies could rapidly acquire significant market share. Greater competition may result in price erosion for our products and services, which may significantly affect our future operating margins.

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