UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K






xANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





For
the Fiscal Year Ended January 31, 2009


or





 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





Commission
File Number 000-31989





CONVERA
CORPORATION


(Exact
name of registrant as specified in its charter)





Delaware
              
              54-1987541(State
      or other jurisdiction of
              
              (I.R.S.
      Employerincorporation
      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 if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes  No ü




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.    Yes  No ü





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 ü   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. ü





Indicate
by check mark whether the registrant is a large accelerated filer, accelerated
filer, a non-accelerated filer, or a smaller reporting company.  See
the definitions of “large accelerated filer,”  “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.




Large
Accelerated Filer   Accelerated
Filer    Non-Accelerated
Filer ü    
Smaller reporting company ü




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  No ü





The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of July 31, 2008 (based on the closing sales price as reported on
the NASDAQ Global Market System) was $20,410,500.





The
number of shares outstanding of the registrant's Class A common stock as of
March 9, 2009 was 53,501,183.





DOCUMENTS INCORPORATED BY
REFERENCE


Portions
of the Registrant’s Proxy Statement for the 2009 Annual Meeting of Shareholders
are incorporated by reference into Part III.





The Index to Exhibits begins on Page
30








CONVERA CORPORATION





ANNUAL
REPORT ON FORM 10-K


FOR
THE FISCAL YEAR ENDED JANUARY 31, 2009





TABLE
OF CONTENTS





PagePART
      IItem
      1.
              Business
              1Item
      1A.
              Risk
      Factors
              6Items
      1B.
              Unresolved Staff
      Comments
              12Item
      2.
              Properties
              12Item
      3.
              Legal Proceedings
              12Item
      4.
              Submission of Matters to a Vote of Security
      Holders
              12PART
      IIItem
      5.
              Market for Registrant's Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
              13Item
      6.
              Selected Financial Data
              15Item
      7.
              Management's
      Discussion and Analysis of Financial Conditionand
      Results of Operations
              16Item
      7A.
              Quantitative and Qualitative Disclosures about Market
      Risk
              26Item
      8.
              Financial Statements and Supplementary Data
              26Item
      9.
              Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
              26Item
      9A(T).
              Controls and Procedures
              26Item
      9B.
              Other Information
              27PART
      IIIItem
      10.
              Directors, Executive Officers and Corporate
      Governance
              28Item
      11.
              Executive Compensation
              28Item
      12.
              Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
              28Item
      13.
              Certain Relationships and Related Transactions, and Director
      Independence
              28Item
      14.
              Principal Accounting Fees and Services
              28PART
      IVItem
      15.
              Exhibits, Financial Statement Schedules
              29


Table of Contents


FORWARD-LOOKING
STATEMENTS





The
      statements contained in this annual report on Form 10-K that are not
      purely historical are “forward-looking statements” within the meaning of
      Section 27A of the Securities Act of 1933 and Section 21E of the
      Securities Exchange Act of 1934 (“Exchange Act”), including without
      limitation statements about the expectations, beliefs, intentions or
      strategies regarding the future of Convera Corporation (hereinafter
      referred to as “Convera,” “we,” “us” and “our” through this document).
      Words such as “expects,” “intends,” “plans,” “projects,” “believes,”
      “estimates,” and similar expressions are used to identify these
      forward-looking statements. These include, among others, statements
      regarding our future expectations, performance, plans and prospects as
      well as assumptions about future events. All forward-looking statements
      included in this annual report are based on information available to us on
      the date hereof, and we assume no obligation to update any such
      forward-looking statements. The forward-looking statements contained
      herein involve risks and uncertainties discussed under the heading “Risk
      Factors” below. Our actual results could differ materially from those
      anticipated in these forward-looking statements as a result of such
      factors, including those set forth in this annual
  report.





ITEM
      1.
            BUSINESS





OVERVIEW





Convera
      provides vertical search services to trade publishers.  Our
      technology and services help publishers to build a loyal online community
      and increase their internet advertising revenues.  With the use
      of our vertical search services, our customers can create search engines
      customized to meet the specialized information needs of their audience by
      combining publisher proprietary content with an authoritative subset of
      the World Wide Web (“the Web”.)  The result is a more relevant
      and comprehensive search experience for the user designed to drive traffic
      to the publishers’ websites.





Revenues
      for our vertical search services are generated under two different pricing
      models that are determined at the time that the contract with the
      publisher is executed.  These pricing models result in Convera
      either receiving a percentage of  the publishers’ advertising
      revenues  earned by the search sites (“revenue share”) or from
      selling a fixed quantity of searches executed on the search site each
      month  for a fixed monthly fee. Many of our Ad share contracts
      with publishers also contain minimum fees that we are entitled to receive
      until website advertising revenue generated by the publishers’ search
      sites exceeds these minimum amounts.  We can also generate
      revenues from hosting publisher websites and from providing technical
      staff training. We offer professional services to customize publisher
      websites and optimize search engines, as well as website monetization
      consulting. Our Converanet service which was launched in December 2008 is
      designed to drive traffic to our publisher sites also generates revenues
      from selling advertising on its
site.





The first
publisher search site using our vertical search services was launched in
November 2006.  Our sales and marketing efforts are targeting the top
50 business-to-business (“B2B”) publishers in both the United States and United
Kingdom, with the goal of building the largest collection of search-based
professional user websites on the internet





Convera
      is traded on the NASDAQ stock market (CNVR) and is headquartered at 1921
      Gallows Road, Vienna, VA  22182.  Our main corporate
      telephone number is (703) 761-3700.





As of
January 31, 2009 and 2008, Allen Holding, Inc., together with Allen &
Company Incorporated, Herbert A Allen and certain related parties (collectively
“Allen & Company”) beneficially owned approximately 42% of the voting power
of Convera and currently hold two seats on the Board of Directors, and would
therefore be able to influence the outcome of matters requiring a stockholder
vote.








BUSINESS
      STRATEGY




The
information needs of business, professional and enthusiast communities are
typically serviced by specialist publishers. The B2B publisher market has
thousands of printed periodicals that are distributed to industry
professionals.  As these communities migrate online, the publishing
industry will need to transition its revenues away from a primary dependence on
print advertising and subscriptions to online advertising
revenue.  Our vertical search and advertising services are designed to
help publishers attract and build a loyal user base for the publisher’s online
vertical community and generate additional advertising revenues, thereby
assisting them with this transition.




A more
relevant and precise search alternative to the general consumer search engines,
our vertical search services address the unique vocabulary and authoritative
content requirements of vertical audiences, such as professional, medical,
scientific and technical communities.  We work with the editorial team
of a publication to develop a whitelist of authoritative websites that are
highly relevant to each vertical market. These can include public, private,
government, trade association, social, community and subscription
sites.  Our Web Search Platform deeply mines all the sites and adjusts
the crawl strategies to keep content updated as required by the publisher. The
content is then enhanced with taxonomies and other navigation tools that are
seamlessly integrated into the publisher’s website. These features allow the Web
search results using our vertical search services to be extremely focused,
relevant search results for topics of significant interest to the target
audience of each publication.  Professional users of these sites are
consequently able to become more efficient and effective in performing their
work.


1
 Table of Contents




As B2B
publishers transition from traditional media to online media, so will
advertising spending.  Ad agencies and planners need to be able to
reach high-value, unique users within an online professional community,
particularly as consumer search engines are transforming media advertising
revenues to commodity levels.  Our vertical search services enhance a
publisher’s advertising proposition by delivering to advertisers a highly
specific target audience.  In addition, the advertising services
incorporated into our vertical search offering allow publishers to directly
manage and pursue search-based advertising revenues for their
websites.




Our
vertical search agreements are designed to generate revenue for Convera using
two different pricing models.  The first model is a revenue share
model whereby Convera earns a percentage of advertising revenue generated by the
search site (typically between 20% and 50% of net advertising revenues). Our
contracts typically contain a monthly minimum fee that we receive for each
vertical market served until our share of the website’s advertising revenues
surpasses the minimum fee.  The second revenue model charges
publishers a monthly subscription fee based on the number of searches executed
using the search site and/or the quantity of pages indexed (“Capacity based
pricing”). This pricing model allows the publishers to earn and retain 100% of
the advertising revenue and make our service a fixed cost. Convera also earns
additional revenue when the actual search volume exceeds the amount in the
subscription.  We introduced our first capacity based pricing contract
in the second quarter of fiscal 2009 and have found that it typically appeals to
customers that generate higher search volumes.  We also generate
professional services fees from delivering consulting and training to our
customers, and from website hosting services.







PRODUCTS
AND SERVICES





We
provide publishers with our vertical search technology on a “software as a
service” basis. Our vertical search service is designed to help publishers
deliver unique value to their online community by customizing the search
experience to meet the specialized information needs of the publisher’s
audience. The targeted search solution enables publishers to further engage
their audiences and increase online advertising revenue. We provide the
technical infrastructure, search expertise and best practice advice required to
build vertical search applications.  The publisher provides the
insight into the information needs of the target community, which is used to
customize the look, feel and functionality of the search experience to the needs
of that community.  The result is a search application that yields a
blended result to a user query – incorporating information from the Web at
large, as well as from an authoritative subset of Web content and multiple
proprietary sources. End users are presented with more relevant search results
in a comprehensive, consolidated manner, regardless of the repository source or
location. Search results can be presented to the user through an intuitive and
dynamic page layout that is designed, controlled and branded by the
publisher.  Our vertical search offering can be integrated into one or
more of the publisher’s existing websites or used to establish a new brand or
product.  As an option, we can host the search results but still
present the results under the publisher’s brand.  Our advertising
server capabilities, which are built into our Web Search Platform, allow us to
serve any type of ad and measure all key analytics.





2
 Table of Contents


We offer
the following services:





Vertical
Search Service





Our
vertical search service is an integrated suite of the following
components:





Convera Web Search
Platform





Leveraging
our fifteen years of search customization experience in the secure government
sector, our Web Search Platform was built using semantic processing technologies
to enhance the search experience.  It incorporates a large set of
commercially recognized taxonomies in addition to privately compiled taxonomies
and thesauri to create a large and very granular Web index. This core design
feature allows the platform to draw dynamic connections between topically or
contextually related content, resulting in a better understanding of the nature
of the query along with the relevancy of the content.  Our platform is
capable of supporting hundreds of simultaneous vertical search applications
provided under 24X7 service level agreements.  The plan is to extend
our vertical search capabilities across multiple lingual content including
Spanish, French, German, Dutch, Portuguese, Chinese, Japanese, and Korean. This
is facilitated through a large-scale translation operation that translates
concepts and terminology into their cross-lingual equivalents. This means that
the millions of categories and related semantic resources applied to
understanding content in one language are reproduced and consistently applied to
understanding the content of other languages – uniformly and reliably delivering
authoritative results across multiple languages.  Our Web Search
Platform incorporates multimedia search of Adobe Systems Portable Document
Format (PDF), image files and other data formats. Our multimedia image crawler
also identifies images and associated descriptive information (meta data) to
enable highly relevant search results across various media types available on
the Web. This insures that the crawler retrieves and displays relevant
information from news or video archives, as well as other multimedia
repositories.





Publisher Control Panel
(PCP)





Our
Publisher Control Panel is a self-service application that provides the
publisher with the ability to control and tailor the Convera Web Search Platform
and the Convera Ad Service for each vertical search site from a single
interface.  Each publisher’s initial vertical search site is readied
for launch by the publisher team using the PCP. Each initial vertical
application launch is managed and mentored by a member of our implementation
team. The publisher receives hands-on training from the Convera implementation
team on the use, management and customization of the vertical search site using
the PCP tools.  This hands-on training allows a publisher to easily
set-up additional vertical search sties and administer a combined website and
best-of-Web search experience designed to meet the specific information needs of
the publisher’s audience.





Using the
PCP, publishers can customize search categories, manage the look and feel of
their vertical search sites, manage whitelists containing the index of websites
to search, customize relevance ranking schemes and the presentation of search
results each employing the easy to use tools and interfaces.  The
publisher also uses the PCP to insert advertisements into the vertical search
sites using the Convera Ad Service.  The PCP also serves as a
dashboard for each vertical site, containing search analytics and content
analytics tools.  It provides the publisher with various usage and
other reports to help them steer each online vertical community to optimize the
publisher’s goal for its online community supported by the vertical
site.





Convera Ad Service
(CAS)





Our
Convera Ad Service allows publishers to directly manage and pursue search-based
advertising revenues for their vertical search websites. CAS connects the
publisher websites directly with the providers of advertising inventory,
enhancing publishers’ abilities to increase their web advertising revenues,
supporting the insertion, tracking and billing of a variety of ad pricing models
including banner ads, tenancy ads, search term ads and click-through
advertisements.  In order to bolster our ability to increase
advertising revenue opportunities for publishers, we are pursuing contracts with
advertising networks. We completed a contract with the Microsoft Advertising
network in September and are actively seeking contracts with other advertising
networks. The integration of this network in to the PCP and CAS was completed in
January 2009. This network allows publishers using the PCP to opt in to the
Microsoft Advertising network’s contextual search ads and thereby fill vacant
spaces on their search websites.





3
 Table of Contents


Converanet





In
December 2008, we launched Converanet, our online search directory portal that
contains all the search engines that we have developed for publishers in a
single website. Converanet is designed to help drive traffic to our customer’s
search sites and thereby drive Ad revenues on those sites. Additionally, we
expect Converanet to directly generate Ad revenue for Convera from paid ads
placed on the Converanet site through the Microsoft Ad center contract which was
signed in September 2008.





Professional
Services





We offer
a range of professional services aimed at ensuring the publisher’s vertical
search application is a success in terms of increasing website traffic and
generating online advertising revenue.  The services include website
customization; search engine optimization, marketing services and training; and
advertising sales kit development and training.








MARKETING
AND DISTRIBUTION





Beginning
      in November 2008, our vertical search offering is sold as a hosted service
      through a self service site to publishers. Through November 2008 we
      maintained a direct sales force located in the United States and United
      Kingdom marketing our products to publishers. The launch of our self
      service capability through the publisher control panel enabled us to
      streamline our sales and marketing processes in November 2008, moving the
      roles occupied by the sales force to our Carlsbad, CA customer care and
      implementation team and thereby reducing our head count and our cost
      base.  This action also led to the shut down of our U.K. sales
      office.





In
      September 2008, we signed a contract with Microsoft’s advertising network
      which will provide us with a revenue share on all search sites that
      publishers deploy Microsoft Ads. We continue to explore the prospect of
      strategic partners such as additional large advertising networks or
      resellers who may provide increased distribution capabilities, access to
      incremental human resources and possible hosting facility
      alternatives.





As
      previously disclosed above, our sales efforts are focused principally on
      the top 50 B2B publishers in the United States and United Kingdom. The top
      50 publishers have an estimated 2,000-plus relevant magazine titles that
      could be converted to search-based sites and subscribers totaling more
      than two million professionals.





