UNITED STATES

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                    FORM 10-K

                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the Fiscal Year Ended January 31, 1997

                        Commission File Number 0-9747


                      EXCALIBUR TECHNOLOGIES CORPORATION
            (Exact name of registrant as specified in its charter)


            Delaware                                        85-0278207
      (State or other jurisdiction of                       (I.R.S. Employer
      incorporation or organization)                        Identification No.)

             1921 Gallows Road, Suite 200, Vienna, Virginia    22182
              (Address of principal executive offices)      (Zip Code)

     Registrant's telephone number, including area code: (703)761-3700

        Securities registered pursuant to Section 12(b) of the Act: None

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

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 the  filing
requirements for the past 90 days. Yes[X]  No[ ]

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. [X]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of April 21, 1997 (based on the closing sales price as reported on
the NASDAQ National Market System) was $40,600,211.

The number of shares outstanding of the registrant's class of common stock as of
April 21, 1997 was 12,668,514.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  Registrant's  Proxy  Statement  for the 1997 Annual  Meeting of
Shareholders are incorporated by reference into Part III.

                  The Index to Exhibits begins on Page 22.

<PAGE>

                      EXCALIBUR TECHNOLOGIES CORPORATION

                          ANNUAL REPORT ON FORM 10-K
                  FOR THE FISCAL YEAR ENDED JANUARY 31, 1997

                                TABLE OF CONTENTS
                                                                     Page

                                    PART I

Item 1.     Business...........................................       1

Item 2.     Properties.........................................       9

Item 3.     Legal Proceedings..................................       9

Item 4.     Submission of Matters to a Vote of Security Holders       9


                                     PART II

Item 5.     Market for Registrant's Common Equity and Related 
            Stockholder Matters................................      10

Item 6.     Selected Financial Data............................      10

Item 7.     Management's Discussion and Analysis of Financial
            Condition and Results of Operations ...............      13

Item 8.     Financial Statements and Supplementary Data........      21

Item 9.     Changes in and Disagreements with Accountants on 
            Accounting and Financial Disclosure................      21

                                   PART III

Item 10.    Directors and Executive Officers of the Registrant.      22

Item 11.    Executive Compensation ............................      22

Item 12.    Security Ownership of Certain Beneficial Owners and
            Management.........................................      22

Item 13.    Certain Relationships and Related Transactions.....      22

                                     PART IV

Item 14.    Exhibits, Financial Statement Schedules, and Reports 
            on Form 8-K........................................      22




<PAGE>
                                     PART I

Item 1.  Business.

Overview

Excalibur Technologies Corporation  ("Excalibur") believes it is the pioneer and
technology leader in providing  enterprise-wide,  accurate,  scalable and secure
knowledge-retrieval  software solutions.  Excalibur's  software products combine
two   complementary   technologies:   semantic  networks  and  Adaptive  Pattern
Recognition Processing (APRP(TM)).  Semantic networks leverage lexical knowledge
at the highest level, using built-in  knowledgebases to search for specific word
meanings  enriched  by  related  terms and  concepts.  The  APRP(TM)  technology
identifies  patterns  in  digital  data,   providing  the  capability  to  build
content-based   retrieval   applications  for  virtually  any  type  of  digital
information. By integrating these two approaches, Excalibur believes it delivers
the  most  complete  and  powerful,   yet  easy  to  use,  knowledge   retrieval
capabilities  available  today and provides  knowledge  workers with  intuitive,
efficient and accurate access to the meaningful  content of all types of digital
assets including  unstructured text, live information streams,  database fields,
images and video.

Based on these  technologies,  Excalibur has developed a comprehensive  suite of
knowledge  retrieval  software  products  including   Excalibur   RetrievalWare,
Excalibur Visual RetrievalWare,  and Excalibur EFS (Electronic Filing Software).
Excalibur  RetrievalWare is a unified family of software  components,  including
libraries,   services  and  applications,   that  enables  developers  to  build
best-of-breed  solutions to transform  information  into knowledge.  Excalibur's
software   solutions   deliver   capabilities   for   real-time   profiling  and
retrospective text searching,  combined full-text and database  searching,  word
meaning-based  semantic  searching,   fault-tolerant  pattern  recognition-based
searching,  statistical  searching and a full suite of  traditional  keyword and
Boolean  search  techniques.   Excalibur  provides  its  software  solutions  to
information  systems  for  workgroups,  enterprises  and  distributed  wide area
networks,  including the Internet and World Wide Web. Excalibur  RetrievalWare's
modular architecture supports parallel processing on distributed, multi-threaded
servers  and is  designed  to  support  both  very  large  databases  and  large
information  systems with thousands of users.  Excalibur's Visual  RetrievalWare
delivers   content-based   retrieval  for  visual  data.   Excalibur  EFS  is  a
multi-platform,  commercial,  end-user software application for document imaging
and information retrieval.

In July 1995, Excalibur acquired ConQuest Software, Inc. ("ConQuest"), a private
company  located in  Columbia,  Maryland,  engaged in the  business of providing
natural language text management software tools.  Excalibur issued approximately
1,427,000 shares of Excalibur common stock and options to purchase approximately
572,000 shares of Excalibur common stock to the former ConQuest shareholders and
option holders in exchange for all of the outstanding  common stock of ConQuest.
The  transaction was accounted for as a pooling of interests.  The  consolidated
results of  operations  presented  herein  reflect the  combined  results of the
pooled business for the respective periods presented.

Excalibur's  wholly-owned  subsidiary  located in the United Kingdom,  Excalibur
Technologies   International,   Ltd.  ("ETIL"),   conducts  international  sales
activities.  Except  as  otherwise  noted,  Excalibur,  ConQuest  (the  acquired
company) and ETIL are collectively referred to hereinafter as the "Company."

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<PAGE>
The  Company  licenses  its  software  products  to  commercial  businesses  and
government  agencies  throughout  North  America,  Europe and other parts of the
world. The Company licenses to end user organizations on a direct basis and also
distributes its software  products  through license  agreements with value-added
resellers,  system  integrators,  original  equipment  manufacturers  and  other
strategic  partners.  As of January 31, 1997, more than 900 customers were using
the Company's software products.

The Company can be contacted via e-mail at  invest@excalib.com or visited at its
web site at www.excalib.com.


Software Retrieval Products

Excalibur's software products are being utilized in a wide-range of applications
and solutions  including  electronic  publishing,  online  information  systems,
global corporate  intranets,  intelligence  analysis and paper archival systems.
Markets include publishing,  legal,  manufacturing,  pharmaceutical,  insurance,
transportation, financial services, government and many others. A description of
each of the Company's products is set forth below.

Excalibur RetrievalWare

Excalibur RetrievalWare offers an advanced,  componentized approach to knowledge
delivery and an alternative to traditional search and retrieval systems. It is a
comprehensive software solution designed for enterprise knowledge retrieval.  It
is intended to empower users to find mission  critical data across multiple data
types. By integrating the semantic network and APRP(TM) technologies,  Excalibur
RetrievalWare  delivers superior levels of power and performance  throughout the
information  management  process,  from data capture and indexing to  searching,
retrieval  and  dissemination.  The  latest  version of the  product,  Excalibur
RetrievalWare  6.0, was released in the fourth  quarter of the fiscal year ended
January 31, 1997.

With semantic  networks,  users can easily and  automatically  find the required
information  in text databases by using all of the power and richness of natural
language processing. Excalibur RetrievalWare incorporates syntax, morphology and
the  actual  meaning of words.  The  baseline  semantic  network,  created  from
complete  dictionaries,  a thesaurus and other reference sources,  gives users a
built-in  knowledge  base of 400,000  word  meanings  and over 1.6 million  word
relationships.  Users enter  straight-forward  plain  English  queries  that are
automatically  enhanced by the related terms and concepts thereby increasing the
opportunity  for the return of relevant data. The software  recognizes  words at
the root level,  idioms and the multiple meanings of words. An important benefit
of this  approach  is the  elimination  of the costs  associated  with  defining
keywords,  building  topic trees,  establishing  expert  rules,  and sorting and
labeling  information in database fields.  Excalibur  RetrievalWare also enables
the  integration of specialized  reference  works for legal,  medical,  finance,
engineering and other disciplines.

The APRP(TM) identifies patterns in digital  information.  In text applications,
it provides  "fuzzy",  fault-tolerant  searching with a high degree of precision
and recall,  giving  end-users  the ability to retrieve even  approximations  of
search  terms  with  a high  degree  of  confidence  that  all of the  requested
information  will be returned  regardless of errors in spelling or the existence
of  "dirty  data."  The  software  works at high  speed and  supports  the rapid
development of multi-language text-retrieval systems.

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<PAGE>

The major components of Excalibur RetrievalWare are discussed below.

Excalibur   RetrievalWare   SDK.  The  Excalibur   RetrievalWare  SDK  (Software
Developer's  Kit)  is a  comprehensive  set  of  tools  for  building  knowledge
retrieval solutions. At its core is a highly scalable, distributed client/server
architecture.   Independent   server  processes   maximize  the  efficiency  and
reliability  of  document  loading,  indexing  and query  handling,  and support
security and encryption/decryption  features.  Dedicated server processes enable
integration of text search and relational  database (DBMS) storage  capabilities
through  an open DBMS  gateway.  The client  environment  is  optimized  for the
development of graphical  interfaces using industry  standard tools such as Java
and Visual Basic. Excalibur RetrievalWare delivers Visual Basic custom controls,
remote  procedure calls and open server  capabilities  as well as  engine-level,
high-level  and  client/server  application  program  interfaces  (APIs).  These
features speed the  development  of systems that can support  thousands of users
and contain custom functionality.

Excalibur  RetrievalWare Text Server.  Excalibur  RetrievalWare text servers are
built  upon an open and  extensible  pipeline  of  indexing,  query and  display
processing modules,  offering  sophisticated and powerful full-text capabilities
for large-scale information systems. The software product includes both semantic
network  and  APRP(TM)  search  engines  and  offers  a  complete  range of text
retrieval options: word meaning-based and pattern  recognition-based  searching,
natural language searching and fuzzy searching,  statistical  searching and full
Boolean logic searching. The servers can be configured with flexibility, running
on different CPUs in a single  server,  or on any machine in a network of server
computers.  Using the TCP/IP  protocol  for  communications,  the servers run on
leading UNIX and Windows/NT platforms and support Windows,  Motif, Macintosh and
Internet clients.

Excalibur  RetrievalWare Web Server. The Excalibur RetrievalWare Web Server is a
component solution that interfaces with any HTTP server through a template-based
common gateway  interface and supports very large scale  distributed  electronic
publishing and enterprise applications on intranets, the Internet, and the World
Wide Web.  The  server  deploys a  dedicated  front-end  server,  providing  the
handling of large volumes of user queries and extensible  functionality  through
integration with relational databases,  and supports Windows/NT and leading UNIX
platforms.

Excalibur  RetrievalWare Profiling Server. The Excalibur RetrievalWare Profiling
Server is a high  performance  system for filtering news wires,  electronic mail
messages, file transfers and other dynamic information streams in real-time. Its
architecture is optimized for real-time  performance  while preserving  complete
symmetry  with  Excalibur   RetrievalWare  Text  and  Web  Servers.  The  design
facilitates the development of applications which fully integrate  retrospective
searching and real-time content profiling.

                                       3
<PAGE>

Excalibur Visual RetrievalWare

By leveraging  the power of APRP,  Excalibur  Visual  RetrievalWare  enables the
development of  client/server  knowledge  retrieval  systems that  automatically
index and retrieve visual data based on its native content. Users can search for
visual  information  directly from their  intranet,  a corporate  database,  the
Internet,  or other sources using images or video clips as clues. Visual data is
reduced to a searchable index that is typically less than 10% of the size of the
original image and is  automatically  recognized  based on its shape,  color and
texture.  Users submit  queries using  examples of visual data or by authoring a
visual clue with a graphical  product.  Based on the shape, color and texture of
the visual clue, a list of similar or exact  matches is returned.  The Excalibur
Visual  RetrievalWare SDK provides a general purpose visual retrieval engine and
a comprehensive image processing library with tools for analyzing,  indexing and
retrieving   digital  images.   The  product  delivers  its  advanced  retrieval
capabilities  in an open,  flexible,  scalable  and secure  architecture  and is
designed  to be easy to  implement  and ready for  extension.  Excalibur  Visual
RetrievalWare  SDK version 2.0 was released in the fourth quarter of fiscal year
1997 supporting Windows 95, Windows/NT and leading UNIX platforms.

Excalibur EFS (Electronic Filing Software)

Excalibur  EFS  release  3.7 is the  latest  version  of the  product  which was
originally  introduced  in 1991.  Text and images can be entered into the system
from computer files,  scanners or facsimile machines (after the scanned image is
converted  to  text  by  optical   character   recognition   software)   and  is
automatically  filed and indexed in a replica of a physical  file room with file
cabinets, drawers, folders,  in-baskets and wastebaskets,  utilizing a graphical
user interface.  Excalibur EFS provides users with multiple methods for document
retrieval and operates under leading UNIX operating  systems and Windows/NT in a
client/server environment. Client-only implementations are available on personal
computers running Microsoft  Windows and Apple  Macintoshes.  Excalibur EFS also
provides  links to leading  external  databases  and APIs that  gives  users the
ability to  integrate  it with  other  software  applications  and  products.  A
variation of this software product provides document image management capability
utilizing the World Wide Web.



