Engineering autonomous agents that display rational and goal-directed behavior in dynamic physical environments requires a steady flow of information from sensors to high-level reasoning components. However, while sensors tend to generate noisy and incomplete quantitative data, reasoning often requires crisp symbolic knowledge. The gap between sensing and reasoning is quite wide, and cannot in general be bridged in a single step. Instead, this task requires a more general approach to integrating and organizing multiple forms of information and knowledge processing on different levels of abstraction in a structured and principled manner. We propose knowledge processing middleware as a systematic approach to organizing such processing. Desirable properties are presented and motivated. We argue that a declarative stream-based system is appropriate for the required functionality and present DyKnow, a concrete implemented instantiation of stream-based knowledge processing middleware with a formal semantics. Several types of knowledge processes are defined and motivated in the context of a UAV traffic monitoring application. In the implemented application, DyKnow is used to incrementally bridge the sense-reasoning gap and generate partial logical models of the environment over which metric temporal logical formulas are evaluated. Using such formulas, hypotheses are formed and validated about the type of vehicles being observed. DyKnow is also used to generate event streams representing for example changes in qualitative spatial relations, which are used to detect traffic violations expressed as declarative chronicles.