Our
      marketing efforts focus on building brand awareness and establishing
      demand for our vertical search services through public relations
      campaigns, trade association memberships and electronic marketing
      campaigns. As our customer references and reputation in the vertical
      search market increase, we expect word-of-mouth to accelerate our
      growth.  Our website, www.convera.com,
      is an integral part of our marketing and sales efforts, but information on
      our website is not a part of this Form 10-K.  Through the
      website, prospective customers can learn about our vertical search
      services and be connected to the websites of current customers utilizing
      our services.








RESEARCH
AND DEVELOPMENT





Our
      research and development program focuses on enhancing and expanding the
      capabilities of our vertical search services to address emerging markets
      and customer requirements.  Certain elements of our developed
      technologies are provided to us pursuant to license agreements with other
      independent software vendors. The technologies acquired by the Company in
      this manner include a language processor, spell checker and FAST Ad
      Momentum advertising platform and FAST ESP360 site search software. These
      license agreements have varying terms for which we have made a prepaid
      royalty payment or purchased a perpetual
  license.





Our
      research and development expenses were $4.7 million, $ 4.7 million, and
      $11.0 million for the years ended January 31, 2009, 2008, and 2007,
      respectively.








4
 Table of Contents


INTELLECTUAL
      PROPERTY AND PROPRIETARY TECHNOLOGY





We
      regard our software as proprietary and rely primarily on a combination of
      patents, copyright, trademark and trade secret laws of general
      applicability, employee confidentiality and invention assignment
      agreements, and other intellectual property protection methods to
      safeguard our technology. We hold one patent related to our current
      business strategy. This patent, which concerns multimedia document
      retrieval, expires on August 24, 2018.  We are actively engaged in
      seeking additional patents specifically related to our vertical search
      offering.  We have undertaken to protect all significant marks
      used to identify our core services. We own U.S. trademark registrations or
      pending applications for our material trademarks, including CONVERA and
      THE VERTICAL SEARCH COMPANY.  Renewals are due
      at various dates between July 2009 and August 2013. In
      addition, we own numerous foreign applications and registrations for our
      material trademarks.








COMPETITION





Our
      business environment is characterized by rapid change and intense
      competition.  We compete primarily within the internet search
      market. Within this market, there are current competitors who are larger
      and more established than we are and have significantly greater financial,
      technical, marketing and other resources.  These competitors
      include established significant technology providers focused on search
      advertising like Google (CSE) and Yahoo! and those that are moving from a
      strong industry presence elsewhere into search like Microsoft Live Search.
      We also face competition from enterprise search software and enterprise
      search appliance vendors selling their solutions to publishers who are
      determined to build their own online solution. There are also potential
      and emerging competitors entering the market with increasingly
      differentiated technologies.





We
      believe relevance of search results and implementation ease to be the
      principal evaluation criteria of potential publisher
      customers.  We consider our principal competitive advantages to
      be that our vertical search service provides more accurate results due to
      an extensive semantic network contained in our Web Platform and offers the
      ability to produce authoritative results through exhaustive ingestion of
      content sources.  Additionally, our Publishers Control Panel
      offers an easy-to-use, self-service solution to
      publishers.  Virtually no technical expertise is required of the
      customer.  We believe we are currently the only company that
      offers a complete suite of vertical search capabilities that includes
      hosting, semantic vertical search, traffic building tools and professional
      services.  There can be no assurance that we will be able to
      compete successfully against current or future competitors and that
      competition will not have a material adverse effect on our operating
      results and financial condition in the
future.








SEGMENT
AND GEOGRAPHIC AREA FINANCIAL INFORMATION





We have
one reportable segment.  Prior to our agreement on March 31, 2007 to
sell the assets of the Enterprise Search business to FAST, we operated under two
reportable segments: the Enterprise Search segment and the vertical search
segment (previously entitled our Excalibur web hosting
product).  Revenue, expenses and cash flows related to the Enterprise
Search business have been reflected as discontinued operations in the
Consolidated Statements of Operations and of Cash Flows.





In the
fiscal year ended January 31, 2009, two customers accounted for 66% of our
revenues, representing 19% and 47%, respectively.  In the fiscal year
ended January 31, 2008, one customer, CMP Information Ltd., accounted for 82% of
our revenues.  In the fiscal year ended January 31, 2007, three
customers accounted for 53%, 29%, and 17% of total revenues,
respectively.





To date,
our revenues have been earned principally from customers located in the US and
in the United Kingdom.  For geographic area revenues and long-lived
assets information, see Note 13, “Segment Reporting” in the Notes to
Consolidated Financial Statements.








5
 Table of Contents




EMPLOYEES





We
      had 56 employees at January 31, 2009.  See Item 1A. “Risk
      Factors” for a discussion of some of the risks we face related to our
      employees.








AVAILABLE
INFORMATION







Our
website address is www.convera.com. Through our
website, we make available free of charge our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after such material
is filed with, or furnished to, the U.S. Securities and Exchange Commission
(“SEC”). The contents of our website are not part of, or incorporated into, this
document.  The SEC also maintains a website (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC.








Item
1A.                      Risk
Factors





An
      investment in our common stock involves substantial risks and
      uncertainties and our actual results and future trends may differ
      materially from our past performance due to a variety of factors,
      including, without limitation, the risk factors identified below.The
      risks and uncertainties described below are not the only risks and
      uncertainties we face. Additional risks and uncertainties not presently
      known to us or that we currently deem immaterial also may impair our
      business operations.  If any of the following risks actually
      occur, our business, results of operations and financial condition would
      suffer.  In that event, the trading price of our common stock
      could decline, and our stockholders may lose part or all of their
      investment in our common stock. The discussion below and elsewhere in this
      report also includes forward-looking statements, and our actual results
      may differ substantially from those discussed in these forward-looking
      statements as a result of the risks discussed
  below.





We
have had a history of operating losses and will likely incur future losses; if
our losses continue and we are unable to achieve profitability, our stock price
will likely suffer.





As of
January 31, 2009, we had an accumulated deficit of approximately $1.1 billion.
We have operated at a loss for each of the past three fiscal
years.  For the fiscal years ended January 31, 2009, 2008 and 2007 our
net losses were approximately $22.6 million, $9.1 million, $44.8 million,
respectively. These financial results include revenues and expenses associated
with the Enterprise Search business, the sale of which was completed on August
9, 2007.  The loss from continuing operations for the fiscal years
ended January 31, 2009, 2008 and 2007 was $22.6 million, $27.0 million and $45.3
million, respectively.  We expect that the Company will continue the
trend of significant operating losses and uses of cash at least for the short
term until the revenue base for our vertical search services grows to sufficient
levels to support its expenses.  We have a short operating history in
the vertical search business; the first Convera supported vertical search site
was launched into production in November 2006.  Previously, our market
strength had been in the government sector, whereas we now compete solely within
the commercial sector.  In addition, our revenue contracts generally
stipulate that we will receive a percentage of website advertising revenues, and
online advertising is an immature and rapidly evolving
industry.  Accordingly, we cannot assure you that we will generate the
revenues required to achieve or maintain profitability in the
future.  You should assess our business in light of the risks,
difficulties, uncertainties, and expenses associated with managing and growing a
relatively new business in a rapidly evolving market.  Our failure to
achieve and sustain our profitability will negatively impact the market price of
our common stock.





Our
ability to achieve profitability is dependent on our vertical search business
and if it fails to achieve market acceptance we will be unable to grow our
business and achieve profitability.




Our
future profitability will depend on our ability to successfully market and
achieve market acceptance for our vertical search services
offering.  The degree of market acceptance will depend upon a number
of factors, including:


·
              the
      advantages of our vertical search services over competing
      products;


·
              our
      ability to innovate and develop new features for our vertical search
      offering;


·
              customer
      needs for search products;


·
              the
      price and cost-effectiveness of our vertical search offering;
      and


·
            the
      strength of sales, marketing and distribution
  support.





6
 Table of Contents




We are
aware of a significant number of competing well-established search products
offered by companies with significantly greater financial and marketing
resources than us.  Even if our vertical search services achieve
market acceptance, we may not be able to maintain that market acceptance over
time if competing products or services are introduced that are viewed as more
effective or are more favorably received.  If our vertical search
services do not achieve and maintain market acceptance, we will not be able to
generate sufficient revenue to attain profitability.





While
we believe that we will have sufficient funds for our operations for at least
the next twelve months, it is possible that we will need additional capital
during or after that time. If such additional capital is not available to us on
acceptable terms or at all, it could harm our financial condition and future
prospects.





As of
January 31, 2009, our balances of cash and cash equivalents were approximately
$22.8 million. We believe our current balance of cash and cash equivalents will
be sufficient to meet our working capital and capital expenditure requirements
for at least the next twelve months based upon our estimates of funds required
to operate our business during such period. However, during or after that time,
we may need to raise additional funds for the following purposes:





·
            to
      fund our operations, including sales, marketing and research and
      development programs;


·
            to
      fund any growth we may experience;


·
            to
      enhance and/or expand the range of products and services we
      offer;


·
            to
      increase our promotional and marketing activities;
  or


·
            to
      respond to competitive pressures and/or perceived opportunities, such as
      investment, acquisition and international expansion
      activities.





We cannot
reassure our investors that if we need additional capital that it will be
available, and if so, on terms beneficial to us.  Historically, we
have obtained external financing primarily from sales of our common stock. To
the extent we raise additional capital by issuing equity securities, our
stockholders may experience substantial dilution. If we are unable to obtain
additional capital, we may then attempt to preserve our available resources by
various methods including deferring the creation or satisfaction of commitments,
reducing expenditures on our research and development programs or otherwise
scaling back our operations.  If we were unable to raise such
additional capital or defer certain costs as described above, that inability
would have an adverse effect on our financial position, results of operations
and prospects.





Our
common stock may be involuntarily delisted from trading on NASDAQ if we fail to
maintain a minimum closing bid price of $1.00 per share for any consecutive 30
trading day period. A notification of delisting or a delisting of our common
stock would adversely affect the price and liquidity of our common
stock.





NASDAQ’s
      quantitative listing standards require, among other things, that listed
      companies maintain a minimum closing bid price of $1.00 per
      share. However, NASDAQ has recently suspended its minimum closing bid
      price threshold through July 20, 2009. If, upon reinstatement of the
      minimum closing bid price threshold, we fail to satisfy this threshold for
      any consecutive 30 trading day period, our common stock may be
      involuntarily delisted from trading on NASDAQ once the applicable grace
      period expires. Our stock price has recently fallen below the $1.00
      per share threshold. Given the increased market volatility arising in part
      from economic turmoil resulting from the ongoing credit crisis, as well as
      our history of operating losses, the closing bid price of our common stock
      could remain below $1.00 per share. A notification of delisting or
      delisting of our common stock could materially adversely affect the market
      price and market liquidity of our common stock and our ability to raise
      necessary capital.





The
current credit and financial market conditions have a negative impact on global
business environment and may exacerbate certain risks affecting our
business.





The
credit and financial markets are currently experiencing unprecedented
volatility, stress, illiquidity and disruption around the world.  Many
of our customers have encountered and may continue to encounter much uncertainty
and risks due to the weakening business environment and credit availability,
particularly in the publishing area.  As a result, these customers may
be unable to satisfy their contract obligations, may delay payment, or may delay
purchasing our services, which could negatively affect our business and
financial performance.  In addition, the weakening business
environment has adversely impacted and may continue to adversely impact sales of
on-line ads, which could negatively affect any business and general
performance.





7
 Table of Contents




We
are in an extremely competitive market, and if we fail to compete effectively or
respond to rapid technological change, our revenues and market share will be
adversely affected.





Our
      business environment and the search industry in general are characterized
      by intense competition, rapid technological changes, changes in customer
      requirements and emerging new market segments. Our competitors include
      many companies that are larger and more established and have substantially
      more resources than us and may include start-ups as well. Current and
      potential competitors have established or may establish cooperative
      relationships among themselves or with third parties to increase the
      ability of their products to address the needs of the markets which we
      serve.  Accordingly, it is possible that new competitors or
      alliances among competitors may emerge and rapidly acquire significant
      market share.




In
      order for our strategy to succeed and to remain competitive, we must
      provide vertical search services that meet the needs of the B2B and
      specialized publishing companies.  We will need to invest
      significant resources in research and development to provide the
      publishers with leading-edge search technology to help them deliver unique
      value to their online community and increase online advertising
      revenues.  To effectively compete we will need to continually
      improve our current service offerings and innovate by introducing new
      services that are responsive to the needs of our users. The development
      efforts required for this are expensive, and we plan to fund these
      developments with our existing capital resources, and other sources, such
      as equity issuances and borrowings, which may be available to
      us.  If these developments do not generate substantial revenues,
      our business and results of operations will be adversely
      affected.  We cannot assure you that we will successfully
      develop any new products or services, complete them on a timely basis or
      at all, achieve market acceptance or generate significant revenues with
      them.




We depend on international sales,
particularly in the United Kingdom, and any economic downturn, changes in
laws, changes in currency exchange rates or political unrest in the United
Kingdom or in other countries could have a material adverse effect on our
business.





To
      date, the majority of revenues related to our business have been derived
      from publishers in the United Kingdom. For the year ended January 31,
      2009, total revenue derived from international sales was approximately
      $1.0 million, representing approximately 76% of total
      revenue.  For the year ended January 31, 2008, total revenue
      derived from international sales was approximately $1.0 million,
      representing approximately 88% of total revenue.  Our
      international operations and sales have historically exposed us to longer
      accounts receivable and payment cycles and fluctuations in currency
      exchange rates.  International sales had been made mostly from
      our U.K. subsidiary until its closure in January 2009 and are typically
      denominated in British pounds.  As of January 31, 2009,
      approximately 71% of our total consolidated accounts receivable were
      denominated in British pounds.  Since exchange rates vary, those
      results when translated may vary from expectations and adversely impact
      overall expected profitability.





Our
      international operations expose us to a variety of other risks that could
      seriously impede our financial condition and growth.  These
      risks include the following:





·
            potentially
      adverse tax consequences;


·
            difficulties
      in complying with regulatory requirements and
  standards;


·
            trade
      restrictions and changes in
tariffs;


·
            import
      and export license requirements and restrictions;
  and


·
            uncertainty
      of the effective protection of our intellectual property rights in certain
      foreign countries.





If any of
these risks described above materialize, our international sales could decrease
and our foreign operations could suffer.





8
 Table of Contents




Our
vertical search offering relies on a third party hosting facility, and any
failure or interruption in the services provided by this third party could harm
our ability to operate our business and damage our reputation.





We rely
on AT&T to host our vertical search offering. We do not control the
operation of the AT&T facility, which may be subject to damage or
interruption from earthquakes, floods, fires, power loss, telecommunications
failures or similar events.  The facility may also be subject to
break-ins, sabotage, intentional acts of vandalism or similar
misconduct.  Despite precautions taken at the facility, the occurrence
of a natural disaster, cessation of operations by our third-party web hosting
provider or its decision to close the facility without adequate notice or other
unanticipated problems at the facility could result in lengthy interruptions in
our service.  In addition, the failure by the facility to provide our
required data communications capacity could result in interruptions in our
service.  Interruptions in our service may cause us to lose revenue,
cause us to issue credits or refunds and cause customers to terminate their
contracts with us.  Our business and reputation will be adversely
affected if our customers and potential customers believe our vertical search
service is unreliable.