Marketing and Distribution

The Company's  marketing and  distribution  strategy was redefined in the fiscal
year ended January 31, 1997. Previously, the primary strategy was to license the
Company's software products through  established  relationships with value-added
resellers,   system  integrators,   computer  manufacturers  and  other  product
distributors.

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<PAGE>

The Company's  sales and marketing  strategy  emphasizes  the direct sale of the
Excalibur  RetrievalWare  product  family,  which is designed  as an  enterprise
knowledge retrieval solution, to end-user customers. The targeted customer group
for  this  software  product  includes  the  world's  largest  corporations  and
comparable  government  agencies  and other  institutions.  The adoption of this
strategy  resulted in the building of new sales and marketing  management  teams
during  fiscal year 1997.  The Company also  replaced or retrained a substantial
number of direct  salespeople  during  fiscal  year 1997 so that the sales  team
would be focused on and  capable of closing the sale of  sophisticated  software
solutions.  Members  of the North  American  sales  team are  located in various
locations  around the United  States.  Most of the  international  sales team is
located in the United Kingdom.

The Company typically licenses its Excalibur RetrievalWare software to end users
as either an  enterprise-wide  or  work-group  level  solution.  Enterprise-wide
licenses  provide  access  for  up to  100  named  or  concurrent  users  across
enterprise  networks and intranets  utilizing  multiple servers.  These licenses
include  an SDK  license  for two  developers  and the text,  web and  profiling
servers, among other components. Work-group level licenses provide access for up
to 20 named or concurrent users on a local area network or intranet  deployed on
a single  server  and  include  the text and web  servers.  Separate  pricing is
generally negotiated for systems that are used to generate direct revenue by the
customer.  Excalibur  Visual  RetrievalWare  SDK is a five named user  developer
license;  deployment  of a  developed  system by a  customer  will  require  the
purchase  of an  end-user  license  with the price  based on the number of named
users. Excalibur EFS is licensed to end user customers with the fee based on the
number of concurrent users.

The Company  also relies on  relationships  with  distributors  of its  software
products, particularly the strategic partners discussed below, for a substantial
portion of its revenues.  Most of these strategic partner relationships began as
distribution arrangements for Excalibur EFS. However, during fiscal year 1997, a
number of these  agreements  were amended to provide for the resale of Excalibur
RetrievalWare products in addition to Excalibur EFS.

The  Company's  GSA  Contract  provides a  contractual  vehicle  for  government
agencies  to place  orders  for  Excalibur  EFS with the  Company.  It  includes
information about the Company and its products,  and establishes pricing,  terms
and  conditions  of sales.  The  Company  expects to  negotiate a renewal of the
amended GSA Contract upon its expiration in September 1997.

Strategic Alliances

In June 1996,  Informix  Software,  Inc.  ("Informix"),  a leading  provider  of
database   technology,   announced  a  commitment  to  integrate  the  Excalibur
RetrievaWare  technologies  into its Informix  Universal Server software product
(the "IUS").  Under the agreement that provides for joint  development  efforts,
text and visual  data  retrieval  capabilities  will be included in each copy of
IUS. The Company has  undertaken the  development of a suite of closely  coupled
Informix  DataBlade  module  products for license by the Company to users of the
IUS.  The Company has  announced  the  availability  of five  DataBlade  modules
including face recognition, video scene change detection and real-time profiling
modules.  In December 1994, the Company entered into a software  development and
license  agreement with Informix to provide text and image retrieval  technology
to users of certain  Informix  products.  Revenues  derived  from the  Company's
agreements  with Informix were less than 10% of the Company's  total revenues in
each fiscal year in the three year period ended January 31, 1997.
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<PAGE>

In  July  1996,  the  Company  authorized  the  use of  its  name  by  Excalibur
Technologies N. V. ("ETNV"), a Belgian company incorporated in June 1996 for the
purpose of selling and marketing the  Company's  products and services  within a
large  territory  including most of Western  Europe,  except the United Kingdom,
France,  Spain and  Portugal.  In  connection  with the  formation of ETNV,  the
Company acquired approximately 13.2% of ETNV's voting capital stock. The Company
granted to ETNV an exclusive  license (the  "License") to distribute  certain of
the Company's  products,  including  Excalibur EFS and  RetrievalWare,  to other
authorized  resellers and end-users in the territory for approximately  five (5)
years.  The License  provides for the payment to the Company of minimum  license
fees of $1,475,000  for fiscal year 1997 and the payment of  additional  minimum
license fees of $2,500,000 for each subsequent  fiscal year of the License.  The
shareholders  of ETNV include  Professional  Computer  Systems B.V.  ("PCS"),  a
software  distributor  that contributed its operations to ETNV. In May 1994, PCS
entered into a software  distribution  agreement with the Company  pertaining to
the  Benelux  region of Europe  that was  superseded  by the  License.  Revenues
recognized by the Company under its distribution licenses with both ETNV and PCS
were less than 10% of total  revenues in each of the three  fiscal  years in the
period ended January 31, 1997.

In January  1996,  the  Company and BTG  Incorporated  ("BTG")  entered  into an
agreement  designating  BTG as the master Federal  distributor for the Company's
Excalibur EFS product. BTG, a major reseller of information  technology products
and  services  to  the  Federal  government,  has  been  the  Company's  largest
value-added  reseller in the Federal market since 1992.  The agreement  provides
BTG with exclusive distribution rights for Excalibur EFS products in the Federal
government market for an initial period of two years. Pursuant to the agreement,
the Company is to receive minimum  license fees of $1,800,000  pertaining to the
first year of the contract. In January 1997, the agreement with BTG was modified
allowing BTG to resell Excalibur  RetrievalWare on a nonexclusive  basis. In the
fiscal years ended January 31, 1997 and 1996, revenues recognized by the Company
under its agreement with BTG were less than 10% of total revenues in each year.

The Company  signed a subcontract  agreement with PRC, Inc.  ("PRC"),  a systems
integrator,  in February  1993.  Under the agreement,  the Company  provides its
software  to PRC as part  of a  federal  procurement  program.  PRC  paid to the
Company a minimum  $2,000,000 in license and  maintenance  fees over a period of
two and one-half years. The Company expanded its relationship  with PRC in April
1996  forming a  strategic  alliance  to deliver  advanced  electronic  document
management to major manufacturing,  utility and government markets. Under an OEM
agreement,  PRC will  integrate the text search and retrieval  functionality  of
Excalibur's  RetrievalWare  technology with its Productivity Edge(TM) electronic
document  management  solution.  Revenues derived from the Company's  agreements
with PRC were less than 10% of the Company's  total revenues in each fiscal year
in the three year period ended January 31, 1997.

Since 1993, the Company has entered into a series of  development,  distribution
and  cooperative  marketing  agreements  with  International  Business  Machines
Corporation  ("IBM")  relating  to  Excalibur  EFS.  Pursuant  to one  of  these
agreements,  IBM made a guaranteed  sales  commitment  to the Company for fiscal
years  1995 and 1994.  Revenues  of  approximately  $1,538,000,  or 12% of total
revenues,  were  attributable to IBM under the various  agreements in the fiscal
year ended January 31, 1995.  Such revenues were less than 10% of total revenues
in each of the fiscal years ended January 31, 1997 and 1996.

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<PAGE>

Technical Support, Implementation Support and Training

The Company believes that it has established a reputation for excellent customer
technical support.  Technical support, or maintenance,  is provided to customers
by the  technical  support  organization,  located  in the  Company's  Carlsbad,
California  facilities,  as well as by certain product  distributors.  Technical
support  consists of bug  fixing,  telephone  support and product  enhancements.
After an initial  90-day  period,  during  which  technical  support is provided
without additional charge,  technical support typically is provided to customers
under a renewable annual contract.

The Company also provides  installation and consulting services to its customers
on-site through employees and independent  consultants who have been trained and
certified by the Company.  The Company also  conducts  training  seminars at its
offices in Vienna,  Virginia,  and Carlsbad,  California,  for its customers and
distribution channel partners.

Product Development and Advanced Research

The primary  technologies  of the Company are its semantic  networks  processing
techniques and its proprietary adaptive pattern recognition  processing software
(APRP(TM)).

Excalibur's  semantic  networks leverage lexical knowledge at the highest level,
offering a system to search for specific word meanings enriched by related terms
and  concepts.  With semantic  networks,  users find  information  using natural
language processing.  Semantic networks  incorporate syntax,  morphology and the
actual meaning of words as defined by published dictionaries and other reference
sources.

 APRP(TM) consists of a software architecture for processing digital information
to extract  patterns in the primary types of  computerized  data:  text,  image,
signal and video. The system provides high-speed pattern recognition that can be
used to store,  categorize,  retrieve and refine data. The processing of digital
patterns  provides  users with a way to store and use  computerized  data faster
with more  flexibility and with fewer data storage  requirements  than competing
systems.   The  Company's  pattern  recognition  methods  use  neural  computing
techniques to process data in a non-algorithmic,  parallel fashion by generating
responses to input data.  Systems utilizing these methods are unlike traditional
computer systems and are now being used in areas where traditional  systems have
been inefficient,  such as natural language,  machine vision, robotics,  pattern
matching  and signal  recognition.  Neural  computing  systems are  "trained" by
processing data, not by programming. Once the system has extracted patterns from
the  digital  data,  these  patterns  can be  sorted,  labeled  and used to make
decisions.

The Company has in place a research and development program to explore and apply
its  proprietary  pattern  recognition  technology  in new  areas  such a  image
recognition,  character  recognition,  forms recognition,  fingerprint matching,
facial  identification  and  machine  vision.  The  Company  also has a  product
development program to enhance the features of its existing software products to
address additional markets.  In subsequent releases of Excalibur  RetrievalWare,
the Company intends to incorporate  the paper asset searching  capability of EFS
so that  users of  Excalibur  RetrievalWare  will be able to search  paper  file
rooms.
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<PAGE>

Certain elements of the Company's  software products are supplied to the Company
by other  independent  software  vendors under license  agreements  with varying
terms. Pursuant to these agreements, the Company makes periodic royalty payments
based on either revenues or units. The  technologies  acquired by the Company in
this manner  include word  processing  filters,  optical  character  recognition
engines, and dictionaries and thesaurus' in electronic form.

The  Company  has  conducted   research  and  product   development  of  pattern
recognition  and  natural  language  systems  since 1980.  Research  and product
development expenditures for the development of new products and enhancements to
existing products were  approximately  $7,694,000,  $4,972,000,  and $5,085,000,
respectively, in the fiscal years ended January 31, 1997, 1996 and 1995.

Protection of Proprietary Technology

The  Company  regards its  software as  proprietary  and relies  primarily  on a
combination   of   copyright,   trademark  and  trade  secret  laws  of  general
applicability,  employee  confidentiality and invention  assignment  agreements,
software  distribution  protection  agreements and other  intellectual  property
protection  methods to  safeguard  its  technology  and software  products.  The
Company has not  obtained  patents on any of its  technology.  The Company  also
relies  upon  its  efforts  to  design  and  produce  new  products,   and  upon
improvements  to existing  products,  to maintain a competitive  position in the
marketplace.

Competition

Competition  in the computer  and  communications  industry in general,  and the
software  development   industry  in  particular,   is  intense.  The  Company's
competitors  include many companies  which are larger and more  established  and
have  substantially  more resources than the Company.  In the United States, the
Company competes in two basic markets within the computer industry: the document
imaging and information  retrieval  markets.  Both markets have many competitors
who are larger and more  established than the Company and have access to greater
resources.  The Company considers its principal  competitive advantage to be the
architecture  and performance of its products.  The Company  differentiates  its
products by using new technology to provide  benefits such as labor savings from
reduced manual pre-processing or organization of data, faster retrieval,  access
to many kinds of data,  full  integration  with network  architecture,  and more
forgiving  interaction  in  retrieving  information  stored  in  computers.  The
information  retrieval market is competitive,  with numerous  companies offering
products on multiple platforms.  Most often, the Company competes with companies
such as Fulcrum  Technologies  Inc. and Verity,  Inc. in this general market. In
the document imaging market,  the Company competes with large hardware companies
and established software vendors.

The Company's  activities  currently are subject to no particular  regulation by
governmental   agencies  other  than  those   routinely   imposed  on  corporate
businesses, and no such regulation is now anticipated.

Employees

The Company had 173  employees at January 31, 1997,  of whom 56 were in research
and development,  66 in sales and marketing,  30 in technical support, and 21 in
finance  and  administration.  The  employees  are  not  covered  by  collective
bargaining agreements and the management of the Company considers relations with
employees to be good.
                                       8
<PAGE>


Item 2.  Properties.

The Company's corporate headquarters  facilities are occupied under two sublease
agreements that expire in calendar year 1999 for a total of approximately 18,700
square feet of space in an office building located at 1921 Gallows Road, Vienna,
Virginia 22182. The Company moved its corporate headquarters to this location in
May 1996.

The Company leases two facilities that serve  primarily as software  development
and customer support centers.  The Company occupies  approximately 31,000 square
feet of space in an office  building,  under a six-year  lease  that  expires in
November 2001, located at 1959 Palomar Oaks Way, Carlsbad, California 92009. The
Company  also  occupies  approximately  8,125  square feet of space in an office
building  located at 10440 Little  Patuxent  Parkway,  Columbia,  Maryland 21044
under a five-year lease that expires in December 2000.

The Company  leases office space in Windsor,  England and  Vitrolles,  France in
support of its international  sales operation.  Under these leases,  the Company
occupies approximately 3,400 square feet and 800 square feet, respectively.  The
two leases for the Windsor  offices expire in 1997,  and the Vitrolles  lease is
renewable  every three years over a nine year period,  but may be canceled  with
six months notice.

During the fiscal  years ended  January 31, 1997 and 1996,  the Company  vacated
leased facilities located in McLean, Virginia, and San Diego,  California,  that
have   remaining   lease  terms  of   approximately   four  and  eleven  months,
respectively.

The Company  believes  that its  facilities  are  maintained  in good  operating
condition and are adequate for its operations.

Item 3.  Legal Proceedings.

There are no material pending legal proceedings to which the Company is a party.

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

There  were no matters  submitted  to the  shareholders  for a vote in the three
month period ended January 31, 1997.

                                       9
<PAGE>



                                PART II

Item 5.  Market for Registrant's  Common Equity and Related  Stockholder
Matters.

The  Company's  common  stock is traded in the  over-the-counter  market  and is
listed on the National Market System of the NASDAQ System under the symbol EXCA.

The following table sets forth,  for the period February 1, 1995 through January
31,  1997,  the high and low sale prices for the common stock as reported by the
National  Market System of NASDAQ.  The number of  shareholders  of record as of
January 31, 1997, was 1,233. The Company has never declared or paid dividends on
its common stock, and anticipates that, for the foreseeable  future, it will not
pay dividends on its common stock.
<TABLE>
<CAPTION>

                                                       High         Low
                                                       ----         ---
         Fiscal 1996 (Feb. 1, 1995 - Jan. 31, 1996)
         <S>                                          <C>          <C>
         First Quarter..........................      $12 3/4      $ 7
         Second Quarter ........................       18 1/2       11 3/4
         Third Quarter..........................       18           13 1/4
         Fourth Quarter.........................       39 3/4       15 3/4

         Fiscal 1997 (Feb. 1, 1996 - Jan. 31, 1997)

         First Quarter..........................      $32           $22 1/4
         Second Quarter ........................       26 3/4        14 1/4
         Third Quarter..........................       18 3/4        13 5/8
         Fourth Quarter.........................       19            12

</TABLE>



Item 6.  Selected Financial Data.

The selected  financial  data  presented  below are derived  from the  Company's
consolidated  financial  statements and should be read in conjunction  with such
consolidated  financial  statements and notes thereto included elsewhere in this
Annual Report on Form 10-K. The selected  financial  data presented  below as of
January 31, 1995,  1994 and 1993 and for the fiscal years ended January 31, 1994
and 1993 has been derived from consolidated  financial statements of the Company
not contained  herein.  All of the historical  information  has been restated to
reflect the pooling of interests with ConQuest Software, Inc.

                                       10


<PAGE>
<TABLE>
<CAPTION>
                                  Fiscal Years Ended January 31,
                        ----------------------------------------------------
                           1997       1996       1995       1994       1993
                        ---------  ---------  ---------  ---------  --------- 
                               (in thousands, except per share data)
<S>                     <C>        <C>        <C>        <C>        <C>  
Statement of Operations Data:
Revenues:     
  Software............. $ 15,866   $ 15,004   $ 10,133   $ 10,878   $  7,943  
  Maintenance..........    4,393      3,671      2,505      1,407        563
                        ---------  ---------  ---------  ---------  ---------
                          20,259     18,675     12,638     12,285      8,506
                        ---------  ---------  ---------  ---------  ---------
Expenses:
  Sales and marketing..   14,429      8,791      9,399     10,124      7,859
  Research and product
    development........    7,694      4,972      5,085      5,483      5,483
  General and              
    administrative.....    3,906      3,330      5,597      3,758      3,148
  Cost of software        
    revenues...........    1,037      1,294      1,197      1,359        569
  Cost of maintenance       
    revenues...........      806        573        524        343        285
  Restructuring costs..        -        653        776          -          - 
  Merger costs.........        -        490          -          -          -
                        ---------  ---------  ---------  ---------  ---------
                          27,872     20,103     22,578     21,067     17,344
                        ---------  ---------  ---------  ---------  ---------

Operating loss            (7,613)    (1,428)    (9,940)    (8,782)    (8,838)

Interest income, net...      781        544        344        463        589
Equity in net loss of      
  affiliate............     (341)         -          -          -          -
Other income...........        -          -        208          -          -
                        ---------  ---------  ---------  ---------  ---------

Net loss...............   (7,173)      (884)    (9,388)    (8,319)    (8,249)

Preferred stock              
  dividends............       14         14         14         14         14
                        ---------  ---------  ---------  ---------  ---------
Net loss applicable to
  common stock......... $ (7,187)  $   (898)  $ (9,402)  $ (8,333)  $ (8,263)
                        =========  =========  =========  =========  =========
Net loss per share of
  common stock......... $  (0.58)  $  (0.08)  $  (0.85)  $  (0.79)  $  (0.85)
                        =========  =========  =========  =========  =========
Weighted average number
  of shares of common
  stock outstanding....   12,351     11,496     11,094     10,532      9,763
                        =========  =========  =========  =========  =========
</TABLE>

                                       11
<PAGE>
<TABLE>
<CAPTION>
                                  Fiscal Years Ended January 31,
                        ----------------------------------------------------
                           1997       1996       1995       1994       1993
                        ---------  ---------  ---------  ---------  --------- 
                               (in thousands, except per share data)
Balance Sheet Data
  (at end of period)<F1>:
<S>                     <C>        <C>        <C>        <C>        <C>  
Cash and cash                                 
  equivalents.......... $  2,685   $  2,903   $  2,645   $  1,280   $  1,928
Working capital........   14,566     12,973      6,908      1,788      4,631
Total assets...........   26,147     23,046     17,951     18,015     21,125
Accumulated deficit....  (43,619)   (36,446)   (35,367)   (25,965)   (17,646)
Total shareholders'      
  equity<F2>...........   18,563     15,251      9,475     12,363     17,138

<FN>

<F1>The Company had no significant long-term debt for any of the periods
      presented
<F2>No dividends have been declared or paid on the Company's common stock
</FN>
</TABLE>


                                       12

<PAGE>


Item 7.  Management's Discussion and Analysis of Financial Condition
            and Results of Operations.

Overview

The Company  principally  earns  revenues  from the  licensing  of its  software
products to commercial  businesses  and  government  agencies  throughout  North
America,  Europe and other parts of the world. The Company licenses its software
to end users directly and also distributes its software products through license
agreements with value-added  resellers,  system integrators,  original equipment
manufacturers,  and  other  strategic  partners.  Revenues  are  provided  under
software  licenses  with new  customers  and from the  related  sale of  product
maintenance,  training and  implementation  support  services.  Additions to the
number of authorized  users,  upgrades to newer product versions and the renewal
of product  maintenance  arrangements by customers pursuant to existing licenses
also provide  revenues to the Company.  Under  software  maintenance  contracts,
customers  are typically  entitled to receive  telephone  support,  software bug
fixes, and new releases of particular software products.

The  Company   believes   that  it  is  the   technology   leader  in  providing
enterprise-wide,   accurate,  scalable,  secure,   knowledge-retrieval  software
solutions  capable of  supporting  both text and image  information  assets.  It
believes that these  qualities  differentiate  its software  products from other
search engines,  toolkits,  and text retrieval products. The Company's Excalibur
RetrievalWare  and Excalibur  Visual  RetrievalWare  products  deliver a unified
software  solution  for text and  visual  knowledge  retrieval.  The  Company is
committed  to  empowering   organizations   by  enabling   people  to  transform
information  into  knowledge  and is focused on the  high-end  of the market for
knowledge retrieval.

In July 1995, the Company  acquired  ConQuest  Software,  Inc.  ("ConQuest"),  a
private  company  engaged in the business of  providing  natural  language  text
management  software tools.  The acquisition was effected  through the Company's
issuance  of common  stock and options to  purchase  common  stock to the former
ConQuest  shareholders and  optionholders in exchange for all of the outstanding
common  stock of ConQuest.  The  business  combination  was  accounted  for as a
pooling of interests  and,  accordingly,  the Company's  consolidated  financial
statements and the discussion and analysis of such statements  contained  herein
reflect the  combined  results of the pooled  businesses  for all of the periods
presented.

Results of Operations

For the fiscal year ended  January 31, 1997, total revenues were $20,259,000, an
increase of 8% over total  revenues of $18,675,000 in the prior fiscal year. The
net loss for the fiscal year ended January 31, 1997 was $7,173,000, or $0.58 per
common share, compared to a net loss of $884,000, or $0.08 per common share, for
last fiscal  year.  The  prior-year  total  revenues  amount  represented  a 48%
increase over total revenues of $12,638,000 in the fiscal year ended January 31,
1995.  The net loss for  fiscal  year 1995 was  $9,388,000,  or $0.85 per common
share.

                                       13
<PAGE>

The net loss for fiscal year 1997  reflects the  Company's  commitment to become
the leading provider of knowledge retrieval solutions.  In order to position the
Company to lead this new market, the Company continued to invest in the business
as planned in fiscal year 1997  resulting  in  significant  increases in product
development  and  sales  and  marketing  expenditures.  Increased  efforts  were
undertaken in order to deliver new software  products,  build strategic industry
alliances,  expand the corporate  infrastructure and increase the recognition of
the Excalibur RetrievalWare brand name.

The following chart  summarizes the components of revenues and the categories of
expenses, including the amounts expressed as a percentage of total revenues, for
the three fiscal years in the period ended January 31, 1997,  and the percentage
changes in the amounts between fiscal years (dollars in thousands).

<TABLE>
<CAPTION>
                                                                     Increase
                                                                    (Decrease) 
                                                                    From fiscal
                           Fiscal years ended January 31,              year                                   
                 ------------------------------------------------   ------------
                      1997             1996             1995        1996   1995
                 --------------   --------------   --------------   ----   ----
                     $       %       $        %       $        %     %       %
Revenues:        -------   ----   -------   ----   -------   ----   ----   ---- 
<S>              <C>       <C>    <C>       <C>    <C>       <C>   <C>     <C> 
RetrievalWare    $ 9,392    46%   $ 4,792    26%   $ 1,834    15%    96%   161%
EFS                6,474    32%    10,212    55%     8,299    66%   -37%    23%
                 -------   ----   -------   ----   -------   ----   ----   ----
 Total software   15,866    78%    15,004    80%    10,133    80%     6%    48%

Maintenance        4,393    22%     3,671    20%     2,505    20%    20%    47%
                 -------   ----   -------   ----   -------   ----   ----   ----
 Total revenues  $20,259   100%   $18,675   100%   $12,638   100%     8%    48%
                 =======   ====   =======   ====   =======   ====   ====   ====
Expenses:
 Sales and        
  marketing      $14,429    71%   $ 8,791    47%   $ 9,399    74%    64%    -6%

 Research and
  product
  development      7,694    38%     4,972    27%     5,085    40%    55%    -2%

 General and
  administrative   3,906    19%     3,330    18%     5,597    44%    17%   -41%

 Cost of
  revenues         1,843     9%     1,867    10%     1,721    14%    -1%     8%

 Restructure &
  merger costs      --      --      1,143     6%       776     6%  -100%    47%
                 =======   ====   =======   ====   =======   ====   ====   ====  
Total expenses   $27,872   138%   $20,103   108%   $22,578   179%    39%   -11%
                 =======   ====   =======   ====   =======   ====   ====   ====
</TABLE>

                                       14
<PAGE>

Software  revenues  increased 6% in the current fiscal year to $15,866,000  from
$15,004,000  in the prior  fiscal year.  However,  revenues  from the  Company's
licensing of Excalibur  RetrievalWare software products increased  significantly
in the current fiscal year.  Revenues  related to this product  increased 96% to
$9,392,000  in fiscal year 1997 from  $4,792,000  last year.  Revenues  for this
product were $1,834,000 in fiscal year 1995.  Excalibur  RetrievalWare  software
revenues  represented  46% of total  revenues in fiscal 1997 compared to 26% and
15%, in fiscal years 1996 and 1995, respectively.

In fiscal year 1997, the Company licensed its software  products to an increased
number of customers involved in numerous industrial,  government and educational
activities around the world.  Customer  organizations  including The World Bank,
UCLA, and Sierra  On-Line/P.F.  Collier,  chose Excalibur  RetrievalWare  as the
knowledge retrieval solution for a variety of corporate intranet, on-line and CD
ROM-based applications.

The Company also earned  revenues in the current  fiscal year  through  software
distribution licenses with strategic partners including Informix Software, Inc.,
Sequent Computer Systems, Inc., and BTG Incorporated. Under the arrangement with
Informix,  the Company's basic text and visual retrieval  capabilities have been
integrated with the Informix Universal Server database product.  The Company has
also  introduced  three  additional   Informix  DataBlade  modules  for  use  in
connection   with  this  product.   Sequent  will  market  and  sell   Excalibur
RetrievalWare  as a critical  enabling  technology  of its business  information
capture,  storage,  and retrieval  solutions.  The Company's agreement with BTG,
which currently  designates this firm as a master federal distributor of the EFS
software  product,   was  expanded  to  include  the  right  to  sell  Excalibur
RetrievalWare.