Because
of the technical nature of our business, our intellectual property is extremely
important to our business, and adverse changes to our intellectual property
could harm our ability to compete.





We
      believe that our success depends, in part, on our ability to protect our
      proprietary rights and technology.  Historically, we have relied
      on a combination of copyright, patents, trademark and trade secret laws,
      employee confidentiality and invention assignment agreements, and other
      methods to safeguard our technology and software products and
      services.  Risks associated with our intellectual property
      include the following:





·
            pending
      patent applications may not be
issued;


·
            intellectual
      property laws may not protect our intellectual property
      rights;


·
            third
      parties may challenge, invalidate, or circumvent any patent issued to
      us;


·
            rights
      granted under patents issued to us may not provide competitive advantages
      to us;


·
            unauthorized
      parties may attempt to obtain and use information that we regard as
      proprietary despite our efforts to protect our proprietary
      rights;


·
            others
      may independently develop similar technology or design around any patents
      issued to us; and


·
            effective
      protection of intellectual property rights may be limited or unavailable
      in some foreign countries in which we
operate.




We
may in the future be subject to intellectual property rights claims, which are
costly to defend and could require us to pay damages and could limit our ability
to use certain technologies in the future.





Companies
in the internet, search and technology industries own large numbers of patents,
copyrights, trademarks and trade secrets and frequently enter into litigation
based on allegations of infringement or other violations of intellectual
property rights.  We face the possibility of intellectual property
rights claims against us. Our technologies may not be able to withstand any
third-party claims or rights against their use. Any intellectual property
claims, with or without merit, could be time-consuming, expensive to litigate or
settle and could divert management resources and attention.




With
respect to any intellectual property rights claim, we may have to pay damages or
stop using technology if it is ultimately found by a court to be in violation of
a third party’s rights. We may have to seek a license for the technology, which
may not be available on reasonable terms and may significantly increase our
operating expenses. The technology also may not be available for license to us
at all.  As a result, we may also be required to develop alternative
non-infringing technology, which could require significant effort and
expense.  If we cannot license or develop technology for the
infringing aspects of our business, we may be forced to limit our product and
service offerings and may be unable to compete effectively.  Any of
these results could harm our operating results.





We
depend on highly skilled personnel, the loss of whom would adversely affect our
ability to effectively grow our business and we may have difficulty attracting
and retaining skilled employees.





Our
      success depends to a significant degree upon the continued contributions
      of our key management and other highly skilled individuals. We generally
      do not utilize employment agreements for our key employees. The loss of
      the services of one or more key employees could have a material adverse
      effect on our ability to grow our business. We also believe that our
      future success will depend in large part upon our ability to attract and
      retain highly skilled personnel for all areas of our
      business.  Competition for personnel within the internet and
      search industries is intense. There can be no assurance that we will be
      successful in attracting and retaining such
  personnel.






9
 Table of Contents





Our
stock price has been and may continue to be highly volatile which may make it
difficult to resell shares of our stock.





The
      market price of our common stock has been highly volatile.  For
      example, in the fiscal year ended January 31, 2009, the market price per
      share of our common stock ranged from $0.16 to $2.24 This volatility may
      adversely affect the price of our common stock, and our stockholders may
      not be able to resell their shares of common stock following periods of
      volatility because of the market's adverse reaction to this volatility. We
      anticipate that this volatility, which frequently affects the stock of
      technology companies, will continue.  Our stock price may
      fluctuate and you may not be able to resell shares of our stock for a
      profit as a result of a number of factors
  including:





·
            future
      announcements concerning us or our
competitors;


·
              quarterly
      variations in our operating results;·
              actual
      or anticipated announcements of technical innovations or new product or
      service developments by us or our
competitors;





·
              general
      conditions in our industry;·
              concentrated
      holdings of our common stock;·
              sales
      of stock by us or by our stockholders;·
              the
      low trading volume of our common stock, which means that small changes in
      the volume of trades may have a disproportionate impact on our stock
      price;




·
            developments
      concerning litigation; and


·
            worldwide
      economic and financial conditions, including the current economic
      crisis.





On
      occasion, the equity markets, and in particular the markets for technology
      companies, have experienced significant price and volume fluctuations.
      These fluctuations have affected the market price for many companies'
      securities and may be unrelated to the companies' operating
      performance.





We
may not be able to use net operating loss carryforwards.





As
      of January 31, 2009, we had net operating loss carryforwards of
      approximately $229 million.  The deferred tax assets
      representing the benefits of these carryforwards have been offset
      completely by a valuation allowance due to our lack of an earnings
      history. The realization of the benefits of these carryforwards depends on
      sufficient taxable income in future years.  Lack of future
      earnings could adversely affect our ability to utilize these
      carryforwards. Additionally, past or future changes in our ownership and
      control could limit the ability to utilize these
      carryforwards.  Despite the carryforwards, we may have income
      tax liability in future years due to the application of the alternative
      minimum tax rules of the United States Internal Revenue
    Code.




Our
amended and restated certificate of incorporation, bylaws, ownership and
Delaware law contain provisions that could discourage a third party from
acquiring us and consequently decrease the market value of an investment in our
stock.





Some
provisions of our amended and restated certificate of incorporation and bylaws,
and of Delaware law, as well as our ownership structure, could delay or prevent
a change of control or changes in our management that a stockholder might
consider favorable. Any delay or prevention of a change of control or change in
management could cause the market price of our common stock to
decline.  These provisions include:




·
            Our
      Board of Directors has the authority to issue up to 5,000,000 shares of
      preferred stock and to determine the price, rights, preferences,
      privileges and restrictions, including voting rights, of those shares
      without any further vote or action by the stockholders. The issuance of
      preferred stock may delay, defer or prevent a change in control, as the
      terms of the preferred stock that might be issued could potentially
      prohibit our consummation of any merger, reorganization, sale of
      substantially all of our assets, liquidation or other extraordinary
      corporate transaction without the approval of the holders of the
      outstanding shares of preferred
stock.


·
            Our
      Board of Directors may alter our bylaws without obtaining stockholder
      approval.


·
            We
      are subject to the provisions of Section 203 of the Delaware General
      Corporation Law which prohibits a Delaware corporation from engaging in
      certain business combinations with any interested stockholder for a period
      of three years, unless specific conditions are
  met.






10
 Table of Contents


Allen Holding Inc. and related parties
exercise voting control over a significant percentage of our outstanding shares,
and our other stockholders may not have an effective say in any matters upon
which our stockholders vote.





As of
January 31, 2009, Allen & Company beneficially owned approximately 42% of
our voting power and held two seats on the Board of Directors, and would
therefore be able to influence the outcome of matters requiring a stockholder
vote.  These matters could include offers to acquire us and elections
of directors. Allen & Company may have interests which are different than
the interests of our other stockholders.





Legislative actions and potential new
accounting pronouncements are likely to impact our future financial position or
results of operations.





Future
changes in financial accounting standards may cause adverse, unexpected revenue
fluctuations and affect our financial position or results of operations. New
pronouncements and varying interpretations of pronouncements have occurred with
frequency in the past and may occur again in the future and as a result we may
be required to make changes in our accounting policies. Compliance with new
regulations regarding corporate governance and public disclosure may result in
additional expenses.  As a result, we intend to invest all reasonably
necessary resources to comply with evolving standards, and this investment may
result in increased general and administrative expenses and a diversion of
management time and attention from science and business activities to compliance
activities.  For example, we have incurred and expect to continue to
incur substantial costs and expend significant resources to comply with the
regulations promulgated under Section 404 of the Sarbanes-Oxley Act of
2002.





Our
internal controls may not be sufficient to achieve all stated goals and
objectives.





Our
internal controls and procedures were developed through a process in which our
management applied its judgment in assessing the costs and benefits of such
controls and procedures, which, by their nature, can provide only reasonable
assurance regarding the control objectives. The design of any system of internal
controls and procedures is based in part upon various assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote.





We
may be subject to regulatory scrutiny and sustain a loss of public confidence if
we are unable to satisfy regulatory requirements relating to our internal
controls over financial reporting and/or we have internal control weaknesses
which result in material financial reporting errors.





Section 404
of the Sarbanes-Oxley Act of 2002 requires us to perform an evaluation of our
internal controls over financial reporting. Compliance with these requirements
can be expensive and time-consuming. While we believe that we will be able to
meet the required deadlines, no assurance can be given that we will meet the
required deadlines in future years when our independent registered public
accounting firm will be required to attest. Our  evaluation was not
subject to attestation by our registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit us to
provide only management’s report in this annual report. If we fail to timely
complete this evaluation, or if our auditors cannot timely attest to our
evaluation in future years, we may be subject to regulatory scrutiny and a loss
of public confidence in our internal controls.





The
Sarbanes-Oxley Act of 2002 ensures that companies are reporting accurate revenue
numbers and revenue recognition policies have been under particular scrutiny.
Any weaknesses in our internal controls on our financial reporting of revenue
could cause prospective revenue adjustments or changes in our future revenue
recognition policies. Either result could cause unexpected changes to current
and/or anticipated future operating results and have a material adverse effect
on our financial condition and stock price.





11
 Table of Contents


Item
1B.             Unresolved
Staff Comments





There are
no material unresolved SEC staff comments as of the date of this
report.





Item
2.                 Properties





We occupy
our corporate headquarters under an extended lease agreement that expires on
August 31, 2009 for a total of approximately 14,186 square feet of space in an
office building in Vienna, Virginia.





We also
lease office space in Carlsbad, California and have subleased space to tenants
at our former offices in Montreal, Canada. We utilize a hosting facility located
in Dallas, Texas operated under a master hosting arrangement with AT&T that
expires in July 2009.





Item
3.                 Legal
Proceedings





None.





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





None.


12
 Table of Contents


PART
II


Item
5.                Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities





Our Class
A common stock is listed on the NASDAQ Global Market under the symbol
“CNVR.”





The
following table sets forth the high and low sale prices for our Class A common
stock on the NASDAQ Global Market for the period from February 1, 2007 through
January 31, 2009.  The number of stockholders of record of our Class A
common stock as of January 31, 2009 was 898.  There were no shares of
our Class B common stock issued or outstanding at January 31,
2009.  We have never declared or paid dividends on our common stock
and do not expect to do so for the foreseeable future.





High
                  
                  
                  LowFiscal
      2009 (February 1, 2008 – January 31, 2009)First
      Quarter
                  
                  $
                  2.24
                  
                  
                  $
                  1.33Second
      Quarter
                  
                  
                  1.72
                  
                  
                  
                  1.03Third
      Quarter
                  
                  
                  1.26
                  
                  
                  
                  0.32Fourth
      Quarter
                  
                  
                  0.72
                  
                  
                  
                  0.16Fiscal
      2008 (February 1, 2007 – January 31, 2008)First
      Quarter
                  
                  $
                  3.98
                  
                  
                  $
                  2.50Second
      Quarter
                  
                  
                  4.75
                  
                  
                  
                  3.08Third
      Quarter
                  
                  
                  3.98
                  
                  
                  
                  2.72Fourth
      Quarter
                  
                  
                  3.89
                  
                  
                  
                  2.00








The
following table sets forth, as of January 31, 2009, information with respect to
our equity compensation plans:









Plan
      Category
                        
                        Number
      of
                          Securities
      to be
                          Issued
      Upon
                          Exercise
      of
                          Outstanding
                          Options,
      Warrants
                          and
      Rights
                          (a)
                        
                        
                        Weighted-Average
                          Exercise
      Price of
                          Outstanding
                          Options,
      Warrants
                          and
      Rights
                          (b)
                        
                        
                        Number
      of
                          Securities
                          Remaining
      Available
                          for
      Future Issuance
                          Under
      Equity
                          Compensation
      Plans
                          (Excluding
                          Securities
                          Reflected
      in Column
                          (a))
                          (c)Equity
      compensation plans approved by security holders:Convera
      Employee Stock Option Plan
                        
                        
                        7,371,811
                        
                        
                        $
                        3.68
                        
                        
                        
                        3,594,151Equity
      compensation plans not approved by security holders:
                        
                        None
                        
                        
                        
                        N/A
                        
                        
                        
                        N/A





13
 Table of Contents


Performance
Graph





The
following graph is a comparison of the cumulative total return to stockholders
of our Class A common stock at January 31, 2009 since January 31, 2004 to the
cumulative total return over such period of (i) the NASDAQ Stock Market-U.S.,
and (ii) the Standard & Poor's Information Technology Index, assuming an
investment in each of $100 on January 31, 2004 and the reinvestment of
dividends.











Recent
Sales of Unregistered Securities; Uses of Proceeds from Registered
Securities





None.







14
 Table of Contents




Ite m
6.                 Selected
Financial Data





The
selected financial data presented below have been derived from our consolidated
financial statements.  The balance sheet data as of January 31, 2009
and 2008, and the statement of operations data for the fiscal years ended
January 31, 2009, 2008, and 2007 should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K. Dollars shown in thousands except per share
data.