Revenues from the licensing of Excalibur EFS software  products,  expressed as a
percentage  of total  revenues,  continued  to decline in fiscal year 1997.  The
percentages were 32%, 55% and 66%, respectively,  in fiscal years 1997, 1996 and
1995.  The Company  believes that these  declines  occurred as the result of its
efforts to focus on the promotion of the Excalibur  RetrievalWare  product line.
Most of the development and sales and marketing expenditures in fiscal year 1997
related  to  the  Excalibur  RetrievalWare  or  Excalibur  Visual  RetrievalWare
software products. The Company expects that Excalibur EFS revenues will continue
to decline during fiscal year 1998.

Revenues provided by software maintenance and customer support arrangements were
$4,393,000, $3,671,000 and $2,505,000,  respectively, in fiscal years 1997, 1996
and 1995.  The addition of users of the Excalibur  RetrievalWare  product to the
base of EFS customers under maintenance  contracts,  particularly  during fiscal
year 1996, resulted in the increase in maintenance  revenues during the last two
fiscal years.

During fiscal year 1997, the Company continued its expansion overseas.  Revenues
of the Company's  international  sales operation  located in the United Kingdom,
Excalibur   Technologies   International,   Ltd.   ("ETIL"),   were  $5,940,000,
$3,551,000, and $2,222,000,  respectively,  in fiscal years 1997, 1996 and 1995.
The increases in revenues in fiscal years 1997 and 1996 over the previous fiscal
years were 67% and 60%,  respectively.  During this three-year period,  revenues
have  been  provided  primarily  by  software  licenses  with  various  European
commercial and government  customers and a  well-established  European  reseller
network.  The most  significant  portion of the  revenue  growth in the  current

                                       15
<PAGE>

fiscal  year was  $1,611,000  in  software  revenue  recognized  under  software
distribution  licenses with an affiliated company established in Belgium in July
1996 and its predecessor  (see Note 3 to the Consolidated  Financial  Statements
contained  herein).  Also,  the Company more than doubled the amount of revenues
obtained from the licensing of its software products to commercial firms located
in the Pacific Rim region. Such revenues were approximately 4% of total revenues
for the fiscal year ended January 31, 1997.

Sales and marketing  costs increased 64% in fiscal year 1997, from $8,791,000 in
the prior  fiscal year to  $14,429,000  in the  current  fiscal  year.  The most
significant  portion of the increase related to the addition of 15 people to the
sales,  marketing  and  business  development  staffs  during  fiscal year 1997,
including senior executives responsible for worldwide sales, worldwide marketing
and strategic  business  development  activities.  During fiscal year 1997,  the
Company  was  focused on  building a staff that will  effectively  identify  and
manage  strategic  sales  opportunities;  be able to close  the  direct  sale of
high-end knowledge retrieval solutions to large corporate,  government and other
institutional  organizations;  and support  the  distribution  of the  Company's
products and  services  through  reseller  channels  managed by large  strategic
partners.  Personnel were added to the functions of sales management,  pre-sales
technical  support,  distribution  channel  management,  public  relations,  and
marketing programs. As a result, salaries, benefits, travel, recruiting fees and
certain other employee costs increased  significantly  between fiscal years. The
Company also incurred  significantly  higher  marketing costs in connection with
its  product  promotion  and brand  recognition  programs.  The Company was very
active in  demonstrating  its  products  at trade shows and  industry  meetings,
creating new product  literature  and  advertising  in computer  industry  trade
publications.  The Company  engaged the services of a public  relations  firm to
assist its  marketing  efforts  resulting in increased  consulting  costs in the
current  fiscal  year.  In the current  fiscal year,  the Company also  recorded
employee   severance  costs,   including  salaries  and  benefits  amounting  to
approximately  $358,000,  related to the termination of certain sales, marketing
and business development personnel.

In fiscal year 1996,  sales and  marketing  costs  decreased by 6% to $8,791,000
from  $9,399,000 in fiscal year 1995. The Company's  efforts in the prior fiscal
year to channel major portions of its EFS business through resellers resulted in
declines in direct selling costs, product promotion expenditures and the size of
the marketing staff.

The major  investment  in product  development  during the  current  fiscal year
resulted  in new  products  and  new  product  features.  The  Company  recently
introduced  Excalibur  RetrievalWare  Version  6.0 as a  comprehensive  software
solution for enterprise-level  knowledge retrieval. This product delivers access
to a variety of information  resources including real-time,  archival and legacy
data and text  documents  in multiple  languages.  The Company  also  introduced
Excalibur Visual RetrievalWare,  an application  development environment product
that  enables  users to  search  for  visual  information  directly  from  their
intranets,  corporate databases,  the Internet,  and other sources. As a result,
research  and product  development  costs  increased  55% in fiscal year 1997 to
$7,694,000  from $4,972,000 in fiscal year 1996. Most of the increase was due to
the  addition  of 25  employees  to  the  technical  staff,  including  software
engineering  and  management  personnel,  and to the  expansion  of the  product
development  facilities.   Consequently,   salaries  and  other  employee  costs
increased  between years as well as office rent,  equipment  costs, and computer
equipment depreciation.

                                       16
<PAGE>

In fiscal year 1996, research and development costs declined by 2% to $4,972,000
from  $5,085,000  in  fiscal  year  1995.  The  decline  was  the  result  of  a
restructuring  that took place in fiscal 1995 and  included a  reduction  in the
number of employees in research and development following a major release of the
EFS software product.  Additionally, the write-off of certain obsolete equipment
in fiscal  1995 had the effect of reducing  depreciation  expense in fiscal year
1996.

General and administrative  expenses increased in the current fiscal year by 17%
from  $3,330,000 in fiscal year 1996 to $3,906,000 in fiscal year 1997.  Payroll
and other related  employee costs  associated  with additions to the finance and
administrative  staff,  including  the  areas  of human  resources,  information
systems and  financial  analysis,  increased  in the current  fiscal  year.  The
Company also retained outside firms to assist in the areas of investor relations
and strategic planning resulting in increased consulting expenses in fiscal year
1997.  General and  administrative  expenses were $5,597,000 in fiscal year 1995
including legal fees and settlement  costs totaling  $925,000  associated with a
lawsuit involving a former employee that was settled in early 1996, compensation
of $850,000  related to the  issuance  of common  stock and  below-market  stock
options to employees and bad debt expense of $362,000.  Fiscal year 1996 expense
amounts  for  stock  compensation  and  bad  debts  were  $36,000  and  $91,000,
respectively.

The cost of revenues,  expressed as a percentage of total  revenues,  was 9% and
10%, respectively,  in fiscal years 1997 and 1996. The costs were $1,843,000 and
$1,867,000,  respectively, in fiscal years 1997 and 1996. The Company negotiated
an amendment to a third-party  royalty agreement resulting in a reduction in the
royalty  rate  applicable  to revenues  derived  from the  license of  Excalibur
RetrievalWare products. In addition,  activity conducted pursuant to development
contracts  was  greater in the prior  year.  These cost  reductions  were offset
partially by increased costs  associated  with  supporting the larger  installed
base of Excalibur RetrievalWare end users. Due primarily to an increase in total
revenues, cost of revenues increased by 8% in fiscal year 1996 compared with the
fiscal year 1995 amount of $1,721,000  that included the costs of  documentation
and  packaging  for the new version of the EFS software  product  released  that
year.

In fiscal year 1996,  the Company  recorded a  restructuring  charge of $653,000
related to the relocation of its headquarters from California to the Washington,
D.C. area and the consolidation of the technical staff into two facilities.  The
costs  consisted  primarily of severance  payments to  terminated  employees and
leased facility  abandonment costs. The Company also incurred $490,000 in legal,
accounting and other costs  associated  with the merger with  ConQuest.  Under a
separate and distinct plan to close a remote development  facility,  the Company
recorded a  restructuring  charge of $312,000 in fiscal year 1995,  as well as a
charge of $464,000 for the write-off of computer equipment no longer meeting the
requirements  of the  product  development  plan.  At January 31,  1997,  unpaid
amounts related to these charges totaled approximately $48,000.

The activities for fiscal year 1997,  including those discussed above,  resulted
in total  expenses  of  $27,872,000,  a 39%  increase  from  total  expenses  of
$20,103,000  in the previous  fiscal year. In fiscal year 1996,  total  expenses
decreased by 11% to $20,103,000  from $22,578,000 in fiscal year 1995. The total
number of employees increased from 126 employees at the beginning of the current
fiscal year to 173 at January 31, 1997. The Company had 134 employees at January
31, 1995.

                                       17
<PAGE>

As a result of an increased  level of  investments  during fiscal year 1997, net
interest  income  increased to $781,000 from  $544,000 in fiscal year 1996.  Net
interest  income  increased  in fiscal year 1996,  from  $344,000 in fiscal year
1995, primarily due to higher rates of return on invested funds. As discussed in
Note 3 to the Consolidated  Financial  Statements  contained herein, the Company
recorded its equity in the net loss of its affiliate,  ETNV, for the fiscal year
ended January 31, 1997. This charge,  including the amortization of the value of
common stock warrants  issued by the Company in connection with the formation of
ETNV  and the  elimination  by the  Company  of its  share of its  gross  profit
included in ETNV's prepaid license balance at January 31, 1997, was $341,000.

Liquidity and Capital Resources

In the fiscal year ended  January 31, 1997,  the Company's  combined  balance of
cash, cash  equivalents and  investments in marketable  securities  decreased by
$2,132,000 to $11,112,000  as summarized  below (in  thousands).  At January 31,
1997 and 1996,  investments in marketable  securities consisted of U.S. Treasury
Bills with maturities of less than one year.

                         January 31     January 31
                            1997           1996         Change
                         ----------    -----------   -----------
        Cash and cash
         equivalents     $   2,685     $    2,903    $    (218)
        Investments          8,427         10,341       (1,914)
                         ==========    ===========   ===========
         Total           $  11,112     $   13,244    $  (2,132)
                         ==========    ===========   ===========

Cash was used to fund the net loss for the fiscal year ended January 31, 1997 of
$7,173,000  and to pay  obligations  accrued  at  January  31,  1996,  including
commissions,  bonuses,  restructuring  costs  and  payroll  taxes  collected  in
connection  with  the  exercise  of  employee  stock  options.  Cash was used to
purchase  computer  equipment  and  furniture  for new  employees;  to fund  the
necessary  improvements  made to leased  office space in Vienna,  Virginia,  now
serving as the Company's corporate headquarters; and to prepay certain corporate
and  marketing  expenses.  In July 1996,  the Company made a cash  investment of
$488,000 in ETNV and incurred  organizational costs of approximately  $68,000 in
connection  with its formation,  thereby  acquiring  approximately  13.2% of the
outstanding voting capital stock.

Accounts  receivable  increased  by  $2,175,000  to a balance of  $9,750,000  at
January 31, 1997, before reduction for the allowance for doubtful accounts.  The
comparable balance at January 31, 1996 was $7,575,000,  including the noncurrent
portion of a customer account  receivable.  The balance,  and the number of days
sales  outstanding,  rose  in  the  period  due  primarily  to  an  increase  in
outstanding  balances with payment terms beyond the normal  practice of 30 days,
reflecting the competitive  nature of the Company's  business and the high value
of enterprise-wide and strategic partner software licenses. However, the balance
of overdue amounts at January 31, 1997 was less than the  corresponding  overdue
balance at January 31, 1996. As a result, the allowance for doubtful accounts of
$367,000  at January  31, 1997 was lower than the balance at January 31, 1996 of
$375,000.  Management  believes  that the  allowance  for  doubtful  accounts of
$367,000 at January 31, 1997 is adequate.

                                       18
<PAGE>

As  indicated  in  Note 4 to the  Consolidated  Financial  Statements  contained
herein,  the Company  completed a private  placement sale of its common stock in
March,   1996  resulting  in  the  receipt  of  net  proceeds  of  approximately
$8,388,000.  The Company also received  approximately  $1,334,000  cash proceeds
from the exercise of employee  stock options in the current  fiscal year.

The  Company's  current  balances of cash,  cash  equivalents  and  investments,
together with funds anticipated from future operations,  are expected to provide
sufficient  cash to meet the  Company's  current  projected  needs  for the next
fiscal year.  Historically,  the Company has used cash  provided by sales of its
common stock to fund its operating  losses.  If the Company fails to achieve its
operating  plan for  fiscal  year 1998,  the  Company's  balance  of cash,  cash
equivalents and marketable securities may be reduced substantially.  The Company
may be required to pursue  additional  external  sources of financing to support
its operations and capital requirements. There can be no assurance that external
sources of financing will be available to fund the Company's ongoing  operations
or other capital requirements on terms acceptable to the Company.


Factors That May Affect Future Results

The Company  believes  that the market for the  Company's  software  products is
growing rapidly and that the Company's business  environment is characterized by
rapid  technological  changes,  changes in customer  requirements,  new emerging
market   segments,   and  increased   competition.   Consequently,   to  compete
effectively,  the  Company  must make  frequent  new product  introductions  and
enhancements  and deploy sales and marketing  resources to take advantage of new
business  opportunities.  The  ability of the  Company to achieve and manage the
expected  growth of the business and to develop new products  will depend on the
Company's  success in retaining its key personnel and adding new employees  with
appropriate  skills  at  the  right  times.   Failure  to  make  timely  product
introductions  and enhancements or to capitalize on new market  opportunities as
they  emerge may  adversely  affect  future  operating  results.  The  Company's
operations are also subject to certain other risks and uncertainties  including,
among others, the effectiveness of actual and potential competition, the success
of  the  Company's   relationships   with  its  strategic   partners  and  other
distributors of the Company's  products,  the risks associated with acquisitions
and  international   expansion,  and  the  availability  of  additional  capital
financing on terms acceptable to the Company.

The Company's business is seasonal. Typically, revenues in the first half of the
fiscal year are lower than total revenues in the second half of the fiscal year.
Revenues generated from product licenses can vary significantly  within a period
due to the  relatively  long  sales  cycle,  variations  in the size of  license
agreements,  and the  number of  shipments  made.  Historically,  the  volume of
customer  orders and  product  shipments  is  greatest at the end of a reporting
period,  and the  Company  often  recognizes  a  significant  portion of license
revenue towards the end of each fiscal reporting  period.  Deferred  revenues of
$2,693,000 at January 31, 1997,  related  primarily to product  maintenance  and
customer support agreements,  are not expected to cause significant fluctuations
in the revenues to be reported in future fiscal periods.

                                       19
<PAGE>

As of  January  31,  1997,  the  Company  had  significant  net  operating  loss
carryforwards  ("NOLs") of  approximately  $58,988,000.  The deferred tax assets
representing the benefits of the NOLs have been offset completely by a valuation
allowance due to the Company's lack of an earnings history. The Company incurred
a net loss of  $7,173,000  for the fiscal  year ended  January  31, 1997 and has
incurred  cumulative  losses of  approximately  $17,445,000  over the last three
fiscal  years.  The  accumulated  deficit of the Company at January 31, 1997 was
$43,619,000.  The  realization  of the  benefits  of the  NOLs is  dependent  on
sufficient taxable income in future fiscal years. Lack of future earnings,  or a
change in the  ownership of the Company,  could  adversely  affect the Company's
ability  to  utilize  the  NOLs.  Further,  because  there  was a change  in the
ownership of ConQuest last fiscal year,  the  Company's  ability to utilize NOLs
relating to ConQuest of approximately $3,233,000 may be limited. Despite the NOL
carryforwards,  the Company may have income tax liability in future years due to
the  application of the  alternative  minimum tax rules of the Internal  Revenue
Code.

The preparation of 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  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

The Company believes that inflation has not had a material effect on the results
of its operations to date.

                                       20


<PAGE>


Item 8.  Financial Statements and Supplementary Data.

Financial  statements and  supplementary  data of the Company are submitted as a
separate section of this Annual Report on Form 10-K.

Item 9.  Changes in and  Disagreements  with  Accountants  on Accounting
            and Financial Disclosure.

None.







                                       21

<PAGE>


                                PART III

Item 10. Directors and Executive Officers of the Registrant.

Information on directors and executive  officers of the Company will be included
under the  heading  "Election  of  Directors"  and  elsewhere  in the  Company's
definitive Proxy Statement  relating to the Annual Meeting of Shareholders to be
held on July 22, 1997 (the "Proxy  Statement")  which is incorporated  herein by
reference.


Item 11. Executive Compensation.

Information  on  executive  compensation  will be  included  under  the  heading
"Executive   Compensation"  of  the  Proxy  Statement   incorporated  herein  by
reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

Information of beneficial  ownership of the Company's voting  securities by each
director and all officers and  directors as a group,  and by any person known to
beneficially  own more than 5% of any class of voting  security  of the  Company
will be included  under the heading  "Security  Ownership of Certain  Beneficial
Owners and Management" in the Proxy Statement incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

Information  relating to certain  relationships and related transactions will be
included under the heading "Certain  Relationships and Related  Transactions" in
the Proxy Statement incorporated herein by reference.


                                PART IV

Item 14. Exhibits,  Financial Statement  Schedules,  and Reports on Form
8-K.

(a)   Documents filed as part of Form 10-K

      1. Financial Statements:

         The  following  financial  statements of the Company are submitted in a
         separate  section  pursuant to the  requirements  of Form 10-K, Part I,
         Item 8 and Part IV, Items 14(a) and 14(d):

         Index to Consolidated Financial Statements
         Report of Independent Public Accountants
         Consolidated Balance Sheets
         Consolidated Statements of Operations
         Consolidated Statements of Shareholders' Equity
         Consolidated Statements of Cash Flows
         Notes to Consolidated Financial Statements

                                       22
<PAGE>

      2. Schedules Supporting Financial Statements:

         The  following  schedule is filed as part of this Annual Report on Form
         10-K and should be read in conjunction  with the Company's consolidated
         financial statements:

         Schedule II, Valuation and Qualifying Accounts

         All  other  schedules  are  omitted  because  they  are  not  required,
         are  inapplicable,  or  the  information  is  otherwise  shown  in  the
         consolidated   financial   statements  or  notes  to  the  consolidated
         financial statements.

      3. Exhibits:

         Exhibit Number and Description

          2.01    Agreement  and  Plan  of  Merger   Between   Excalibur
                  Technologies Corporation,  Excalibur Acquisition Corp.
                  and ConQuest Software, Inc., dated July 5, 1995. (2)

          3.01    Certificate    of     Incorporation    of    Excalibur
                  Technologies Corporation. (1)

          3.02    Amendment of the  Certificate of  Incorporation  dated
                  June 28, 1996.

          3.03    Bylaws of Excalibur Technologies Corporation. (1)

         10.04    Consulting  Agreement  with  James W. Dowe III,  dated
                  July 1, 1990. (1)

         10.05    Incentive Stock Option Plan, dated April 1989. (1)

         10.06    Agreement  and  Plan  of  Merger   Between   Excalibur
                  Technologies Corporation,  Excalibur Acquisition Corp.
                  and ConQuest Software, Inc., dated July 5, 1995. (2)

         10.07    Employment Agreement,  dated July 20, 1995, with Edwin
                  R. Addison.  (4)

         10.08    1995 Incentive Plan, dated November 1995. (3)

         10.09    ConQuest  Incentive  Stock Option  Plan,  dated August
                  19, 1993. (4)

         10.10    Office Lease (10440  Little  Patuxent  Parkway,  Suite
                  800, Columbia, MD), commencing January 1, 1996. (4)

         10.11    Office Lease (1959  Palomar Oaks Way,  Carlsbad,  CA),
                  commencing November 15, 1995. (4)

         10.12    Office  Lease  (1921   Gallows  Road,   Vienna,   VA),
                  commencing in May 1996. (4)

                                       23
<PAGE>

         10.13    Excalibur  Technologies   Corporation  Employee  Stock
                  Purchase Plan, effective August 1, 1996. (5)

         22.01    Subsidiaries of Excalibur Technologies Corporation.

         23.01    Consent of Arthur  Andersen  LLP,  Independent  Public
                  Accountants.
-----------------------

(1)   Incorporated  herein by reference to Form 10-K for the year ended  January
      31, 1991, filed April 22, 1991.

(2)   Incorporated herein by reference to Form 8-K, filed August 4, 1995.

(3)   Incorporated  herein  by  reference  to the Proxy  Statement  for the 1995
      Annual Meeting of Shareholders, dated October 16, 1995.

(4)   Incorporated  herein by reference to Form 10-K for the year ended  January
      31, 1996, filed April 30, 1996.

(5)   Incorporated  herein by reference to the Proxy  Statement  for the
      1996 Annual Meeting of Shareholders, dated May 28, 1996.


 (b)  Reports on Form 8-K.

None.



Index to Consolidated Financial Statements                               Page
------------------------------------------                               ----

Reports of Independent Public Accountants                                F-1

Consolidated Balance Sheets
      As of January 31, 1997 and 1996                                    F-2

Consolidated Statements of Operations
      For the fiscal years ended January 31, 1997, 1996, and 1995        F-3

Consolidated Statements of Shareholders' Equity
      For the fiscal years ended January 31, 1997, 1996, and 1995        F-4

Consolidated Statements of Cash Flows
      For the fiscal years ended January 31, 1997, 1996, and 1995        F-5

Notes to Consolidated Financial Statements                               F-7

Schedule II - Valuation and Qualifying Accounts
      For the fiscal years ended January 31, 1997, 1996, and 1995        F-19


                                       24

<PAGE>




                REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Excalibur Technologies Corporation:

We have  audited  the  accompanying  consolidated  balance  sheets of  Excalibur
Technologies Corporation (a Delaware corporation) and subsidiaries as of January
31,  1997 and 1996,  and the  related  consolidated  statements  of  operations,
shareholders'  equity and cash  flows for each of the three  years in the period
ended January 31, 1997. These consolidated financial statements and the schedule
referred  to below  are the  responsibility  of the  Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements and schedule based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards  require that we plan and perform an 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,  based on our audits,  the  consolidated  financial  statements
referred to above  present  fairly,  in all  material  respects,  the  financial
position of Excalibur  Technologies  Corporation and  subsidiaries as of January
31, 1997 and 1996, and the results of their  operations and their cash flows for
each of the three years in the period ended January 31, 1997, in conformity with
generally accepted accounting principles.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
consolidated  financial  statements taken as a whole. The schedule listed in the
index  to  consolidated  financial  statements  is  presented  for  purposes  of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the  auditing  procedures  applied  in  the  audits  of the  basic  consolidated
financial  statements  and,  in our  opinion,  fairly  states  in  all  material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.


                                                ARTHUR ANDERSEN LLP


Washington, D.C.,
February 28, 1997

                                      F-1

<PAGE>
<TABLE>

                   EXCALIBUR TECHNOLOGIES CORPORATION
                            AND SUBSIDIARIES
                      CONSOLIDATED BALANCE SHEETS
                 (in thousands, except per share data)
<CAPTION>
                                                            January 31,
                                                      ------------------------
                    ASSETS                                1997         1996
                                                      ---------      ---------
<S>                                                   <C>            <C> 
Current Assets:    
   Cash and cash equivalents....................      $  2,685       $  2,903
   U.S. government securities, at cost..........         8,427         10,341
   Accounts receivable, net.....................         9,383          6,942
   Prepaid expenses and other ..................         1,655            582
                                                      ---------      ---------
        Total current assets....................        22,150         20,768

Equipment and Leasehold Improvements, net.......         2,939          1,943
Other Assets....................................         1,058            335
                                                      ---------      ---------
                                                      $ 26,147       $ 23,046
                                                      =========      =========

     LIABILITIES AND SHAREHOLDERS' EQUITY 
Current Liabilities:
   Accounts payable.............................      $  1,680       $  1,005
   Accrued expenses.............................         2,310          2,999
   Deferred revenues............................         2,693          2,759
   Deferred compensation........................           901          1,032
                                                      ---------      ---------
        Total current liabilities...............         7,584          7,795
                                                      ---------      ---------

Shareholders' Equity:
    5% Cumulative convertible preferred stock,
        $0.01 par value, preference in liquidation
        $10 per share, 1,000 shares authorized;
        27 shares issued and outstanding........           271            271 
   Common stock, $0.01 par value, 40,000
         shares authorized; 12,449 and 11,953
         shares issued and outstanding..........           124            119
   Additional paid-in capital...................        61,830         51,272
   Accumulated deficit .........................       (43,619)       (36,446)
   Cumulative translation adjustment............           (43)            35
                                                      ---------      ---------
        Total shareholders' equity..............        18,563         15,251
                                                      ---------      ---------
                                                      $ 26,147       $ 23,046
                                                      =========      =========

       The accompanying notes to the financial statements are an integral
                   part of these consolidated balance sheets.
</TABLE>

                                      F-2
<PAGE>
<TABLE>
                      EXCALIBUR TECHNOLOGIES CORPORATION
                               AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share data)
<CAPTION>
                                     For the Fiscal Years Ended January 31
                                   -----------------------------------------
                                      1997            1996           1995 
                                   ---------       ---------       ---------
<S>                                <C>             <C>             <C>
Revenues:     
   Software......................  $ 15,866        $ 15,004        $ 10,133
   Maintenance...................     4,393           3,671           2,505
                                   ---------       ---------       ---------
                                     20,259          18,675          12,638
                                   ---------       ---------       ---------
Expenses:
   Sales and marketing...........    14,429           8,791           9,399
   Research and product                  
    development..................     7,694           4,972           5,085
   General and                   
    administrative...............     3,906           3,330           5,597
   Cost of software revenues.....     1,037           1,294           1,197
   Cost of maintenance revenues..       806             573             524 
   Restructuring costs...........         -             653             776
   Merger costs..................         -             490              -
                                   ---------       ---------       ---------
                                     27,872          20,103          22,578
                                   ---------       ---------       ---------

Operating loss...................    (7,613)         (1,428)         (9,940)

Other income / (expenses):
   Interest income, net..........       781             544             344
   Equity in net loss of 
     affiliate...................      (341)              -               -
   Other income..................         -               -             208 
                                   ---------       ---------       ---------

Net loss.........................    (7,173)           (884)         (9,388)

Dividends on preferred stock.....        14              14              14
                                   ---------       ---------       ---------                                  
Net loss applicable to
     common stock................  $ (7,187)       $   (898)       $ (9,402)
                                   =========       =========       =========

Net loss per common share........  $  (0.58)       $  (0.08)       $  (0.85)
                                   =========       =========       =========
Weighted-average number of
   common shares outstanding.....    12,351          11,496          11,094
                                   =========       =========       =========

            The accompanying notes to the financial statements are an
                 integral part of these consolidated statements.
</TABLE>
                                      F-3
<PAGE>
<TABLE>
                      EXCALIBUR TECHNOLOGIES CORPORATION
                               AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                (in thousands)
<CAPTION>
                                                                  