Fiscal
      Years Ended January 31,Statement
      of Operations Data:
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005Continuing
      Operations(1):Revenues
                    
                    $
                    1,341
                    
                    
                    $
                    1,118
                    
                    
                    $
                    269
                    
                    
                    $
                    20
                    
                    
                    $
                    -Operating
      expenses:Cost
      of
      revenues
                    
                    
                    7,003
                    
                    
                    
                    9,660
                    
                    
                    
                    8,138
                    
                    
                    
                    1,797
                    
                    
                    
                    -Sales
      and
      marketing
                    
                    
                    3,340
                    
                    
                    
                    3,880
                    
                    
                    
                    4,386
                    
                    
                    
                    2,804
                    
                    
                    
                    -Research
      and product development
                    
                    
                    4,668
                    
                    
                    
                    4,652
                    
                    
                    
                    11,010
                    
                    
                    
                    3,198
                    
                    
                    
                    4,164General
      and administrative
                    
                    
                    7,040
                    
                    
                    
                    11,179
                    
                    
                    
                    14,833
                    
                    
                    
                    10,860
                    
                    
                    
                    -Amortization
      of capitalized software development costs
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,045
                    
                    
                    
                    1,012
                    
                    
                    
                    -Impairment
      of long-lived assets
                    
                    
                    3,133
                    
                    
                    
                    603
                    
                    
                    
                    6,407
                    
                    
                    
                    -
                    
                    
                    
                    -25,184
                    
                    
                    
                    29,974
                    
                    
                    
                    47,819
                    
                    
                    
                    19,671
                    
                    
                    
                    4,164Operating
      loss
                    
                    
                    (23,843
                    )
                    
                    
                    (28,856
                    )
                    
                    
                    (47,550
                    )
                    
                    
                    (19,651
                    )
                    
                    
                    (4,164
                    )Other
      income,
      net
                    
                    
                    1,257
                    
                    
                    
                    1,815
                    
                    
                    
                    2,267
                    
                    
                    
                    602
                    
                    
                    
                    175Loss
      from continuing
      operations
                    
                    $
                    (22,586
                    )
                    
                    $
                    (27,041
                    )
                    
                    $
                    (45,283
                    )
                    
                    $
                    (19,049
                    )
                    
                    $
                    (3,989
                    )Discontinued
      Operations:Income
      (loss) from discontinued operations
                    
                    
                    -
                    
                    
                    
                    20
                    
                    
                    
                    456
                    
                    
                    
                    4,788
                    
                    
                    
                    (15,831
                    )Gain
      on sale of discontinued operations
                    
                    
                    -
                    
                    
                    
                    17,925
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Income
      (loss) from discontinued operations
                    
                    
                    -
                    
                    
                    
                    17,945
                    
                    
                    
                    456
                    
                    
                    
                    4,788
                    
                    
                    
                    (15,831
                    )Net
      loss
                    
                    $
                    (22,586
                    )
                    
                    $
                    (9,096
                    )
                    
                    $
                    (44,827
                    )
                    
                    $
                    (14,261
                    )
                    
                    $
                    (19,820
                    )Net
      income (loss) per common share – basic and diluted:Continuing
      Operations
                    
                    $
                    (0.42
                    )
                    
                    $
                    (0.51
                    )
                    
                    $
                    (0.87
                    )
                    
                    $
                    (0.44
                    )
                    
                    $
                    (0.11
                    )Discontinued
      Operations
                    
                    
                    -
                    
                    
                    
                    0.34
                    
                    
                    
                    0.01
                    
                    
                    
                    0.11
                    
                    
                    
                    (0.45
                    )Net
      loss per common share – basic and diluted
                    
                    $
                    (0.42
                    )
                    
                    $
                    (0.17
                    )
                    
                    $
                    (0.86
                    )
                    
                    $
                    (0.33
                    )
                    
                    $
                    (0.56
                    )Weighted-average
      number of common shares outstanding – basic and diluted
                    
                    
                    53,328
                    
                    
                    
                    53,146
                    
                    
                    
                    52,222
                    
                    
                    
                    43,089
                    
                    
                    
                    35,433Balance
      Sheet Data (at end of period)Cash
      and cash
      equivalents
                    
                    $
                    22,754
                    
                    
                    $
                    36,641
                    
                    
                    $
                    47,433
                    
                    
                    $
                    37,741
                    
                    
                    $
                    17,766Total
      assets
                    
                    
                    24,877
                    
                    
                    
                    46,367
                    
                    
                    
                    59,281
                    
                    
                    
                    64,217
                    
                    
                    
                    36,294Long-term
      obligations
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,717
                    
                    
                    
                    -Accumulated
      deficit
                    
                    
                    (1,147,215
                    )
                    
                    
                    (1,124,629
                    )
                    
                    
                    (1,115,533
                    )
                    
                    
                    (1,070,706
                    )
                    
                    
                    (1,056,445
                    )Total
      shareholders’ equity
      (2)
                    
                    
                    22,696
                    
                    
                    
                    42,735
                    
                    
                    
                    51,097
                    
                    
                    
                    50,841
                    
                    
                    
                    25,149




(1)
Research and development for our current business began in fiscal 2005 and
accordingly is included in Continuing Operations in this presentation of
selected financial data.





(2)  No
dividends have been declared or paid on our common stock.





15
 Table of Contents


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





Forward
Looking Statements





The
      statements contained in the following discussion that are not purely
      historical are “forward-looking statements” within the meaning of Section
      27A of the Securities Act of 1933 and Section 21E of the Securities
      Exchange Act of 1934, including without limitation statements about the
      expectations, beliefs, intentions or strategies regarding the future of
      our business.  Words such as “expects,” “intends,” “plans,”
      “projects,” “believes,” “estimates,” and similar expressions are used to
      identify these forward-looking statements. These include, among others,
      statements regarding our future expectations, performance, plans and
      prospects as well as assumptions about future events. All forward-looking
      statements included in this annual report are based on information
      available to us on the date hereof, and we assume no obligation to update
      any such forward-looking statements. The forward-looking statements
      contained herein involve risks and uncertainties discussed in Item 1A.
      “Risk Factors” of this annual report. Our actual results could differ
      materially from those anticipated in these forward-looking statements as a
      result of such factors, including those set forth in this annual
      report.





The
following discussion should be read in conjunction with our Consolidated
Financial Statements and the Notes to those statements included elsewhere in the
Annual Report on Form 10-K.





Overview





We
      provide vertical search services to trade publishers. Our technology and
      services help publishers to build a loyal online community and increase
      their internet advertising revenues.  With the use of our
      vertical search services, our customers can create search engines
      customized to meet the specialized information needs of their audience by
      combining publisher proprietary content with an authoritative subset of
      the Web.  On March 31, 2007, we agreed to sell the assets of our
      Enterprise Search business for $23.0 million in cash to FAST. This
      transaction closed on August 9, 2007 with FAST assuming certain
      obligations of the business and retaining certain employees serving its
      Enterprise Search customers. Accordingly, revenues and expenses and cash
      flows related to the Enterprise Search business for the periods prior to
      this transaction closing have been reflected as discontinued operations in
      the accompanying Consolidated Statements of Operations and of Cash
      Flows.  See further discussion in Note 2, “Discontinued
      Operations” in the Notes to Consolidated Financial
    Statements.





Our
      principal source of revenue is provided through sales of our vertical
      search services to the websites of publishers of trade business and
      specialist publications. Our vertical search technology is a hosted
      application sold as a service to the publishers.  We generate
      our revenues from contracts based on search volume or by receiving a
      percentage of publishers’ advertising revenues earned by the search sites.
      Many of our contracts with publishers contain monthly minimum fees that we
      are entitled to receive until website advertising revenue generated by the
      publishers’ search sites exceeds these monthly minimum
      amounts.  We can also generate revenues from hosting publisher
      web sites and from providing technical staff training. We offer
      professional services to customize publisher web sites and optimize search
      engines, as well as web site monetization
  consulting.





We
      use an AT&T facility to host our vertical search
      offering.  This facility, located in Dallas, Texas, is operated
      under a master hosting arrangement that expires in July 2009. However, the
      master hosting arrangement contains an option for an extension of an
      additional 18 months at a moderate increase above the current contractual
      rate that is not reflected in the contractual obligations of this section
      or in Note 12 “Commitments and Contingencies.”  We also
      maintained a hosting facility in San Diego, CA, which was vacated on
      January 31, 2008 in an effort to appropriately scale our hosting
      infrastructure. We believe that our current hosting center environment has
      sufficient equipment capacity and redundancy to host vertical search
      websites for 200 trade publications each with an average community of
      40,000 users at competitive search performance levels, which is enough
      capacity to meet our current needs.







Trends




As of
January 31, 2009, Convera had 82 vertical search service websites with 28
separate publishers under contract. A total of 51 Convera supported websites
were in production and a total of 31 vertical search websites were in
development awaiting launch. As of January 31, 2008, Convera had 76 vertical
search sites under contract, a total of 39 Convera supported websites were in
production and a total of 37 vertical search sites were in development awaiting
launch. At January 31, 2007, Convera had 3 vertical search sites under contract
and in production; the first Convera vertical search service website was
launched into production in November 2006.





16
 Table of Contents




Our
strategy for fiscal 2010 continues to target the top 50 B2B publishers in the
United States and United Kingdom, which have an estimated 2,000 plus relevant
trade magazine titles that have the economic attributes necessary to support
search-based websites.  For both newly signed and current customers,
our expectation is that the publishers will develop and launch vertical
search-based websites in a much shorter period of time than was typical in
fiscal 2009 due to the release of version 2 of our Publisher Control
Panel.  The tools included in this version of the Publisher Control
Panel shortens the time required to launch a site from nine months to less than
a month, which should translate into our receiving advertising based revenues
sooner than in prior periods.




During
fiscal 2009, we began offering a capacity-based pricing model for our search
service to our customer base as an alternative to the advertising revenue share
model we have offered since the inception of our vertical search service. The
capacity-based pricing model allows the customer to pay a fixed monthly amount
for search volume and/or websites indexed and stored and allows the publisher to
retain revenue generated by their search site. The capacity-based pricing model
has proven to be a popular alternative with our higher search volume customers
and we expect the percentage of our customers on this model to grow during
fiscal 2010.  Under the advertising revenue share model, we earn a
percentage of customer search-related advertising revenue (typically between 20%
and 50% of net advertising revenues). Many of these advertising revenue share
contracts also contain a monthly minimum fee to supplement the revenue share. We
will receive the minimum fee for each vertical market served until our share of
the website’s advertising revenues surpasses the minimum fee.





The
majority of the revenues earned for fiscal years 2009 and 2008 represented
contract minimum amounts for hosted services. We expect continued growth in
hosted service fee revenues, as our new and renewal contracts with publishers
will typically contain a minimum service fee for our vertical search
services.





In fiscal
2008, we launched the Convera Ad Service (“CAS”) as an integral part of our
vertical search services.  CAS enables publishers to better manage the
monetization of their professional communities’ search experiences and increase
the effectiveness of search-based revenues on their websites.  CAS can
also connect the publisher websites directly with the providers of advertising
inventory, increasing the opportunities for the websites to grow their
advertising revenues.





In
September 2008, we signed a contract with Microsoft’s advertising network which
will provide us with a revenue share on all search sites that publishers deploy
Microsoft Ads.  This service was implemented in January 2009 and is fully
integrated with CAS. We expect advertising to begin appearing on publisher
sites in fiscal 2010.  We are now working on other advertising
partnerships to maximize the monetization potential of each and every page
view on our search system.





While the
addition of the new capacity-based revenue model coupled with the launch of CAS
and the addition of the Microsoft Ad network to our service during fiscal 2009
offers new opportunities for our customers and Convera to increase revenue
growth, the economic slowdown and recession that has been experienced over most
sectors of the global economy will more than likely result in slower advertising
share growth during fiscal 2010.  The publishing industry overall is
experiencing a downturn as a result of the recession and their investment in
online technology has slowed considerably. Industry analysts and several of our
customers are expecting lower ad revenues and slower online ad growth on a site
by site basis.  While we will attempt to counteract this trend with
new publisher contracts and an overall increase in search site launches, we
could experience lower revenues in the coming quarters from our revenue sharing
contracts with publishers.





In the
fourth quarter of fiscal 2009, in response to the slower contracting pace, lower
ad revenues and slower online ad growth we took action to reduce our operating
costs. In November 2008, we streamlined our sales process and took steps to
reduce the cost structure of our sales, marketing and customer service
functions. This action has resulted in reducing our sales, marketing and
customer service headcount by nine and led to the shut down of our U.K. sales
office in January 2009. As a result of this action, the Company recorded
severance expense of approximately $403,000 in the fourth quarter of fiscal year
2009. We believe that this action will allow us to continue to serve our
customers effectively while substantially reducing our operating
costs.





17
 Table of Contents




In
February 2009, we further reduced our operating costs by reorganizing our
engineering and hosting operations group, reducing headcount in our Carlsbad, CA
facility by 23 and reducing our expense base by approximately $2.8 million on an
annual basis. We incurred approximately $259,000 in severance expense related to
the reduction in our engineering and operations staff which will be recorded in
our first quarter of fiscal 2010. Convera has 32 employees after the completion
of this action.





The
combined reduction in expenses and a potential increase in revenues could result
in a significant decrease in the loss from continuing operations in fiscal
2010.  We will continue to evaluate our revenue growth as well as the
related operating expenses and endeavor to maintain these expenses in line with
anticipated fiscal 2010 revenue attainment. We will continue to pursue
opportunities to expand distribution and increase revenue opportunities for
our  service through resellers and Ad networks. We are also actively
exploring merger and acquisition opportunities with companies whose customer
base, products or services are similar to or compatible with ours to accelerate
our pathway to profitability.





During
the quarter ended January 31, 2009 we evaluated the carrying value of the
long-lived assets related to our web hosting facility for impairment in
accordance with SFAS No. 144.  Current projections indicate that the
future cash flows utilized for impairment analysis were insufficient to recover
the carrying value of the long-lived assets related to web hosting, indicating
that such assets were impaired. Consequently, we recorded a $3.1 million charge
to reflect the impairment of the software licenses at January 31,
2009.





With the
closing of the U.K. sales office in January 2009 as well as the impending wind
up of the sublease of our Montreal office space in fiscal 2010, the Company will
be evaluating various alternatives for formally closing down the foreign
subsidiaries out of which these offices operate.  Among our options
are formal or informal liquidation or leaving these entities dormant until such
time that they may be needed to operate again.  The Company is in the
process of examining the potential issues and tax implications of each
scenario.  If the Company makes the decision to liquidate these
foreign subsidiaries the related accumulated other comprehensive loss would be
included in determining net income in the period of liquidation.  If
only one of the subsidiaries is liquidated only the portion of accumulated other
comprehensive loss attributable to the closed subsidiary would be included in
the net income calculation in the period of liquidation.




Recently Issued Accounting
Standards





In
December 2007, the FASB issued a revision to SFAS No. 141, “Business
Combinations” (“SFAS 141R”).  The objective of this Statement is to
improve the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial reports about a
business combination and its effects.  This Statement will apply
prospectively to any business combinations we may enter into for which the
acquisition date is on or after the beginning of our first annual reporting
period beginning after December 15, 2008.





Recently Adopted Accounting
Standards





In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157 (“SFAS 157”), Fair Value Measurements. SFAS 157 provides guidance for
measuring the fair value of assets and liabilities. It requires additional
disclosures related to the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and the
effect of fair value measurements on earnings. It does not require any new fair
value measurements.  SFAS 157 became effective for us beginning
February 1, 2008 and did not have a material impact on our consolidated results
of operations and financial condition.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities - including an Amendment of SFAS No. 115”(“SFAS 159”), which permits an entity to measure many financial assets
and financial liabilities at fair value that are not currently required to be
measured at fair value. Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting date. The
fair value option may be elected on an instrument-by-instrument basis, with few
exceptions. SFAS 159 amends previous guidance to extend the use of the fair
value option to available-for-sale and held-to-maturity securities. SFAS 159
also establishes presentation and disclosure requirements to help financial
statement users understand the effect of the election.  SFAS 159
became effective for us beginning February 1, 2008 and the adoption did not have
a material impact on our consolidated results of operations and financial
condition.





18
 Table of Contents


Critical
Accounting Policies





Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.  For a
comprehensive discussion of our significant accounting policies, see Note 1 in
the accompanying consolidated financial statements included in this Form
10-K.  We do not have any material ownership interest in any entities
that are not wholly owned and consolidated subsidiaries. The preparation of
these financial statements requires us 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.  We base those estimates on historical experience and other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets,
liabilities and equity that are not readily apparent from other
sources.  Actual results may differ from these estimates under
different assumptions or conditions.





We
believe the following accounting policies reflect the more significant judgments
and estimates used in the preparation of this discussion of our financial
condition and results of operations.





Revenue
Recognition





Revenue
from our vertical search service offering can consist of hosted services,
professional services and advertising revenue shares.  Our vertical
search services revenues are recognized in accordance with SEC Staff Accounting
Bulletin No. 104 (SAB 104) “Revenue Recognition”. We
evaluate vertical search services arrangements that have multiple deliverables,
in accordance with Emerging Issues Task Force (“EITF”) Abstract Issue No. 00-21
“Revenue Arrangements with
Multiple Deliverables.”  Judgment is required in interpreting a
revenue contract to determine the appropriate accounting for the
transaction.  Multiple deliverable arrangements that contain elements
that do not qualify as separate units of accounting are recognized ratably over
the term of the hosting arrangement.  Our vertical search service
contracts typically include advertising share revenue agreements, and may
include monthly contract minimum service fees.  Monthly contract
minimums and other hosting fees or set-up fees are recognized ratably over the
term of the hosting agreement.  Advertising share revenues are
recognized when earned under the provisions of the hosting
agreement.  Revenue from training and professional services is
recognized when the services are performed.  In addition, in all
cases, to recognize revenue we need to assess whether the price is fixed and
determinable, whether persuasive evidence of an arrangement exists, whether the
service has been delivered and whether collection of the receivable is
reasonably assured.





Provision for Doubtful
Accounts





A
considerable amount of judgment is required in assessing the ultimate
realization of individual accounts receivable balances and determining whether a
provision for doubtful accounts is warranted.  Our determination is
based on an analysis of our historical collection experience and our portfolio
of customers taking into consideration the general economic environment as well
as the industry in which we operate.  To the extent we do not
recognize deterioration in our customers’ financial condition in the period it
occurs, or to the extent we do not accurately estimate our customers’ ability to
pay, the amount of bad debt expense recognized in a given reporting period will
be impacted.  At January 31, 2009, we determined that a provision for
estimated losses resulting from the inability of our customers to make the
required payments of $165,000 was required. No provision for doubtful accounts
was required at January 31, 2008.




Impairment of Long-Lived
Assets





We
evaluate all of our long-lived assets for impairment in accordance with the
provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.”  SFAS No. 144 requires that we review our
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable based on
expected undiscounted cash flows attributable to that asset. This review
requires significant judgments both in assessing events and circumstances as
well as estimating future cash flows.  Should events indicate that any
of our assets are impaired, the amount of such impairment will be measured as
the difference between the carrying value and the fair value of the impaired
asset and the impairment will be recorded in earnings during the period of such
impairment. The determination of fair value is inherently an estimate and
requires significant judgment. See Note 3, “Impairment of Long-Lived Assets” in
the accompanying consolidated financial statements included in this Form 10-K
for information about the impairment charges we have taken.






19
 Table of Contents




Software Development
Costs





Our
software development costs are accounted for in accordance with AICPA Statement
of Position 98-1 (SOP98-1) “Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use”. We expense costs
incurred in the preliminary project stage and, thereafter, we capitalize
permitted costs incurred in the development or acquisition of internal use
software.  Certain costs such as research and development, maintenance
and training are expensed as incurred. Amortization of the capitalized costs is
performed on a straight-line basis over the estimated use life of the
asset.  No software development costs have been capitalized in
fiscal year 2009.





Accounting for Income
Taxes





We follow
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109").  Under the asset and liability method of
SFAS 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax laws
and tax rates in each jurisdiction where we operate, and applied to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities due to a
change in tax rates is recognized in income in the period that includes the
enactment date.  We calculate estimated income taxes in each of the
jurisdictions in which we operate. This process involves estimating actual
current tax expense along with assessing temporary differences resulting from
differing treatment of items for both book and tax purposes.





We record
a valuation allowance to reduce our deferred tax assets to the amount that is
more likely than not to be realized. Realization of the deferred tax assets is
principally dependent upon the achievement of projected future taxable income.
If the estimates and related assumptions change in the future we may be required
to adjust our valuation allowance against our deferred tax assets, resulting in
a benefit or a charge to income in the period such determination is made. As of
January 31, 2009, we have recorded a full valuation allowance against the net
deferred tax asset.





We
adopted the provisions of the Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (“FIN 48”),
on February 1, 2007.  FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance
with SFAS No. 109.  FIN 48 also prescribes a recognition threshold and
measurement standard for the financial statement recognition and measurement of
an income tax position taken or expected to be taken in a tax
return.  FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosures and transitions.  We previously recognized income tax
positions based on management’s estimate of whether it was reasonably possible
that a liability had been incurred for unrecognized tax benefits by applying
SFAS No. 5, Accounting for Contingencies.  The provisions of FIN 48
became effective for the Company on February 1, 2007.





Significant
judgment is required in evaluation our uncertain tax positions and determining
the valuation allowance applied to deferred tax assets. We have concluded that
there are no uncertain tax positions requiring recognition in our consolidated
financial statements.





Stock-Based
Compensation





On
February 1, 2006, we adopted the provisions of and accounted for stock-based
compensation in accordance with Statement of Financial Accounting Standards No.
123 (Revised 2004), Share-Based Payment (“SFAS
123(R)”), that addresses the accounting for stock-based
compensation.  SFAS 123(R) requires that stock based compensation be
accounted for using a fair value based method. We use the Black-Scholes-Merton
(“Black–Scholes”) option pricing model to determine the fair value of
stock-based awards under SFAS 123(R). We are required to make significant
judgments and estimates in the application of SFAS 123(R), in particular with
regards to forfeiture rates, volatility and expected life
assumptions.  If any of the assumptions used in the Black-Scholes
model change, stock based compensation expense could differ materially in the
future from that recorded in the current period.





20
 Table of Contents


Results
      of Operations





For
      the fiscal year ended January 31, 2009, total revenues from continuing
      operations were $1.3 million, as compared to revenues of $1.1 million in
      fiscal year 2008. The loss from continuing operation for fiscal 2009 was
      $22.6 million or $ (0.42) per common share, compared to a loss from
      continuing operations of $27.0 million or $(0.51) per common share in
      fiscal year 2008. The net loss for fiscal 2009 was $22.6 million or
      $(0.42) as compared to a net loss of $9.1 million or $(0.17) per common
      share in fiscal year 2008. The net loss for fiscal 2008 includes a $17.9
      million gain from the sale of discontinued operations or $0.34 per
      share.





For
      the fiscal year ended January 31, 2007, total revenues from continuing
      operations were $0.3 million. The loss from continuing operations for
      fiscal 2007 was $45.3 million, or $(0.87) per common
      share.  Income from discontinued operations was $0.5 million, or
      $0.01 per common share in fiscal 2007.  The net loss for fiscal
      2007 was $44.8 million or $(0.86) per common
  share.





The
following charts summarize the components of revenues and the categories of
expenses, including the amounts expressed as a percentage of total revenues, for
each of the three fiscal years in the period ended January 31, 2009 (dollars in
thousands):





Components
      of Revenue and Expenses
                                                                        
                                                                        
                                                                        Increase
      (Decrease)Fiscal
      years ended January 31,
                                                                        
                                                                        
                                                                        From
      2009
                                                                        
                                                                        
                                                                        From
      20082009
                                                                        
                                                                        
                                                                        2008
                                                                        
                                                                        
                                                                        2007
                                                                        
                                                                        
                                                                        to
      2008
                                                                        
                                                                        
                                                                        to
      2007$
                                                                        
                                                                        
                                                                        
                                                                        %
                                                                        
                                                                        
                                                                        $
                                                                        
                                                                        
                                                                        
                                                                        %
                                                                        
                                                                        
                                                                        $
                                                                        
                                                                        
                                                                        
                                                                        %
                                                                        
                                                                        
                                                                        %
                                                                        
                                                                        
                                                                        %Continuing
      Operations:Revenue
                                                                        
                                                                        $
                                                                        1,341
                                                                        
                                                                        
                                                                        
                                                                        100
                                                                        %
                                                                        
                                                                        $
                                                                        1,118
                                                                        
                                                                        
                                                                        
                                                                        100
                                                                        %
                                                                        
                                                                        $
                                                                        269
                                                                        
                                                                        
                                                                        
                                                                        100
                                                                        %
                                                                        
                                                                        
                                                                        20
                                                                        %
                                                                        
                                                                        
                                                                        316
                                                                        %Expenses:Cost
      of revenues
                                                                        
                                                                        
                                                                        7,003
                                                                        
                                                                        
                                                                        
                                                                        522
                                                                        %
                                                                        
                                                                        
                                                                        9,660
                                                                        
                                                                        
                                                                        
                                                                        864
                                                                        %
                                                                        
                                                                        
                                                                        8,138
                                                                        
                                                                        
                                                                        
                                                                        3025
                                                                        %
                                                                        
                                                                        
                                                                        -28
                                                                        %
                                                                        
                                                                        
                                                                        19
                                                                        %Sales
      and marketing
                                                                        
                                                                        
                                                                        3,340
                                                                        
                                                                        
                                                                        
                                                                        249
                                                                        %
                                                                        
                                                                        
                                                                        3,880
                                                                        
                                                                        
                                                                        
                                                                        347
                                                                        %
                                                                        
                                                                        
                                                                        4,386
                                                                        
                                                                        
                                                                        
                                                                        1630
                                                                        %
                                                                        
                                                                        
                                                                        -14
                                                                        %
                                                                        
                                                                        
                                                                        -12
                                                                        %Research
      and product development
                                                                        
                                                                        
                                                                        4,668
                                                                        
                                                                        
                                                                        
                                                                        348
                                                                        %
                                                                        
                                                                        
                                                                        4,652
                                                                        
                                                                        
                                                                        
                                                                        416
                                                                        %
                                                                        
                                                                        
                                                                        11,010
                                                                        
                                                                        
                                                                        
                                                                        4093
                                                                        %
                                                                        
                                                                        
                                                                        0
                                                                        %
                                                                        
                                                                        
                                                                        -58
                                                                        %General
      and administrative
                                                                        
                                                                        
                                                                        7,040
                                                                        
                                                                        
                                                                        
                                                                        525
                                                                        %
                                                                        
                                                                        
                                                                        11,179
                                                                        
                                                                        
                                                                        
                                                                        1000
                                                                        %
                                                                        
                                                                        
                                                                        14,833
                                                                        
                                                                        
                                                                        
                                                                        5514
                                                                        %
                                                                        
                                                                        
                                                                        -37
                                                                        %
                                                                        
                                                                        
                                                                        -25
                                                                        %Amortization
      of capitalized software development costs
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        0
                                                                        %
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        0
                                                                        %
                                                                        
                                                                        
                                                                        3,045
                                                                        
                                                                        
                                                                        
                                                                        1132
                                                                        %
                                                                        
                                                                        
                                                                        0
                                                                        %
                                                                        
                                                                        
                                                                        -100
                                                                        %Impairment
      of long-lived assets
                                                                        
                                                                        
                                                                        3,133
                                                                        
                                                                        
                                                                        
                                                                        234
                                                                        %
                                                                        
                                                                        
                                                                        603
                                                                        
                                                                        
                                                                        
                                                                        54
                                                                        %
                                                                        
                                                                        
                                                                        6,407
                                                                        
                                                                        
                                                                        
                                                                        2382
                                                                        %
                                                                        
                                                                        
                                                                        420
                                                                        %
                                                                        
                                                                        
                                                                        -91
                                                                        %Total
      operating expenses
                                                                        
                                                                        
                                                                        25,184
                                                                        
                                                                        
                                                                        
                                                                        1878
                                                                        %
                                                                        
                                                                        
                                                                        29,974
                                                                        
                                                                        
                                                                        
                                                                        2681
                                                                        %
                                                                        
                                                                        
                                                                        47,819
                                                                        
                                                                        
                                                                        
                                                                        17776
                                                                        %
                                                                        
                                                                        
                                                                        -16
                                                                        %
                                                                        
                                                                        
                                                                        -37
                                                                        %Operating
      loss
                                                                        
                                                                        
                                                                        (23,843
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (28,856
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (47,550
                                                                        )Other
      income, net
                                                                        
                                                                        
                                                                        1,257
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        1,815
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        2,267
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        -31
                                                                        %
                                                                        
                                                                        
                                                                        -20
                                                                        %Loss
      before taxes
                                                                        
                                                                        
                                                                        (22,586
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (27,041
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (45,283
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        -16
                                                                        %
                                                                        
                                                                        
                                                                        -40
                                                                        %Income
      tax benefit
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        0
                                                                        %
                                                                        
                                                                        
                                                                        0
                                                                        %Loss
      from continuing Operations
                                                                        
                                                                        
                                                                        (22,586
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (27,041
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (45,283
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        -16
                                                                        %
                                                                        
                                                                        
                                                                        -40
                                                                        %Discontinued
      Operations:Income
      from discontinued operations
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        20
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        456
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        -100
                                                                        %
                                                                        
                                                                        
                                                                        -96
                                                                        %Gain
      on sale on disposal of discontinued operations
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        17,925
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        -100
                                                                        %
                                                                        
                                                                        
                                                                        0
                                                                        %Income
      from discontinued operations
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        17,945
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        456
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        -100
                                                                        %
                                                                        
                                                                        
                                                                        3835
                                                                        %Net
      loss
                                                                        
                                                                        $
                                                                        (22,586
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        $
                                                                        (9,096
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        $
                                                                        (44,827
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        148
                                                                        %
                                                                        
                                                                        
                                                                        -80
                                                                        %


21
 Table of Contents


Continuing
Operations:





Revenues





Hosted
services revenue from our vertical search services offering for the year ended
January 31, 2009 increased by 20% to $1.3 million from $1.1 million for the year
ended January 31, 2008.  This increase is due to an overall increase
in the number of customers served and the vertical search sites in
production.  During fiscal year 2009 there were 22 of the sites in
production generating revenue, compared to 11 revenue generating sites in fiscal
year 2008.





As of
January 31, 2009, there were a total of 51 Convera supported websites in
production compared to 39 such sites at January 31, 2008. Revenue from
international operations is generated from publishers located primarily in the
United Kingdom. International revenues were $1.0 million in the year ended
January 31, 2009 and were $1.0 million in the year ended January 31,
2008.





Two
customers accounted for a total of 66 % of the revenues generated in the year
ended January 31, 2009, accounting for 47% and 19%, respectively. One customer
accounted for 82% of total revenue during the year ended January 31,
2008.  Three customers accounted for 53%, 29% and 17%, respectively of
total revenue for the year ended January 31, 2007.





Operating
Expenses:





Cost of
Revenues





Our
hosted services cost of revenue decreased 28% to $7.0 million for the year ended
January 31, 2009 from $9.7 million for the year ended January 31, 2008. This
decrease includes a $1.8 million decrease in hosting costs due to the
termination of the agreement with AT&T for the San Diego hosting center in
January 2008, a $1.1 million decrease in compensation expenses resulting from
the restructuring actions undertaken in fiscal 2008 and $0.2 million decrease in
consulting expense due to lower foreign language translation requirements in
fiscal 2009. These decreases were offset, in part, by a $0.4 million increase in
depreciation and software maintenance costs related to software licenses
acquired and placed into service after January 31, 2008. Cost of revenues
increased 19% to $9.7 million at January 31, 2008 from the prior fiscal year,
due principally to increased personnel related costs due to the formation of the
publisher services implementation team. Cost of revenue headcount decreased to
an average of 17 for the year ended January 31, 2009 from an average of 23 for
the year ended January 31, 2008.