                         Preferred Stock   Common Stock     Add'l                          Cumulative
                         ---------------   ------------   Paid-in  Deferred   Accumulated  Translation
                           Shares     $    Shares    $    Capital    Comp.      Deficit     Adjust.     Total
                           ------   -----  ------   ----  --------  -------    ---------    ------     --------
<S>                            <C>  <C>    <C>      <C>    <C>       <C>       <C>          <C>        <C>    
Balance, January 31, 1994      27   $ 271  10,273   $102   $37,949   $    -    $(25,965)    $   6      $12,363  

Conversion of
notes payable.............      -       -       7      -        29        -          -          -           29
Sales of common stock, 
net of offering costs.....      -       -     735      7     5,328        -          -          -        5,335
Compensation paid
in common stock...........      -       -     156      2       848        -          -          -          850
Issuance of common stock
upon exercise of options..      -       -      76      1       463      (78)         -          -          386
Issuance of common stock
for antidilution 
protection in agreement...      -       -       6      -         -        -          -          -            -       
Treasury stock purchase...      -       -     (22)     -       (94)       -          -          -          (94)
Amortization of deferred
compensation..............      -       -       -      -         -       40          -          -           40
Accrued dividends paid....      -       -       -      -         -        -         (14)        -          (14)
Translation adjustment....      -       -       -      -         -        -          -        (32)         (32)
Net loss..................      -       -       -      -         -        -      (9,388)        -       (9,388)
                           ------   -----  ------   ----   --------  -------   ---------    ------     --------  
Balance, January 31, 1995.     27    $271  11,231   $112   $44,523   $  (38)   $(35,367)    $ (26)     $ 9,475

Issuance of common stock
upon exercise of options..      -       -     714      7     6,726        -          -          -        6,733
Issuance of common stock  
for services..............      -       -       8      -        36        -          -          -           36
Amortization of deferred
compensation..............      -       -       -      -       (13)      38          -          -           25
Accrued dividends paid....      -       -       -      -         -        -         (14)        -          (14)
Translation adjustment....      -       -       -      -         -        -          -         61           61
Adjustment for change in
ConQuest fiscal year......      -       -       -      -         -        -        (181)        -         (181)
Net loss..................      -       -       -      -         -        -        (884)        -         (884)
                           ------   -----  ------   ----   --------  -------   ---------    ------     --------  
Balance, January 31, 1996.     27   $ 271  11,953   $119   $51,272        -    $(36,446)    $  35      $15,251

Issuance of common stock
upon exercise of options..      -       -     146      1     1,416        -          -          -        1,417
Sale of common stock, net  
of offering costs.........      -       -     350      4     8,384        -          -          -        8,388
Issuance of warrants to
ETNV investors............      -       -       -      -       758        -          -          -          758
Translation adjustment....      -       -       -      -         -        -          -        (78)         (78)
Net loss..................      -       -       -      -         -        -      (7,173)        -       (7,173)
                           ------   -----  ------   ----   --------  -------   ---------    ------     --------  
Balance, January 31, 1997.     27   $ 271  12,449   $124   $61,830        -    $(43,619)    $ (43)     $18,563
                           ======   =====  ======   ====   ========  =======   =========    ======     ========


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

</TABLE>
                                      F-4
<PAGE>
<TABLE>
                    EXCALIBUR TECHNOLOGIES CORPORATION
                               AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
<CAPTION>
                                                  For the Fiscal Years Ended
                                                          January 31         
                                               ---------------------------------
                                                  1997        1996        1995
                                               ---------   ---------   ---------
<S>                                            <C>         <C>         <C>
Cash Flows from Operating Activities:      
Net loss ...................................   $ (7,173)   $   (884)   $ (9,388)
Adjustments to reconcile net loss to net
cash used in operating activities:
   Depreciation and amortization ...........      1,367       1,048       1,084
   Equity in net loss of affiliate..........        341           -           -  
   Loss on disposal of assets ..............         36          66         450
   Compensation paid in common stock .......          -          36         850
   Amortization of deferred compensation ...          -          25          40
Changes in operating assets and liabilities:
   Accounts receivable, net ................     (2,324)     (3,289)       (266)
   Prepaid expenses and other ..............       (767)       (476)        131
   Accounts payable and accrued expenses ...        (97)       ( 41)      1,451
   Deferred revenues .......................        (86)       (244)      1,179
   Adjustment for change in fiscal year of
   ConQuest ................................           -       (181)          -
                                               ---------   ---------   ---------
   Net cash used in operating activities ...     (8,703)     (3,940)     (4,469)
                                               ---------   ---------   ---------
Cash Flows from Investing Activities:
   Purchase of investments .................    (17,959)    (12,023)     (8,903)
   Proceeds from maturities of
   investments .............................     19,873      10,287       9,649
   Purchases of equipment and leasehold
   improvements ............................     (2,394)       (541)       (653)
   Investment in affiliate .................       (556)          -           -  
                                               ---------   ---------   ---------
   Net cash (used in) provided by
   investing activities ....................     (1,036)     (2,277)         93
                                               ---------   ---------   ---------
Cash Flows from Financing Activities:
   Proceeds from notes payable .............          -         238         189
   Proceeds from the issuance
   of common stock .........................      9,722       6,688       5,678
   Dividends paid ..........................          -         (14)        (14)
   Repayment of notes payable ..............        (39)       (549)        (48)
                                               ---------   ---------   ---------
   Net cash provided by financing
   activities ..............................      9,683       6,363       5,805
                                               ---------   ---------   ---------
The Effect of Exchange Rate Changes on
Cash .......................................       (162)        112         (64)
                                               ---------   ---------   ---------
Net (Decrease) Increase in Cash and
Cash Equivalents ...........................       (218)        258       1,365

Cash and Cash Equivalents, beginning of
period .....................................      2,903       2,645       1,280
                                               --------    --------    --------
Cash and Cash Equivalents, end of period ...   $  2,685    $  2,903    $  2,645
                                               ========    ========    ========
</TABLE>
            The accompanying notes to the financial statements are an
                 integral part of these consolidated statements.

                                      F-5
<PAGE>
<TABLE>

                   EXCALIBUR TECHNOLOGIES CORPORATION
                            AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                       (continued, in thousands)
<CAPTION>

                                                 For the Fiscal Years Ended
                                                         January 31,
                                              ----------------------------------
                                                 1997         1996         1995
                                              ---------    ---------    --------
<S>                                           <C>          <C>          <C>    
Supplemental Disclosures of Cash Flow
Information:
   Cash paid for interest.................    $     11     $     61     $     8
                                              =========    =========    ========

Supplemental Disclosures of Noncash
Investing and Financing Activities:
   Issuance of warrants to purchase           
   common stock...........................    $    758     $      -     $     -
                                              =========    =========    ========
                                              
   Stock options exercised under
   deferred compensation arrangements.....    $     83     $     45     $    43
                                              =========    =========    ========

   Purchase of treasury stock with note       
   payable................................    $      -     $      -     $    94
                                              =========    =========    ========

   Conversion of notes payable into           
   common stock...........................    $      -     $      -     $    29
                                              =========    =========    ========
   Issuance of notes in relation to           
   severance agreements...................    $      -     $      -     $    89
                                              =========    =========    ========


            The accompanying notes to the financial statements are an
                 integral part of these consolidated statements.
</TABLE>

                                      F-6
<PAGE>

                      EXCALIBUR TECHNOLOGIES CORPORATION
                               AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)    THE COMPANY

Operations and Organization

The  consolidated   financial  statements  include  the  accounts  of  Excalibur
Technologies Corporation  ("Excalibur");  Excalibur Technologies  International,
Ltd.  ("ETIL"),  a  wholly-owned   subsidiary;   and  ConQuest  Software,   Inc.
("ConQuest"),  a company that was  acquired in July,  1995.  These  entities are
collectively   referred  to  hereinafter  as  the  "Company."  All   significant
intercompany  transactions  and accounts have been  eliminated.  Certain amounts
presented in the prior years'  financial  statements  have been  reclassified to
conform with the fiscal year 1997 presentation.

The Company designs, develops, and markets knowledge retrieval software products
capable of  supporting  text and visual  data.  The Company  offers  consulting,
training,  product maintenance and systems implementation services in support of
its software  products.  The Company licenses its software  products directly to
commercial  businesses and government agencies throughout North America,  Europe
and other parts of the world, and also distributes its software  products to end
users through license agreements with value-added resellers, system integrators,
original equipment manufacturers and other strategic partners.

The Company has incurred  cumulative  losses of $17,445,000  over the last three
fiscal years and the accumulated  deficit of the Company at January 31, 1997 was
$43,619,000.   The  Company's  operations  are  subject  to  certain  risks  and
uncertainties  including,  among  others,  actual and potential  competition  by
entities with greater financial  resources,  experience and market presence than
the  Company;  the  success  of the  Company's  product  marketing  and  product
distribution   strategies;   the  risks   associated   with   acquisitions   and
international  expansion;  the need to manage growth;  certain technology risks;
and the availability of additional  capital financing on terms acceptable to the
Company.

Acquisition of ConQuest Software, Inc.

In July 1995,  Excalibur  acquired  ConQuest,  a private  company engaged in the
business of providing  natural  language text  management  software  tools.  The
former  shareholders  of ConQuest  received  approximately  1,427,000  shares of
common  stock of  Excalibur in exchange for all of the common stock of ConQuest.
Outstanding  options to purchase  common stock of ConQuest were  converted  into
options to purchase  approximately 572,000 shares of Excalibur common stock. The
acquisition  was  accounted  for as a pooling of  interests  and,  as such,  the
accompanying  consolidated  financial statements reflect the combined results of
the pooled businesses for the respective periods presented. In fiscal year 1996,
the  Company  recorded  a charge of  approximately  $490,000  for the  estimated
transaction costs of completing the merger between  Excalibur and ConQuest.  The
costs included  legal,  accounting and other  professional  fees of $363,000 and
other costs of $127,000. These costs were paid by January 31, 1996.

                                      F-7

<PAGE>

Prior to its acquisition by Excalibur,  ConQuest reported operating results on a
calendar  year  basis.  ConQuest's  separate  results  for prior  years were not
restated  to conform  to the fiscal  year of  Excalibur.  Therefore,  ConQuest's
separate  results of operations  for the month ended  January 31, 1995,  are not
reflected in the consolidated  statement of operations for the fiscal year ended
January 31, 1996. The revenues,  operating loss and net loss of ConQuest for the
month ended January 31, 1995 were $138,000, $177,000 and $181,000, respectively.
The results of operations  contained in these consolidated  financial statements
for the fiscal year ended  January 31, 1995 combine  those of Excalibur  for the
period,  as  previously  reported,  with those of ConQuest for the calendar year
ended December 31, 1994.

Separate  results of  Excalibur  and  ConQuest  for the  periods  preceding  the
acquisition were as follows (in thousands):

                              
                                             Fiscal quarter     Fiscal year
                                                  ended            ended     
                                             April 30, 1995   January 31, 1995
         Revenues:                           --------------   ----------------
           Excalibur, previously reported        $  2,801         $ 10,841
           ConQuest ......................            840            1,797
                                                 ---------        ---------
         Total, as restated ..............       $  3,641         $ 12,638
                                                 =========        =========

          Net Loss:
            Excalibur, previously reported       $   (466)        $ (6,926)
            ConQuest .....................           (137)          (2,462)
                                                 ---------        ---------
          Total, as restated .............       $   (603)        $ (9,388)
                                                 =========        =========



(2)    SIGNIFICANT ACCOUNTING POLICIES

The preparation of 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  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

Revenue Recognition

Revenues  from  the sale of  computer  software  licenses  are  recognized  upon
shipment of product provided that no significant  vendor  obligations remain and
that  collection of the resulting  receivable is considered  probable.  Revenues
related  to  agreements   with  customers   that  contain   future   performance
requirements  are recognized  when the performance  requirements  are satisfied.
Revenues  related to customer  support  agreements  are deferred and  recognized
ratably  over  the  term  of  the  respective  agreements,   usually  one  year.
Maintenance  revenues that are bundled with initial  licensing fees are deferred
and recognized over the term of the related  maintenance  periods,  typically 90
days.

                                      F-8
<PAGE>

The American  Institute of Certified Public  Accountants  recently  approved for
exposure  a draft  Statement  of  Position  (the  "Exposure  Draft")  that would
supersede  Statement  of  Position  91-1  "Software  Revenue  Recognition".   If
implemented in its current form, the Exposure Draft would be effective for years
beginning  after  December 15, 1996.  Management  believes the proposed  changes
would not have a material adverse financial impact on the Company.

Research and Development Costs

No product  development  costs were  capitalized,  and there were no capitalized
costs not yet  amortized,  during the fiscal years ended January 31, 1997,  1996
and 1995.

Cash and Cash Equivalents

For purposes of the balance  sheets and  statements  of cash flows,  the Company
considers  all highly  liquid  investments  purchased  with a maturity  of three
months or less to be cash equivalents. U.S. government securities are considered
to be  investments  and are excluded from cash  equivalents  regardless of their
maturities.  Cash  equivalents  consist  of  funds  deposited  in  money  market
accounts.  Consequently,  the  carrying  amount  of cash  and  cash  equivalents
approximates fair value.