Sales
& Marketing





Sales and
marketing expense decreased 14 % to $3.3 million for the year ended January 31,
2009 from $3.9 million for the year ended January 31, 2008.  The
decrease in sales and marketing expense includes a $0.4 million decrease in
marketing program costs, a $0.3 million decrease in sales commission levels due
to changes in the commission plan and a $0.2 million decrease in facility costs
stemming from a downsizing of the U.K. office facility in early fiscal 2009.
Fiscal year 2008 expenses were reduced $0.5 million as a result of the
deterioration of the dollar to pound exchange rate during the fiscal
year.  Sales and marketing expenses decreased 12% to $3.9 million for
the year ended January 31, 2008 from the prior fiscal year due to decreased
marketing program costs. Sales and marketing head count decreased to an average
of eight for the year ended January 31, 2009 from an average of twelve for the
year ended January 31, 2008.





Research
and Development





Research
and product development costs remained level at $4.7 million for the years ended
January 31, 2009 and 2008. Research and development costs for fiscal 2009
include a $0.4 million increase in personnel related costs, and a $0.3 million
increase in stock compensation expense, offset in part by a $0.3 million
decrease in facilities cost stemming from the restructuring actions taken in
2008 and a $ 0.2 million decrease in consultant costs due to reduced language
translation requirements in fiscal 2009. Research and product development costs
decreased 58% to $4.7 million for the year ended January 31, 2008 from the prior
fiscal year due to decreased personnel related costs stemming from restructuring
actions taken throughout fiscal 2008.  Research and development
headcount decreased to an average of 23 for the first year of fiscal 2009 from
an average of 25 for the year ended January 31, 2008.





22
 Table of Contents




General
and Administrative





General
and administrative expense decreased 37% to $7.0 million for the year ended
January 31, 2009 from $11.2 million for the year ended January 31, 2008. The
decrease includes a $2.1 million reduction in third-party legal fees related to
the settlement of lawsuits in fiscal 2008 as well as a $0.7 million reduction in
costs related to a settlement fee paid to DSMCi in fiscal
2008.  Additionally, consulting expenses decreased $0.3 million,
accounting fees were reduced $0.7 million and there was a $0.8 million decrease
in compensation costs resulting from lower staffing levels, offset by a $0.7
million increase in stock compensation expense. General and administrative
expenses decreased 25% to $11.2 million for the year ended January 31, 2008 from
the prior fiscal year due principally to lower staffing levels stemming from
restructuring actions taken during fiscal 2008. General and administrative
headcount decreased to an average of 16 in fiscal 2009 from an average of 23 for
the year ended January 31, 2008.




Impairment
of long lived assets





During
the quarter ended January 31, 2009, an analysis of our Ad server and related
hosting group identified several asset impairment indicators.  These
indicators included failure to achieve forecasted operating results, the lack of
significant new contracts and the general economic downturn that has slowed
investment in online publishing.  These conditions and events
indicated that the carrying value of this asset group, consisting primarily of
network hosting equipment and related software, may not be recoverable.
 Accordingly, we completed an impairment test in accordance with our
accounting policy for this asset group, which resulted in an impairment charge
of $3.1 million. To determine the amount of the impairment charge, we were
required to make estimates of the fair value of the assets in this group, and
these estimates were based on the use of the income approach to determine the
fair value of the software and a third party appraisal for the
equipment.





Other
income





Other
income decreased to $1.3 million for the year ended January 31, 2009 from $1.8
million in the comparable period of the prior fiscal year due principally to the
combined effects of a lower average cash balance and lower interest
rates.  Other income for the year ended January 31, 2009 includes $0.7
million earned from satisfying an obligation for the delivery of a discontinued
product to a US government customer and $0.5 million of interest income. Other
income for the year ended January 31, 2008 consisted entirely of interest
income.








Discontinued
operations





Discontinued
operations for the year ended January 31, 2008 included income of $17.9 million
from the net gain on the sale of the RetrievalWare enterprise search business.
The sale of RetrievalWare was completed in August 2007 and there was no business
activity or operating results from discontinued operations during the year ended
January 31, 2008.  Discontinued operations for the year ended January
31, 2007 included $0.5 million of income generated by the RetrievalWare
enterprise search business.








Contractual
Obligations





We are
obligated under certain contractual arrangements to make future payments for
goods and services. These contractual obligations secure the future rights to
various assets and services to be used in the normal course of operations. For
example, we are contractually committed to make certain minimum lease payments
for the use of property under operating lease agreements. In accordance with
applicable accounting rules, the future rights and obligations pertaining to
firm commitments such as operating lease obligations and certain purchase
obligations under contracts are not reflected as assets or liabilities on the
accompanying consolidated balance sheets.





23
 Table of Contents




As of
January 31, 2009, we had the following contractual obligations associated with
our lease commitments, and other contractual obligations for the periods
indicated below:





Contractual
      Obligations
                  
                  Payments
      Due By Fiscal Period (in thousands)Total
                  
                  
                  2010
                  
                  
                  
                  2011-2012Operating
      leases
                  
                  $
                  1,222
                  
                  
                  $
                  1,138
                  
                  
                  $
                  84Other
      contractual obligations
                  
                  
                  1,032
                  
                  
                  
                  1,032
                  
                  
                  
                  -Total
                  
                  $
                  2,254
                  
                  
                  $
                  2,170
                  
                  
                  $
                  84





·
            Operating
      lease obligations — represents the minimum lease rental payments
      under non-cancelable leases, primarily for our office space and operating
      equipment in various locations around the
world.





·
            Other
      contractual obligations — represents the principal amounts due on
      outstanding contractual obligations relating to our hosting agreements
      with AT&T for our vertical search product.  In January 2008,
      we exercised our right to terminate the contract for the San Diego hosting
      facility (see further discussion in Note 3 of the consolidated financial
      statements).  The Other contractual obligations balance includes
      the termination obligation due for the San Diego hosting facility of
      approximately $0.7 million, as well as 100% of the contractual obligation
      for the Dallas hosting facility (expiring July 2009), although that
      agreement is cancelable for a payment of 50% of the remaining balance at
      the time of cancellation. We also have the option for an extension of an
      additional 18 months at a slight increase above the current contractual
      rate that is not reflected in other contractual
    obligations.








24
 Table of Contents


Liquidity
and Capital Resources




Our
balance of cash and cash equivalents at January 31, 2009 as compared to January
31, 2008 is summarized below (in thousands).





January
      31, 2009
                  
                  
                  January
      31, 2008
                  
                  
                  ChangeCash
      and cash equivalents
                  
                  $
                  22,754
                  
                  
                  $
                  36,641
                  
                  
                  $
                  (13,887
                  )







At
January 31, 2009, our principal source of liquidity was cash and cash
equivalents of $22.8 million.





Operating
activities of continuing operations consumed $15.6 million in cash in fiscal
2009. The primary use of cash from operating activities was the net loss from
continuing operations of $22.6 million. The net loss was reduced for non-cash
expenses represented by depreciation and amortization expense of $2.7 million,
stock-based compensation of $2.9 million and an impairment charge of $3.1
million.  The $2.5 million increase in stock-based compensation
expense between fiscal 2009 and 2008 is the result of lower stock based
compensation expense in fiscal 2008 stemming from the recognition of a
cumulative catch up credit generated by the forfeiture of stock options from
employees terminated as a result of the fiscal 2008 restructuring
actions.  The $3.1 million impairment charge recognized in fiscal 2009
was mainly related to certain acquired software used in our vertical search
business. We recorded a $0.6 million impairment charge in fiscal 2008 due to
hosting equipment rendered idle in the termination of our hosting arrangement
for the San Diego facility.





An
increase in accounts receivables decreased operating cash flow by of $0.8
million in fiscal 2009. We experienced aging in accounts receivable due to
slower paying publishers in fiscal 2009; the increase in accounts receivable is
reflective of customers taking longer to pay their invoices due to the slower
overall economy.  We established a reserve of $165,000 at January 31,
2009 based on an analysis of the recoverability of the accounts of several slow
paying customers.  If these accounts ultimately become partially or
completely uncollectible all or part of these accounts may have to be written
off as bad debts. A decrease in accounts payable and accrued expenses reduced
operational cash flow by $0.7 million in fiscal 2009. The reduction in accounts
payable and accrued expenses is a consequence of the restructuring and
realignment actions taken to reduce operating costs. Deferred revenue decreased
$ 0.6 million in fiscal 2009 reducing operational cash flow. The cash underlying
the deferred revenue had been received in a prior period; the revenue was
recognized during fiscal 2009 in accordance with the terms of the customer
contract. Net cash of $1.7 million was provided by discontinued operations in
fiscal 2008.





Our
investing activities provided $2.0 million in cash during fiscal 2009. Proceeds
of $4.0 million were collected in the finalization and release of the funds held
in escrow for the sale of the RetrievalWare Enterprise Search Business to FAST
in August 2008, offset in part by our payment during the first quarter of fiscal
2009 of a $1.0 million working capital adjustment related to the sale of the
RetrievalWare Enterprise Search business.  Purchases of equipment
totaling $1.1 million in fiscal 2009 were partially offset by the proceeds from
the sale of assets of $0.1 million. Investing activities provided $12.1 million
in cash in fiscal 2008. The sale of the Enterprise Search business provided
$16.4 million, net of expense directly related to the transaction. This was
offset by $4.3 million used in purchases of equipment and leasehold
improvements.  Investing activities of discontinued operations used
$4,000 in fiscal 2008.





Financing
activities used $28,000 for fiscal 2009 related to the repurchase of shares upon
completion of a deferred stock agreement with a senior officer of the company in
January 2009.  The issuance of common stock related to the exercise of
employee stock options and deferred stock arrangements provided a net of $0.6
million in fiscal 2008.





In fiscal
2007 the Enterprise Search business provided $16.4 million, or 98% of our $16.7
million total revenue. The closing of the sale of the Enterprise Search business
has reduced our revenue base in the short term and has continued our trend of
operating losses and uses of cash until the revenue base for the vertical search
business grows sufficiently to support the underlying expense base. These
factors as well as the economic slowdown and recession that have been
experienced over most sectors of the global economy may result in slower
advertising share growth during fiscal 2010. Industry analysts and several of
our customers are expecting lower ad revenues and slower online ad growth on a
site by site basis. While we will attempt to counteract this trend with new
publisher contracts and an overall increase in search site launches, we could
experience lower revenues in the coming quarters from our revenue sharing
contracts with publishers.






25
 Table of Contents




We have
also taken action in view of these trends to reduce our operating costs. In
November 2008, we introduced the self service capabilities to our Publisher
Control Panel. The introduction of these features and roll out allowed us to
reduce the cost structure of our sales, marketing and customer service
functions. This streamlining action has resulted in reducing our sales,
marketing and customer service headcount by nine and led to the shut down of our
U.K. sales office in January 2009. In February 2009, as a reaction to the slower
contracting pace, lower ad revenues and slower online ad growth, we reduced the
costs of our hosting and engineering group, reducing our headcount by 23 as well
as our expense base. These reductions will allow us to align our cost structure
with the expectations of slower revenue growth. We believe that this
streamlining action will allow us to continue to serve our customers effectively
while substantially reducing our operating costs.





We
believe that we have sufficient resources to fund operations for at least the
next twelve months.





Inflation





We
believe that inflation has not had a material impact on the results of our
operations to date.







Item
7A.             Quantitative
and Qualitative Disclosures about Market Risk





Our
market risk is principally confined to changes in foreign currency exchange
rates and potentially adverse effects of differing tax
structures.  International revenues from CTIL, our foreign sales
subsidiary located in the United Kingdom until its closure in January 2009, were
approximately 76% of total revenues in fiscal year 2009. International sales
have been made predominantly from our U.K. subsidiary and are typically
denominated in British pounds.  As of January 31, 2009, approximately
71% of total consolidated accounts receivable were denominated in British
pounds.  The majority of these receivables are due within 90 days of
the end of fiscal year 2009, and all receivables are due within one
year.  Additionally, we are exposed to potential foreign currency
gains or losses resulting from intercompany accounts that are not of a long-term
nature.  We are also exposed to foreign exchange rate fluctuations as
the financial results of CTIL are translated into U.S. dollars in
consolidation.  As exchange rates vary, those results when translated
may vary from expectations and adversely impact overall expected
profitability.





As of
January 31, 2009, approximately 3% of our cash and cash equivalents were
denominated in British pounds, EUROs and Canadian dollars,
respectively.  Cash equivalents consist of funds deposited in money
market accounts with original maturities of three months or less.  We
also have certificates of deposit of $76,000 and $450,000 included in Other
assets which are pledged to collateralize letters of credit required for leased
facilities.  Given the relatively short maturity periods of these cash
equivalents, the cost of these investments approximates their fair values and
our exposure to fluctuations in interest rates is limited.








Item
8.                Financial Statements and Supplementary Data





Financial
statements and supplementary data are submitted as a separate section of this
Form 10-K.







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


None.








Item
9A(T).     Controls and Procedures





(a)
            Management's
      Report on Internal Control Over Financial
  Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rule 13a-15(f) under the
Exchange Act, as amended, and for assessing the effectiveness of internal
control over financial reporting. Our management, with the participation of our
Chief Executive Officer, who is our principal executive officer and our Chief
Financial Officer, who is our principal accounting officer, conducted an
evaluation of the effectiveness of our internal control over financial reporting
as of January 31, 2009. In making this assessment, our management used the
criteria established in Internal Control -- Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
Management has concluded that we maintained effective internal control over
financial reporting as of January 31, 2009, based on the criteria established in
COSO's Internal Control – Integrated Framework.




26
 Table of Contents





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.





(b)
            Changes
      in Internal Control Over Financial
Reporting





There was
no change in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
quarter ended January 31, 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.


(c)
              Evaluation
      of Disclosure Controls and
Procedures
 
 Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) and determined that our disclosure controls
and procedures were effective as of January 31, 2009. The evaluation considered
the procedures designed to ensure that information required to be disclosed by
us in reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms and communicated to our management as appropriate to allow timely
decisions regarding required disclosure.
 
 (d)
              Inherent
      Limitations of Disclosure Controls and Internal Control Over Financial
      Reporting
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.








Item 9B.
            Other
      Information





Not
applicable.




27
 Table of Contents





PART
III





Item
10.           Directors,
Executive Officers and Corporate Governance





The
information required for this Item will be included in our definitive Proxy
Statement for the 2009 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission no later than 120 days after January 31,
2009, which information is incorporated in this report by
reference.








Item
11.                 Executive
Compensation





The
information required for this Item will be included in our definitive Proxy
Statement for the 2009 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission no later than 120 days after January 31,
2009, which information is incorporated in this report by
reference.







Item 12.  Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters


The
information required for this Item will be included in our definitive Proxy
Statement for the 2009 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission no later than 120 days after January 31,
2009, which information is incorporated in this report by
reference.








Item
13.                 Certain
Relationships and Related Transactions, and Director Independence





The
information required for this Item will be included in our definitive Proxy
Statement for the 2009 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission no later than 120 days after January 31,
2009, which information is incorporated in this report by
reference.








Item
14.                 Principal
Accounting Fees and Services





The
information required for this Item will be included in our definitive Proxy
Statement for the 2009 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission no later than 120 days after January 31,
2009, which information is incorporated in this report by
reference.











28
 Table of Contents


PART IV





Item
15.                 Exhibits,
Financial Statement Schedules





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




1.   
 Financial Statements








The
      following financial statements of Convera Corporation are submitted in a
      separate section pursuant to the requirements of Form 10-K, Part I, Item
      8:





Index
      to Consolidated Financial
Statements


Report
      of Independent Registered Public Accounting
Firm


Consolidated
      Balance Sheets


Consolidated
      Statements of Operations and Comprehensive
Loss


Consolidated
      Statements of Shareholders' Equity


Consolidated
      Statements of Cash Flows


Notes
      to Consolidated Financial
Statements





2.      Schedules
Supporting Financial Statements:





All
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:





See
Exhibit Index on the following page.


29
 Table of Contents


Exhibit Index





Exhibit No.
                    Exhibit Title
                    
                    Incorporated
      by Reference from the Following
      Documents3.1
                    Amended
      and Restated Certificate of Incorporation of Convera
                    
                    Form
      S-4 (Registration No. 333-50172), November 17, 20003.2
                    By-laws of Convera (Amended and
      Restated)
                    
                    Filed
      Herewith3.3
                    Amendment
      to By-Laws
                    
                    Form
      10-K, March 31, 200610.1
                    1995 Incentive Plan, dated November
      1995
                    
                    Filed
      Herewith10.2
                    Convera 2000 Stock Option Plan (Amended and
      Restated)
                    
                    Filed
      Herewith10.3
                    Office Lease (1808 Aston Avenue, Carlsbad, California)
      commencing November 1, 2001
                    
                    Filed
      Herewith10.4
                    Amended and Restated Convera Corporation 1996 Employee
      Stock Purchase Plan
                    
                    Filed
      Herewith10.5
                    AT&T
      Master Agreement dated August 24, 2004
                    
                    Form
      10-K, April 1, 200510.6
                    Office
      Sublease (Sublandlord – MWH Americas, 6760 Alexander Bell Drive, Columbia
      Maryland) commencing June 1, 2005
                    
                    Form
      10-K, March 31, 200610.7
                    Office
      Lease (6760 Alexander Bell Drive, Columbia Maryland) commencing August 20,
      2005
                    
                    Form
      10-K, March 31, 200610.8
                    Employment
      Agreement with Patrick C. Condo dated October 24, 2005
                    
                    Form
      10-K, March 31, 200610.9
                    Office
      Lease Amendment (1808 Aston Avenue, Carlsbad, California) commencing
      January 17, 2007
                    
                    Form
      10-K, May 1, 200710.10
                    Employment
      Agreement with Matthew Jones, dated December 6, 2006
                    
                    Form
      10-K, May 1, 200710.11
                    Amended
      and Restated Asset Purchase Agreement with FAST Search and Transfer Inc.,
      effective August 9, 2007
                    
                    Form
      8-K, August 15, 200710.12
                    Office
      Lease Amendment (1921 Gallows Road, Vienna Virginia) commencing January 1,
      2008
                    
                    Form
      10-K, April 2, 200810.13
                    Office
      Centre Service Agreement (Venture House, Arlington Square, Downshire Way,
      Bracknell, United Kingdom), commencing March 1, 2008
                    
                    Form
      10-K, April 2, 200821.1
                    Subsidiaries
      of Convera
                    
                    Form
      10-K, April 30, 200423.1
                    Consent of Independent Registered Public Accounting
      Firm
                    
                    Filed
      Herewith31.1
                    Certification of Chief Executive Officer pursuant to
      Rule 13a-14(a)/15d-14(a)
                    
                    Filed
      Herewith31.2
                    Certification of Chief Financial Officer pursuant to
      Rule 13a-14(a)/15d-14(a)
                    
                    Filed
      Herewith32.1
                    Certification of Chief Executive Officer, pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
                    
                    Filed
      Herewith32.2
                    Certification of Chief Financial Officer, pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
                    
                    Filed
      Herewith




30
 Table of Contents


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.





CONVERA CORPORATION





By:  /s/ Patrick C.
Condo


Patrick C. Condo


President and Chief Executive
Officer





Date:  March
31, 2009





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 Officer
                        
                        March 31, 2009Patrick
      C. Condo
                        
                        and
      Director (Principal Executive Officer)/s/
      Matthew G. Jones
                        
                        Vice
      President, Chief Financial Officer
                        
                        March 31, 2009Matthew
      G. Jones
                        
                        (Principal
      Financial and Accounting Officer)/s/
      Ronald J. Whittier
                        
                        Director
                        
                        March 31, 2009Ronald
      J. Whittier/s/
      Herbert A. Allen
                        
                        Director
                        
                        March 31, 2009Herbert
      A. Allen/s/
      Herbert A. Allen, III
                        
                        Director
                        
                        March 31, 2009Herbert
      A. Allen, III/s/
      John C. Botts
                        
                        Director
                        
                        March 31, 2009John
      C. Botts/s/
      Eli S. Jacobs
                        
                        Director
                        
                        March 31, 2009Eli
      S. Jacobs/s/
      Ajay Menon
                        
                        Director
                        
                        March 31, 2009Ajay
      Menon/s/
      Carl J. Rickertson
                        
                        Director
                        
                        March 31, 2009Carl
      J. Rickertson/s/
      Jeffrey White
                        
                        Director
                        
                        March 31, 2009Jeffrey
      White/s/
      Alexander F. Parker
                        
                        Director
                        
                        March 31, 2009Alexander
      F. Parker
    31
 Table of Contents








Index to Consolidated Financial Statements
            PageReport of Independent Registered Public Accounting
      Firm
            F-1Consolidated Balance Sheets
              As of January 31,
      2009 and 2008
            F-2Consolidated Statements of Operations and Comprehensive
      Loss
              For the fiscal
      years ended January 31, 2009, 2008 and 2007
            F-3Consolidated Statements of Shareholders'
Equity
              For the fiscal
      years ended January 31, 2009, 2008 and 2007
            F-4Consolidated Statements of Cash Flows
              For the fiscal
      years ended January 31, 2009, 2008 and 2007
            F-5Notes to Consolidated Financial Statements
            F-6








32
 Index to Consolidated Financial
Statements





Report of IndependentRegistered Public Accounting Firm








To the
Board of Directors and Shareholders of


Convera
Corporation





We have
audited the accompanying consolidated balance sheets of Convera Corporation (the
Company) as of January 31, 2009 and 2008, and the related consolidated
statements of operations and comprehensive loss, changes in shareholders’
equity, and cash flows for each of the three years in the period ended January
31, 2009. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial reporting.  Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.  Accordingly, we
express no such opinion.  An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Convera Corporation at
January 31, 2009 and 2008, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended January 31, 2009,
in conformity with U.S. generally accepted accounting principles.








/s/ Ernst & Young
LLP


McLean,
Virginia


March 27,
2009





F-1
 Index to Consolidated Financial
Statements


CONVERA CORPORATIONAND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(in
thousands, except per share data)








ASSETSJanuary
      31, 2009
                    
                    
                    January
      31, 2008Current
      Assets:Cash
      and cash
      equivalents
                    
                    $
                    22,754
                    
                    
                    $
                    36,641Accounts
      receivable, net of allowance for doubtful accounts of $165 and $0,
      respectively
                    
                    
                    620
                    
                    
                    
                    182Escrow,
      prepaid expenses and
      other
                    
                    
                    447
                    
                    
                    
                    4,002Total
      current
      assets
                    
                    
                    23,821
                    
                    
                    
                    40,825Equipment
      and leasehold improvements, net of accumulated depreciation of $9,672
      and $11,535, respectively
                    
                    
                    460
                    
                    
                    
                    4,913Other
      assets
                    
                    
                    596
                    
                    
                    
                    629Total
      assets
                    
                    $
                    24,877
                    
                    
                    $
                    46,367LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
                    
                    $
                    502
                    
                    
                    $
                    699Accrued
      expenses
                    
                    
                    1,675
                    
                    
                    
                    2,282Deferred
      revenues
                    
                    
                    4
                    
                    
                    
                    651Total
      liabilities
                    
                    
                    2,181
                    
                    
                    
                    3,632Commitments
      and Contingencies
                    
                    
                    -
                    
                    
                    
                    -Shareholders'
      Equity:Common
      stock Class A, $0.01 par value, 100,000,000 shares authorized; 54,157,738
      and 53,947,749 shares issued, respectively; 53,501,183 and 53,291,194
      shares outstanding, respectively
                    
                    
                    540
                    
                    
                    
                    538Treasury
      stock at cost, 656,555 and 656,555 shares, respectively
                    
                    
                    (1,517
                    )
                    
                    
                    (1,517
                    )Additional
      paid-in-capital
                    
                    
                    1,172,965
                    
                    
                    
                    1,170,128Accumulated
      deficit
                    
                    
                    (1,147,215
                    )
                    
                    
                    (1,124,629
                    )Accumulated
      other comprehensive
      loss
                    
                    
                    (2,077
                    )
                    
                    
                    (1,785
                    )Total
      shareholders'
      equity
                    
                    
                    22,696
                    
                    
                    
                    42,735Total
      liabilities and shareholders'
      equity
                    
                    $
                    24,877
                    
                    
                    $
                    46,367




See
accompanying notes.





F-2
 Index to Consolidated Financial
Statements





CONVERA CORPORATIONAND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


(in
thousands, except share and per share data)





For
      the Fiscal Years Ended January 31,2009
                
                
                2008
                
                
                2007Revenues:Hosted
      services
                
                $
                1,341
                
                
                $
                1,118
                
                
                $
                269Expenses:Cost
      of
      revenues
                
                
                7,003
                
                
                
                9,660
                
                
                
                8,138Sales
      and
      marketing
                
                
                3,340
                
                
                
                3,880
                
                
                
                4,386Research and product
      development
                
                
                4,668
                
                
                
                4,652
                
                
                
                11,010General and
      administrative
                
                
                7,040
                
                
                
                11,179
                
                
                
                14,833Amortization of
      capitalized software development costs
                
                
                -
                
                
                
                -
                
                
                
                3,045Impairment of
      capitalized software development costs, software and
    equipment
                
                
                3,133
                
                
                
                603
                
                
                
                6,407Total operating
      expenses
                
                
                25,184
                
                
                
                29,974
                
                
                
                47,819Operating
      loss
                
                
                (23,843
                )
                
                
                (28,856
                )
                
                
                (47,550
                )Other
      income,
      net
                
                
                1,257
                
                
                
                1,815
                
                
                
                2,267Loss
      from continuing
      operations
                
                
                (22,586
                )
                
                
                (27,041
                )
                
                
                (45,283
                )Income
      (loss) from discontinued operations, net of tax benefit of $0, $241 and
      $0, respectively
                
                
                -
                
                
                
                20
                
                
                
                456Gain
      from sale of discontinued RetrievalWare operations
                
                
                -
                
                
                
                17,925
                
                
                
                -Income
      from discontinued
      operations
                
                
                -
                
                
                
                17,945
                
                
                
                456Net
      loss
                
                $
                (22,586
                )
                
                $
                (9,096
                )
                
                $
                (44,827
                )Basic
      and diluted net income (loss) per common share:Continuing
      operations
                
                $
                (0.42
                )
                
                $
                (0.51
                )
                
                $
                (0.87
                )Discontinued
      operations
                
                
                -
                
                
                
                0.34
                
                
                
                0.01Basic
      and diluted net loss per common share
                
                $
                (0.42
                )
                
                $
                (0.17
                )
                
                $
                (0.86
                )Weighted-average
      number of common shares outstanding – Basic and diluted
                
                
                53,328,029
                
                
                
                53,145,955
                
                
                
                52,221,644Comprehensive
      loss:Net
      loss
                
                $
                (22,586
                )
                
                $
                (9,096
                )
                
                $
                (44,827
                )Foreign
      currency translation adjustment
                
                
                (292
                )
                
                
                (490
                )
                
                
                145Comprehensive
      loss
                
                $
                (22,878
                )
                
                $
                (9,586
                )
                
                $
                (44,682
                )








See
accompanying notes











F-3
 Index to Consolidated Financial
Statements


CONVERA CORPORATIONAND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY


(in
thousands, except share data)








Common
      Stock
                    
                    
                    Treasury
      Stock
                    
                    
                    Additional
      Paid-in
                    
                    
                    Accumulated
                    
                    
                    Accumulated
      Other Compre-hensiveShares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Deficit
                    
                    
                    Income
      (Loss)
                    
                    
                    TotalBalance,
      January 31, 2006
                    
                    
                    47,803,186
                    
                    
                    
                    477
                    
                    
                    
                    (674,353
                    )
                    
                    
                    (1,558
                    )
                    
                    
                    1,124,068
                    
                    
                    
                    (1,070,706
                    )
                    
                    
                    (1,440
                    )
                    
                    
                    50,841Private
      placement
                    
                    
                    5,103,333
                    
                    
                    
                    51
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    36,693
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    36,744Issuance
      of common stock upon exercise of options
                    
                    
                    461,455
                    
                    
                    
                    5
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,645
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,650Issuance
      of treasury stock for Employee Stock Purchase Plan
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    17,798
                    
                    
                    
                    41
                    
                    
                    
                    71
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    112Stock-based
      compensation
                    
                    
                    101,325
                    
                    
                    
                    1
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,431
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,432Foreign
      currency translation adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    145
                    
                    
                    
                    145Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (44,827
                    )
                    
                    
                    -
                    
                    
                    
                    (44,827
                    )Balance,
      January 31, 2007
                    
                    
                    53,469,299
                    
                    
                    
                    534
                    
                    
                    
                    (656,555
                    )
                    
                    
                    (1,517
                    )
                    
                    
                    1,168,908
                    
                    
                    
                    (1,115,533
                    )
                    
                    
                    (1,295
                    )
                    
                    
                    51,097Issuance
      of common stock upon exercise of options
                    
                    
                    337,125
                    
                    
                    
                    3
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    817
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    820Stock-based
      compensation
                    
                    
                    141,325
                    
                    
                    
                    1
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    403
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    404Foreign
      currency translation adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (490
                    )
                    
                    
                    (490
                    )Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (9,096
                    )
                    
                    
                    -
                    
                    
                    
                    (9,096
                    )Balance,
      January 31, 2008
                    
                    
                    53,947,749
                    
                    
                    $
                    538
                    
                    
                    
                    (656,555
                    )
                    
                    $
                    (1,517
                    )
                    
                    $
                    1,170,128
                    
                    
                    $
                    (1,124,629
                    )
                    
                    $
                    (1,785
                    )
                    
                    $
                    42,735Stock-based
      compensation
                    
                    
                    209,989
                    
                    
                    
                    2
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,837
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,839Foreign
      currency translation adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (292
                    )
                    
                    
                    (292
                    )Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (22,586
                    )
                    
                    
                    -
                    
                    
                    
                    (22,586
                    )Balance,
      January 31, 2009
                    
                    
                    54,157,738
                    
                    
                    $
                    540
                    
                    
                    