Marketable Securities

Under Statement of Financial  Accounting Standard ("SFAS") No. 115,  "Accounting
For  Certain  Investments  in Debt and  Equity  Securities,"  that  was  adopted
February  1,  1994,  the  Company   classifies  its  marketable   securities  as
held-to-maturity  securities.  Accordingly,  marketable  securities,  consisting
entirely  of U.S.  government  securities,  are  carried at cost,  adjusted  for
premium and discount  amortization.  At January 31, 1997 and 1996, the aggregate
fair value of the securities  based upon quoted market prices was $8,428,000 and
$10,345,000,  respectively.  The Company's adoption of SFAS No. 115 did not have
an impact on the  Company's  consolidated  financial  statements  as  marketable
securities previously were carried at cost.

Income Taxes

Deferred taxes are provided utilizing the liability method as prescribed by SFAS
No.  109,  "Accounting  for  Income  Taxes,"  whereby  deferred  tax  assets are
recognized  for  deductible  temporary  differences  and operating  loss and tax
credit  carryforwards,  and deferred tax  liabilities are recognized for taxable
temporary  differences.  Temporary  differences are the differences  between the
reported  amounts of assets and  liabilities  and their tax bases.  Deferred tax
assets and  liabilities  are adjusted for the effects of changes in tax laws and
rates on the date of  enactment.  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.

Depreciation and Amortization

Depreciation  of office  furniture and equipment is provided on a  straight-line
basis over the  estimated  useful  lives of the assets,  generally  three to ten
years.  Amortization  of leasehold  improvements  is provided on a straight-line
basis over the term of the applicable lease.

                                      F-9
<PAGE>
Net Loss Per Common Share

Net loss per common share is calculated based on the weighted-average  number of
common  shares  outstanding  during each period,  after  deducting  dividends on
preferred  stock.   Common  stock  equivalents  (stock  options,   warrants  and
cumulative  convertible  preferred  stock) were  excluded  from the net loss per
share   computations   for  all  periods   presented  herein  because  of  their
anti-dilutive effect.

The Company will be required to apply the provisions of SFAS No. 128,  "Earnings
per Share," commencing with its consolidated financial statements for the fiscal
quarter and year ending  January 31, 1998.  The  pronouncement  provides for the
presentation  of basic and diluted  earnings per share  ("EPS"),  replacing  the
currently required primary and fully-diluted EPS. The basic EPS will be computed
by dividing reported earnings  available to common  shareholders by the weighted
average  number of shares  outstanding  during the  period.  Diluted EPS will be
computed in a manner similar to  fully-diluted  EPS,  except for certain changes
including the way that the treasury stock method may be applied to determine the
dilution for stock options and warrants.  Companies  will be required to restate
prior-period EPS to conform with the new statement.  The Company does not expect
that the  application of the new standard will have a material  effect on future
EPS presentations or on EPS amounts reported in prior periods.

Translation of Foreign Financial Statements

Assets and liabilities of foreign operations are translated at the year-end rate
of exchange.  Statements  of operations  are  translated at the average rates of
exchange  during the year.  Gains or losses from  translating  foreign  currency
financial  statements are accumulated in a separate  component of  shareholders'
equity.

Concentrations of Credit Risk

Financial  instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents,  marketable  securities,  and
accounts  receivable.  Management believes that the Company's  investment policy
limits the  Company's  exposure to  concentrations  of credit risk.  The Company
sells  its  products  primarily  to  U.S.   government  agencies  and  to  major
corporations,  including  distributors  that serve a wide  variety  of U.S.  and
foreign markets.  The Company extends credit to its corporate customers based on
an evaluation of the customer's financial condition, generally without requiring
a deposit  or  collateral.  Exposure  to losses on  receivables  is  principally
dependent  on each  customer's  financial  condition.  The Company  monitors its
exposure for credit losses and maintains an allowance  for  anticipated  losses.
The allowance for doubtful accounts was $367,000 and $375,000,  respectively, at
January 31, 1997 and 1996.

Impairment of Long-lived Assets

The  Company  complies  with SFAS No. 121,  "Accounting  for the  Impairment  of
Long-lived  Assets and for  Long-lived  Assets to be Disposed  of." SFAS No. 121
requires that long-lived  assets and certain  identifiable  intangibles held and
used by an entity be  reviewed  for  impairment  whenever  events or  changes in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable.  To determine  recoverability of its long-lived assets, the Company
evaluates the probability  that future  undiscounted net cash flows will be less
than the carrying amounts of net assets.  Impairment is measured at fair value. 

                                      F-10
<PAGE>

(3)    INVESTMENT IN AFFILIATE

In  July  1996,  the  Company  authorized  the  use of  its  name  by  Excalibur
Technologies N. V. ("ETNV"), a Belgian company incorporated in June 1996 for the
purpose of selling and marketing the  Company's  products and services  within a
large  territory  including  most of  Northern  Europe  and Italy.  The  Company
contributed approximately $488,000 in cash to ETNV in consideration for 13.2% of
its voting  capital  stock.  In connection  with the  organization  of ETNV, the
Company issued warrants to purchase 148,500 shares of the Company's common stock
to certain  shareholders  of ETNV.  The warrants are  exercisable  at a price of
$22.00 per share for seven  years but only if ETNV  achieves  certain  financial
objectives.

The Company  granted to ETNV an exclusive  license (the "License") to distribute
certain of the Company's products to other authorized resellers and customers in
the territory for  approximately  five (5) years. If the revenues of ETNV in the
fifth year exceed a certain level,  the License shall  automatically be renewed.
If the  License is not  renewed,  the other  shareholders  of ETNV may  exercise
options  to sell  their  shares  to the  Company  according  to a  revenue-based
formula. The Company recorded revenue of approximately  $1,191,000 in the fiscal
year ended January 31, 1997, related to the License.

After a term of approximately five (5) years, the Company may exercise an option
to purchase all of the capital stock of ETNV under certain  conditions  and at a
price determined in accordance with a revenue-based  formula.  In the event that
the Company does not exercise its option,  the other  shareholders are permitted
to sell their shares, subject to certain limitations,  through a private sale or
public offering.

The Company's  investment in ETNV is accounted for using the equity method.  The
investment  exceeded the Company's share of the underlying net assets of ETNV by
approximately  $827,000,  including  $758,000  attributable  to the value of the
warrants discussed above. The excess is being amortized over a five-year period.
The  amortization  of the excess,  as well as the Company's  share of ETNV's net
loss for the period and the  elimination of the Company's  share of gross profit
included in ETNV's  prepaid  license  fees at January 31,  1997,  is included in
equity in net loss of affiliate in the  accompanying  consolidated  statement of
operations for the fiscal year ended January 31, 1997.  At January 31, 1997, the
investment balance,  included in other assets in the accompanying  balance sheet
net of accumulated amortization of $341,000, was $973,000.

(4)    CAPITALIZATION

Stock Offerings

On March 8, 1996, the Company completed a private placement of 350,000 shares of
the Company's  common stock at an offering price of $25.00 per share,  resulting
in net  proceeds  of  approximately  $8,388,000.  Allen &  Company  Incorporated
("Allen"),  a shareholder of the Company,  acted as the placement agency in this
transaction and received a fee of approximately $350,000.

On April 25, 1994, the Company  completed a private  placement of 625,000 shares
of the Company's common stock to an unaffiliated  institutional  investor, at an
offering  price of $8.00 per share,  resulting in net proceeds of  approximately
$4,800,000  to  the  Company.  Allen  acted  as the  placement  agency  in  this
transaction and received a fee of approximately $200,000.

                                      F-11
<PAGE>

Cumulative Convertible Preferred Stock

The cumulative  convertible  preferred stock is convertible into common stock at
the rate of 10  shares  of common  stock  per  share of  cumulative  convertible
preferred  stock.  Holders of the  cumulative  convertible  preferred  stock are
entitled to receive cumulative  dividends of $0.50 per share per annum,  payable
annually on April 1 if declared by the Board of Directors,  in cash or shares of
common stock (to be determined by the Board of Directors) valued at the lower of
$1.00 per share or the market  price on the date of  declaration.  The amount of
accumulated  dividends  that have not been  declared  or accrued at January  31,
1997, is approximately $28,000.

In the event of voluntary liquidation,  dissolution or winding-up of the Company
or upon any distribution of assets, whether voluntary or involuntary, holders of
the convertible  preferred stock would have a liquidation  preference of $10 per
share, plus accrued and unpaid dividends.


(5)    EMPLOYEE BENEFIT PLANS

Stock Options

The Company has adopted certain stock option plans to attract, retain and reward
key employees.  The plans are administered by a Committee appointed by the Board
of Directors,  which has the authority,  among other things,  to determine which
officers, directors and key employees are awarded options pursuant to the plans,
and the terms and option exercise prices of the stock options. In addition, from
time to time, the Board of Directors  awards stock options outside the plans; no
such awards occurred in fiscal years 1997 or 1996. Of the total number of shares
authorized  for  stock  options,   options  to  purchase  2,654,559  shares  are
outstanding and 1,165,578 shares are available for future grants,  including the
1,000,000 shares authorized by the Company's shareholders in June 1996.

Each  qualified  incentive  stock  option  granted  pursuant to the plans has an
exercise price equal to the fair market value of the common stock at the date of
grant,  a  ten-year  term,  and  typically  a  four-year   vesting   period.   A
non-qualified option granted pursuant to the plans may contain an exercise price
that is below the fair  market  value of the  common  stock at the date of grant
and/or may be  immediately  exercisable.  The term of  non-qualified  options is
usually  five or ten  years.  The  Company  records  expense  related to certain
non-qualified options and other stock-based compensation based on the difference
between the fair market value of the stock at the date of award and the exercise
price,  if  any,  over  the  vesting  period.  Expense  related  to  stock-based
compensation  awards  recorded in the accounts during fiscal years 1996 and 1995
was $61,000 and $890,000,  respectively.  No such expense was recorded in fiscal
year 1997.

                                      F-12

<PAGE>

The  following  table  summarizes  the  Company's  activity for all of its stock
option awards.
<TABLE>
<CAPTION>                                                    
                                                                    Weighted-   
                                    Number of                        Average
                                     Options      Price Range     Exercise Price
                                   ----------   ---------------   --------------
<S>                                 <C>         <C>                  <C>  
      Balance, January 31, 1994     2,607,059   $ 1.00 - 17.02        $9.33

      Granted                         200,328     2.07 - 11.60         7.05
      Exercised                       (92,930)    1.04 -  6.25         4.61
      Canceled                       (297,561)    1.04 - 16.64        10.19
                                   ----------   ---------------   --------------
      Balance, January 31, 1995     2,416,896     1.00 - 17.02         9.22

      Granted                         912,150     7.44 - 26.21        15.72
      Exercised                      (713,905)    1.00 - 16.91         9.50
      Canceled                       (197,363)    7.44 - 16.64        11.42
                                   ----------   ---------------   --------------
      Balance, January 31, 1996     2,417,778     1.04 - 26.21        11.41

      Granted                         468,500    13.00 - 29.64        18.72
      Exercised                      (142,455)    2.07 - 16.64        10.21
      Canceled                        (89,265)    9.54 - 29.64        18.41
                                   ----------   ---------------   --------------
      Balance, January 31, 1997     2,654,558   $ 1.04 - 29.53       $12.53
                                   ==========   ===============   ==============
</TABLE>
Options to purchase  1,738,246,  1,534,235 and 1,938,309 shares of the Company's
common stock were vested and  exercisable  at January 31,  1997,  1996 and 1995,
respectively, at weighted-average per share exercise prices of $10.56, $9.37 and
$9.05, respectively.

The  following  table  summarizes  additional  information  about stock  options
outstanding at January 31, 1997.
<TABLE>
<CAPTION>
                             Options Outstanding            Options Exercisable
                     ------------------------------------  ---------------------    
                                  Weighted-
                                  Average      Weighted-              Weighted-
                                  Remaining     Average                Average
    Range of         Number of    Contractual  Exercise     Number     Exercise
 Exercise Prices      Options       Life         Price    Exercisable   Price
-----------------   -----------   -----------  ---------  -----------  ---------
<C>                 <C>           <C>           <C>        <C>          <C>    
$ 1.04 to $ 4.14      535,421     3.13 years    $  1.88      535,421    $  1.88
$ 6.34 to $12.50      591,675     5.61            10.37      481,050      10.39
$13.00 to $15.98      802,150     8.05            15.34      316,181      15.34
$16.02 to $17.02      386,750     6.29            16.68      266,000      16.76
$17.25 to $29.53      338,562     9.15            21.72      139,594      21.72
-----------------   -----------   -----------  ---------  -----------  ---------
                    2,654,558     6.40 years    $ 12.53    1,738,246    $ 10.56
                    ===========   ===========  =========  ===========  ========= 
</TABLE>
                                      F-13
<PAGE>

The Company adopted the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based  Compensation,"  effective  for  the  Company's  January  31,  1997,
consolidated  financial  statements.  The Company applies APB Opinion No. 25 and
related Interpretations in accounting for its plans.  Accordingly,  compensation
cost has been recognized for its stock plans based on the intrinsic value of the
stock option at date of grant (i.e.,  the difference  between the exercise price
and the fair value of the Company's common stock).

Had  compensation  cost for the Company's  stock-based  compensation  plans been
determined  based on the fair value at the grant  dates for awards  under  those
plans  made in fiscal  years  1997 and 1996  consistent  with the method of SFAS
No.123,  the Company's net loss and loss per share would have been  increased to
the pro forma amounts  indicated  below  (amounts in thousands  except per share
data).

                                         1997          1996
                                       -------       -------
      Net loss, as reported             $7,173       $   884
      Pro forma compensation expense     2,533         1,141
                                       -------       -------
      Pro forma net loss                $9,706        $2,025
                                       =======       =======

      Net loss per share, as reported    $0.58         $0.08
      Net loss per share, pro forma       0.79          0.18

The fair  value of each  option  is  estimated  on the date of grant  using  the
Black-Scholes  option-pricing model with the following  assumptions used for the
grants that occurred in fiscal years 1997 and 1996; no dividend yield,  expected
volatility of 60%, a risk-free interest rate of approximately 6.5%, and expected
lives of four years.  The weighted average fair value per share for stock option
grants  that were  awarded  in fiscal  years 1997 and 1996 were $9.76 and $7.17,
respectively.

Employee Stock Purchase Plan

In  June  1996,   the  Company's   shareholders   approved  the  adoption  of  a
non-compensatory  stock purchase plan for all active  employees.  Of the 250,000
shares of common stock that were reserved for issuance thereunder,  3,253 shares
were  purchased  by  employees  in fiscal  year  1997.  The plan  provides  that
participating  employees may purchase  common stock each plan quarter at a price
equal to 85% of the closing  price at the end of the quarterly  period.  Payment
for the shares is made through  authorized  payroll  deductions  of up to 10% of
eligible annual compensation.

Deferred Compensation

ConQuest entered into arrangements  with certain of its officers,  employees and
independent  consultants  to defer a  portion  of their  compensation.  Deferred
compensation  of  employees  is  restricted  for use in the  exercise  of  stock
options. However, if an employee's options expire because the option terms lapse
or because employment  terminates,  the employee may request cash redemption one
year after expiration,  with 90 days notice.  During fiscal years 1997, 1996 and
1995, deferred compensation of $99,000, $45,000 and $43,000,  respectively,  was
settled  through the exercise of options to purchase  common stock.  Pursuant to

                                      F-14
<PAGE>

the merger with ConQuest,  deferred  compensation of $88,000 was paid in cash in
fiscal year 1996.  Effective  January 1, 1993,  ConQuest  revised  the  deferred
compensation  arrangements  and discontinued the accrual of interest on deferred
compensation  balances  for  employees  only.  Interest  continues  to accrue on
deferred  compensation  payable to independent  consultants.  Accrued  interest,
which is  included  in the  deferred  compensation  balances,  was  $73,000  and
$60,000, respectively, at January 31, 1997 and 1996.

Employee Savings Plan

The Company has an employee  savings plan that qualifies under Section 401(k) of
the Internal Revenue Code. Under the plan,  participating  eligible employees in
the United  States may defer up to 20 percent of their pre-tax  salary,  but not
more than  statutory  limits.  During  fiscal  year  1996,  the  Company  made a
discretionary  contribution  of  $3,000  to the  savings  plan;  no  other  such
contributions  were made for fiscal  years 1997,  1996 or 1995.  ConQuest  had a
similar plan  established  for the benefit of its employees that was merged into
the Company's plan effective December 31, 1996.



(6)   INCOME TAXES

As the Company  incurred  pretax  losses for the fiscal year  periods  presented
herein,  there are no income taxes  provided in the  accompanying  statements of
operations.   At  January  31,  1997,   the  Company  had  net  operating   loss
carryforwards ("NOLs") of approximately $58,988,000 that expire at various dates
beginning in fiscal year 1998 through fiscal year 2012.  The  realization of the
benefits of the NOLs is dependent on sufficient  taxable income in future fiscal
years. Lack of future earnings, a change in the ownership of the Company, or the
application  of the  alternative  minimum tax rules could  adversely  affect the
Company's  ability to utilize the NOLs.  Further,  because there was a change in
the  ownership of ConQuest last fiscal year,  the  Company's  ability to utilize
NOLs  related  to  ConQuest's  operations  of  approximately  $3,233,000  may be
limited. The Company's net deferred tax assets at January 31, 1997 and 1996 were
as follows (in thousands):
<TABLE>
<CAPTION>
                                                  1997              1996
                                                ---------         ---------
<S>                                             <C>               <C>
      Deferred tax assets
          Net operating loss carryforwards of    
             Excalibur, not yet utilized        $ 21,186          $ 18,661
          Net operating loss carryforwards of
             ConQuest, not yet utilized            1,229             1,229
          Other                                    1,113             1,260
                                                ---------         ---------
             Total deferred tax assets            23,528            21,150
          Valuation reserve                      (23,464)          (21,069)
                                                ---------         ---------
                                                      64                81
                                                     (64)              (81)
      Deferred tax liabilities                  ---------         ---------  
             Net deferred tax assets            $      -          $      - 
                                                =========         =========
</TABLE>
                                      F-15
<PAGE>

Though  management  believes that future net operating income and taxable income
of the Company may be sufficient to utilize a substantial amount of the benefits
of the Company's net operating  loss  carryforwards  and to realize its deferred
tax assets,  a valuation  allowance has been recorded to offset  completely  the
carrying  value of the  deferred tax assets due to the  Company's  lack of prior
earnings and the size of the accumulated deficit.


(7)   COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company conducts its operations using leased office  facilities.  The leases
terminate  at various  dates  through  fiscal year 2002.  The  Company  also has
operating leases for automobiles at its foreign  subsidiary that are included in
the figures below. Future minimum rental payments under noncancelable  operating
leases as of January  31,  1997,  net of sublease  payments,  are as follows (in
thousands):

                   Year Ending
                   January 31,
                   -----------
                       1998                 $ 1,158
                       1999                   1,149
                       2000                     884
                       2001                     138
                       2002                       8
                                            ========
                                            $ 3,337
                                            ========

Total  rental  expense  under  operating  leases,  net of sublease  income,  was
approximately $1,070,000, $870,000, and $873,000, in fiscal years 1997, 1996 and
1995,  respectively.  In fiscal year 1995,  other income included  approximately
$208,000  that  ConQuest  received  from its former  landlord as  incentive  for
ConQuest to terminate its lease for office space.

Employment Agreements

In connection with the merger with ConQuest, the Company entered into employment
agreements  with four former  officers of ConQuest.  The employment  agreements,
which  expire  in  July  1997,  provide  for  minimum  aggregate  annual  salary
compensation of $548,000 plus incentive compensation.


(8)    RESTRUCTURING COSTS

In fiscal year 1996,  the Company  completed an  assessment of its personnel and
facilities  requirements and finalized a corporate  restructuring and relocation
plan. This plan included the relocation of the Company's corporate  headquarters
from San Diego,  California to Northern  Virginia and the  consolidation  of the
product development and related customer support staff into two facilities.  The
relocation was made to move corporate  management  closer to the Company's major
domestic and European  customers and to better  organize the technical  staff to
support  major  product  development  initiatives.   Consequently,  the  Company

                                      F-16
<PAGE>

recorded a  restructuring  charge of $653,000  in fiscal year 1996.  This charge
consisted of severance  payments to  terminated  employees,  including a balance
payable to the  Company's  former Chief  Executive  Officer  under an employment
agreement,  and lease  abandonment  costs.  A substantial  amount of the balance
accrued at January 31, 1996, was paid during fiscal year 1997.

During  fiscal  year  1995,  the  Company  recorded a charge of  $312,000  for a
corporate  restructuring that included the consolidation of a remote development
facility. Additionally, the Company reviewed its computer equipment requirements
and,  consistent  with its strategic  direction,  recorded a $464,000 charge for
equipment no longer meeting the requirements of its product development efforts.


 (9)   OPERATIONS BY GEOGRAPHIC AREA

The major portion of the Company's sales to overseas  customers during the three
most recent fiscal years was made by the  Company's  foreign  subsidiary,  ETIL,
which was  established  in the United  Kingdom  during  fiscal  year  1993.  The
following  table  presents   information  about  the  Company's   operations  by
geographical area (in thousands):
<TABLE>
<CAPTION>

                                               Fiscal Years Ended January 31,
                                           ------------------------------------
                                             1997          1996          1995
                                           --------      --------      --------
<S>                                        <C>           <C>           <C>     
Sales to unaffiliated customers:
  North American operations                $ 14,319      $ 15,124      $ 10,416
  ETIL                                        5,940         3,551         2,222
                                           --------      --------      --------
                                           $ 20,259      $ 18,675      $ 12,638
                                           ========      ========      ========

Net loss:
  North American operations                $ (7,054)     $   (597)     $ (9,069)
  ETIL                                         (119)         (287)         (319)
                                           --------      --------      --------
                                           $ (7,173)     $   (884)     $ (9,388)
                                           ========      ========      ========

Identifiable assets:
  North American operations                $ 21,942      $ 20,528      $ 16,324
  ETIL                                        4,205         2,518         1,627
                                           --------      --------      --------
                                           $ 26,147      $ 23,046      $ 17,951
                                           ========      ========      ========
</TABLE>
                                      F-17
<PAGE>

(10)   OTHER FINANCIAL DATA

a)  Equipment  and  leasehold  improvements  at  January  31,  1997  and  1996
consisted of the following (in thousands):
<TABLE>
<CAPTION>
                                        1997            1996
                                       ------          ------
<S>                                    <C>             <C>   
Computer equipment                     $5,693          $4,061
Office furniture                        1,118             631
Leasehold improvements                    307              89
                                       ------          ------
                                        7,118           4,781

Less accumulated depreciation           4,179           2,838
                                       ------          ------
                                       $2,939          $1,943
                                       ======          ======
</TABLE>

b)  Accrued   liabilities  at  January  31,  1997  and  1996  consisted  of  the
following ( in thousands):
<TABLE>
<CAPTION>

                                      1997            1996
                                     ------          ------
<S>                                  <C>             <C>   
Accrued compensation                 $1,503          $1,413
Accrued taxes                           199             655
Accrued restructuring costs              41             473
Other                                   567             458
                                     ------          ------
                                     $2,310          $2,999
                                     ======          ======
</TABLE>


c) The Company paid legal fees and  expenses  totaling  approximately  $221,000,
$361,000 and $487,000,  respectively,  in fiscal years 1997,  1996 and 1995 to a
law firm in which a former director of the Company was a partner.

d) Revenues  derived from  contracts  and orders  issued by agencies of the U.S.
government   were   approximately   $6,004,000,   $4,255,000   and   $3,668,000,
respectively,  in the fiscal years ended January 31, 1997, 1996 and 1995.  These
revenues,  expressed as a percentage of total revenues for the fiscal year, were
approximately 30%, 23% and 29%,  respectively.  The Company has distribution and
cooperative   marketing   arrangements  with  International   Business  Machines
Corporation  (IBM). Under these agreements,  the Company recognized  revenues of
approximately  $1,538,000,  or 12% of total  revenues,  in the fiscal year ended
January 31, 1995.  Revenues  related to these  agreements  were less than 10% of
total revenues in fiscal years 1997 and 1996.

                                      F-18
<PAGE>


                                 SCHEDULE II



                      EXCALIBUR TECHNOLOGIES CORPORATION
                               AND SUBSIDIARIES
                      VALUATION AND QUALIFYING ACCOUNTS

            FOR FISCAL YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
                                                            Translation
                        Balance at  Additions   Deductions  Adjustment  Balance
                        Beginning    Charged       From       During    at End
Description              of Year    to Expense   Reserves   the Period  of Year
-----------              -------    ----------   --------   ----------  -------
<S>                       <C>       <C>       <C>            <C>        <C>

1997
----
Deducted from 
accounts receivable:    
  For doubtful accounts   $375,000  $150,000  $156,000 (a)   $(2,000)   $367,000

1996
----
Deducted from
accounts receivable:
  For doubtful accounts   $374,000  $ 91,000  $ 96,000 (a)   $ 6,000    $375,000

1995
----
Deducted from
accounts receivable:
  For doubtful accounts   $100,000  $361,000  $ 87,000 (a)   $     -    $374,000


Note (a) - Uncollected receivables written off, net of recoveries.

</TABLE>


                                      F-19



<PAGE>
                                  SIGNATURES                                   

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                     EXCALIBUR TECHNOLOGIES CORPORATION


                                     By:  /s/Patrick C. Condo
                                          -------------------
                                          Patrick C. Condo
                                          President and Chief Executive Officer

Date:  April 25, 1997

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

     Signature                        Title                           Date
     ---------                        -----                           ----

/s/Patrick C. Condo          President, Chief Executive           April 25, 1997
---------------------        Officer and Director                 --------------
Patrick C. Condo             (Principal Executive Officer)

/s/Donald R. Keough
---------------------        Chairman of the Board                April 23, 1997
Donald R. Keough                                                  --------------
             
/s/James H. Buchanan         Chief Financial Officer              April 28, 1997
---------------------        Secretary and Treasurer (Principal   --------------
James H. Buchanan            Financial and Accounting Officer)  
                        
/s/Richard M. Crooks, Jr.                                         April 25, 1997
-------------------------    Director                             --------------
Richard M. Crooks, Jr.

/s/W.Frank King III                                               April 24, 1997
---------------------        Director                             --------------
W. Frank King III            

/s/John G. McMillian                                              April 24, 1997
---------------------        Director                             --------------
John G. McMillian

/s/Paul E. Nelson                                                 April 25, 1997
---------------------        Director                             --------------
Paul E. Nelson

/s/Philip J. O'Reilly                                             April 25, 1997
---------------------        Director                             --------------
Philip J. O'Reilly

/s/Shaun C. Viguerie                                              April 25, 1997
---------------------        Director                             --------------
Shaun C. Viguerie