                    (656,555
                    )
                    
                    $
                    (1,517
                    )
                    
                    $
                    1,172,965
                    
                    
                    $
                    (1,147,215
                    )
                    
                    $
                    (2,077
                    )
                    
                    $
                    22,696








See
accompanying notes





F-4
 Index to Consolidated Financial
Statements


CONVERA CORPORATIONAND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)





For
      the year ended January 31,2009
                                        
                                        
                                        2008
                                        
                                        
                                        2007Cash
      Flows from Operating Activities:Loss
      from continuing operations
                                        
                                        $
                                        (22,586
                                        )
                                        
                                        $
                                        (27,041
                                        )
                                        
                                        $
                                        (45,283
                                        )Adjustments
      to reconcile loss from continuing operations to net cash used in operating
      activities from continuing operations:Depreciation
      and amortization
                                        
                                        
                                        2,688
                                        
                                        
                                        
                                        2,611
                                        
                                        
                                        
                                        6,685Provision
      for doubtful accounts
                                        
                                        
                                        195
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Stock-based
      compensation
                                        
                                        
                                        2,867
                                        
                                        
                                        
                                        425
                                        
                                        
                                        
                                        5,967Gain
      on disposal of assets
                                        
                                        
                                        (7
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Impairment
      of capitalized software development costs, software and
      equipment
                                        
                                        
                                        3,133
                                        
                                        
                                        
                                        603
                                        
                                        
                                        
                                        6,407Changes
      in operating assets and liabilities:Restricted
      cash
                                        
                                        
                                        -
                                        
                                        
                                        
                                        71
                                        
                                        
                                        
                                        -Accounts
      receivable
                                        
                                        
                                        (779
                                        )
                                        
                                        
                                        (9
                                        )
                                        
                                        
                                        (170
                                        )Prepaid
      expenses and other assets
                                        
                                        
                                        163
                                        
                                        
                                        
                                        (141
                                        )
                                        
                                        
                                        569Accounts
      payable and accrued expenses
                                        
                                        
                                        (688
                                        )
                                        
                                        
                                        (1,166
                                        )
                                        
                                        
                                        814Deferred
      revenues
                                        
                                        
                                        (633
                                        )
                                        
                                        
                                        (10
                                        )
                                        
                                        
                                        609Net
      cash used in operating activities from continuing
    operations
                                        
                                        
                                        (15,647
                                        )
                                        
                                        
                                        (24,657
                                        )
                                        
                                        
                                        (24,402
                                        )Net
      cash provided by operating activities from
      discontinued operations
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,672
                                        
                                        
                                        
                                        1,323Net
      cash used in operating activities
                                        
                                        
                                        (15,647
                                        )
                                        
                                        
                                        (22,985
                                        )
                                        
                                        
                                        (23,079
                                        )Cash
      Flows from Investing Activities:Proceeds
      from the sale of RetrievalWare business, net of direct
    costs
                                        
                                        
                                        -
                                        
                                        
                                        
                                        16,419
                                        
                                        
                                        
                                        -Proceeds
      from escrow receivable related to sale of RetrievalWare
      business
                                        
                                        
                                        4,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Payments
      of working capital adjustment related to sale of RetrievalWare
      business
                                        
                                        
                                        (968
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Purchases
      of equipment and leasehold improvements
                                        
                                        
                                        (1,112
                                        )
                                        
                                        
                                        (4,347
                                        )
                                        
                                        
                                        (136
                                        )Proceeds
      from disposal of assets
                                        
                                        
                                        63
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Net
      cash provided by (used in) investing activities from continuing
      operations
                                        
                                        
                                        1,983
                                        
                                        
                                        
                                        12,072
                                        
                                        
                                        
                                        (136
                                        )Net
      cash used in investing activities from discontinued
    operations
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (4
                                        )
                                        
                                        
                                        (306
                                        )Net
      cash provided by (used in) investing activities
                                        
                                        
                                        1,983
                                        
                                        
                                        
                                        12,068
                                        
                                        
                                        
                                        (442
                                        )Cash
      Flows from Financing Activities:Proceeds
      from the private placement of stock, net
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        36,744Proceeds
      from the exercise of stock options
                                        
                                        
                                        -
                                        
                                        
                                        
                                        820
                                        
                                        
                                        
                                        1,650Net
      payments from the issuance of common stock
                                        
                                        
                                        (28
                                        )
                                        
                                        
                                        (197
                                        )
                                        
                                        
                                        (253
                                        )Repayment
      of long-term debt
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (5,000
                                        )Net
      cash (used in) provided by financing activities
                                        
                                        
                                        (28
                                        )
                                        
                                        
                                        623
                                        
                                        
                                        
                                        33,141Effect
      of Exchange Rate Changes on Cash
                                        
                                        
                                        (195
                                        )
                                        
                                        
                                        (498
                                        )
                                        
                                        
                                        72Net
      (Decrease) Increase in Cash and Cash Equivalents
                                        
                                        
                                        (13,887
                                        )
                                        
                                        
                                        (10,792
                                        )
                                        
                                        
                                        9,692Cash
      and Cash Equivalents, beginning of period
                                        
                                        
                                        36,641
                                        
                                        
                                        
                                        47,433
                                        
                                        
                                        
                                        37,741Cash
      and Cash Equivalents, end of period
                                        
                                        $
                                        22,754
                                        
                                        
                                        $
                                        36,641
                                        
                                        
                                        $
                                        47,433




See
accompanying notes.


F-5
 Index to Consolidated Financial
Statements




CONVERA CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(tabular amounts expressed in
thousands, except share and per share data)





(1)            CONVERA
CORPORATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Nature
of Operations





Convera
Corporation (“Convera,” “us,” “our” or “we”) provides vertical search services
to the websites of trade publishers.  We also offer web site hosting
and vertical search related professional services and training to
publishers.  Convera was established through the combination on
December 21, 2000 of the former Excalibur Technologies Corporation (“Excalibur”)
and Intel Corporation’s (“Intel”) Interactive Media Services (“IMS”) division
(the “Combination”).





In the
third quarter of fiscal 2008, we completed the sale of our RetrievalWare
Enterprise Search Business (“Enterprise Search”) to Fast Search & Transfer
(“FAST”).  FAST acquired the assets of the Enterprise Search business,
assumed certain obligations of the business and retained certain of the
employees serving its Enterprise Search customers. Prior to the FAST
transaction, we were operating under two reportable segments: Enterprise Search
and vertical search (previously entitled our Excalibur web hosting product).
Concurrent with the completion of the FAST Transaction, the remaining vertical
search business is reported as a single segment.  The operations of
the Enterprise Search business have been reflected as discontinued operations in
the accompanying Consolidated Statements of Operations and of Cash Flows for the
fiscal years ended January 31, 2008 and 2007.  See further discussion
in Note 2, “Discontinued Operations”.





As of
January 31, 2009 and January 31, 2008, Allen Holding, Inc., together with Allen
& Company Incorporated, Herbert A. Allen and certain related parties
(collectively “Allen & Company”) beneficially owned approximately 42% of the
voting power of Convera and held two seats and three seats, respectively, on the
Board of Directors.





Principles
of Consolidation





The
consolidated financial statements include the accounts of Convera Corporation
and its wholly owned subsidiaries.  All significant intercompany
transactions and accounts have been eliminated.





Use
of Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
revenues, expenses and contingent assets and liabilities.  We base
those estimates on historical experience and other factors that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets, liabilities and equity that
are not readily apparent from other sources.  Actual results could
differ from those estimates.





Reclassifications





Certain
amounts presented in the prior year’s financial statements have been
reclassified to conform to the fiscal year 2009 presentation.





Revenue
Recognition





Revenue
from our vertical search service offering can consist of hosted services,
professional services and advertising revenue shares.


F-6
 Index to Consolidated Financial
Statements


Our
vertical search services revenues are recognized in accordance with SEC Staff
Accounting Bulletin No. 104 (SAB 104) “Revenue
Recognition.”  We evaluate vertical search services
arrangements that have multiple deliverables, in accordance with as Emerging
Issues Task Force (“EITF”) Abstract Issue No. 00-21 “Revenue Arrangements with Multiple
Deliverables.”  Revenue is recognized when the services have
been performed, the price is fixed and determinable, persuasive evidence of an
arrangement exists and collection of the resulting receivable is reasonably
assured.  Multiple deliverable arrangements that contain elements that
do not qualify as separate units of accounting are recognized ratably over the
term of the hosting arrangement.





Our
contracts entitle us to receive either: (1) a percentage of the advertising
revenue generated by the customer search site (“ad share revenue”) or, (2) fees
based on the search volume consumed by the customer (“search volume revenue”).
The majority of our current contracts are ad share arrangements that entitle us
to receive a percentage of customer search-related advertising revenue earned
(typically between 20% and 50% of net advertising revenues).  Many of
these ad share contracts also contain monthly minimum service fees that we
continue to receive until monthly website advertising revenue generated by the
publishers’ search sites exceeds these monthly minimum amounts. Search volume
contracts entitle us to receive fees based on the search volume consumed by the
customer. These arrangements typically include a fixed monthly minimum fee based
on the contracted search volume the customer expects to consume on a monthly
basis. We are entitled to receive additional fees from customers whose monthly
search volumes exceed the contracted amounts. Contract minimums, including both
ad share and search volume contract minimums, and other hosting fees or set-up
fees are recognized ratably over the term of the vertical search service
agreement. Advertising share and search volume revenues in excess of these
minimums are recognized when earned under the provisions of the vertical search
services agreement.





Revenues
from training and professional services are recognized when the services are
performed, provided they qualify as separate units of accounting.





Deferred
revenue is recorded when payments are received in advance of our performance in
the underlying agreements.





Stock-based
Compensation





On
February 1, 2006, we adopted the provisions of and accounted for stock-based
compensation in accordance with Statement of Financial Accounting Standards No.
123 (Revised 2004), Share-Based Payment (“SFAS
123(R)”), that addresses the accounting for share-based payment transactions in
which an enterprise receives employee services in exchange for either: (a)
equity instruments of the enterprise or (b) liabilities that are based on the
fair value of the enterprise’s equity instruments or that may be settled by the
issuance of such equity instruments.  In January 2005, the Securities
and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 107, which
provides supplemental implementation guidance for SFAS 123(R). SFAS 123(R)
eliminates the ability to account for stock-based compensation transactions
using the intrinsic method under Accounting Principal Board Opinion No. 25
(“APB25”) Accounting for Stock
Issued to Employees, and instead requires that such transactions be
accounted for using a fair value based method.





We
elected the modified–prospective transition method as permitted by SFAS
123(R).  In accordance with the modified –prospective transition
method, stock-based compensation expense was recorded for all new grants and for
the unvested portion of grants that were outstanding and unvested and ultimately
expected to vest as the requisite service is rendered beginning on February 1,
2006, the first day of our fiscal year 2007.





Research
and Product Development Costs





Our
software development costs are accounted for in accordance with AICPA Statement
of Position 98-1 (SOP98-1) “Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use”. We expense costs
incurred in the preliminary project stage and, thereafter, we capitalize
permitted costs incurred in the development or acquisition of internal use
software.  Certain costs such as research and development, maintenance
and training are expensed as incurred. Amortization of the capitalized costs is
performed on a straight-line basis over the estimated use life of the
asset.




F-7
 Index to Consolidated Financial
Statements




Advertising





Our
advertising costs, which were immaterial for the fiscal years ended January 31,
2009, 2008 and 2007, are expensed as incurred and included with sales and
marketing in the consolidated statements of operations.





Other
Income




For the
fiscal year ended January 31, 2009, other income consisted primarily of $0.5
million of net interest income and $0.6 million earned from satisfying an
obligation for the delivery of the discontinued product to a US government
customer.  For the fiscal year ended January 31, 2008, other income
primarily consisted of $1.8 million of interest income.  For the
fiscal year ended January 31, 2007, other income consisted of $2.4 million of
net interest income offset by interest expense of $0.2 million.





Income
Taxes





We follow
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109").  Under the asset and liability method of
SFAS 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax laws
and tax rates in each jurisdiction where we operate, and applied to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities due to a
change in tax rates is recognized in income in the period that includes the
enactment date. We calculate estimated income taxes in each of the jurisdictions
in which we operate. This process involves estimating actual current tax expense
along with assessing temporary differences resulting from differing treatment of
items for both book and tax purposes.





We record
a valuation allowance to reduce our deferred tax assets to the amount that is
more likely than not to be realized. Realization of the deferred tax assets is
principally dependent upon the achievement of projected future taxable income.
If the estimates and related assumptions change in the future we may be required
to adjust our valuation allowance against our deferred tax assets, resulting in
a benefit or a charge to income in the period such determination is made. As of
January 31, 2009, we have recorded a full valuation allowance against the net
deferred tax asset.





We
adopted the provisions of the Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (“FIN 48”)
on February 1, 2007.  FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance
with SFAS No. 109.  FIN 48 also prescribes a recognition threshold and
measurement standard for the financial statement recognition and measurement of
an income tax position taken or expected to be taken in a tax
return.  FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosures and transitions.  We previously recognized income tax
positions based on management’s estimate of whether it was reasonably possible
that a liability had been incurred for unrecognized tax benefits by applying
SFAS No. 5, Accounting for Contingencies.





Significant
judgment is required in evaluation our uncertain tax positions and determining
the valuation allowance applied to deferred tax assets. We have concluded that
there are no uncertain tax positions requiring recognition in our consolidated
financial statements.





F-8
 Index to Consolidated Financial
Statements


Net
Loss Per Common Share





We follow SFAS No. 128,“Earnings per
Share,”for computing and presenting
net loss per share information.  Basic loss per common share is
computed by dividing net loss available to common stockholders by the weighted
average number of common shares outstanding for the period.  Diluted
loss per common share excludes common stock equivalent shares and unexercised
stock options as the computation would be anti-dilutive.When
discontinued operations are present, income (loss) before discontinued
operations on a per share basis represents the “control number” in determining
whether potential common shares are dilutive or anti-dilutive.A reconciliation of the net
loss available to common stockholders and the number of shares used in computing
basic and diluted net loss per share is inNote10.





Foreign
Currency










Fair
Value of Financial Instruments





The
carrying value of our financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses,
approximates their fair value.





Cash
and Cash Equivalents





We
consider all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.  Cash equivalents consist
of funds deposited in money market accounts primarily backed by short-term U.S.
Government securities.  Consequently, the carrying amount of cash and
cash equivalents approximates this fair value.  Substantially all cash
and cash equivalents are on deposit with two major financial
institutions.





Restricted
Cash





As of
January 31, 2009 the Company has certificates of deposit of $76,000 and
$450,000, which are pledged to collateralize letters of credit required for
leased facilities.  The certificate of deposit for $76,000 is pledged
as collateral for a lease expiring in December 2009. The certificate of deposit
for $450,000 is pledged to a lease commitment through February
2010.  Both certificates of deposit are included with Other assets on
the consolidated balance sheet.





F-9
 Index to Consolidated Financial
Statements


Concentrations
of Credit Risk





Financial
instruments that potentially subject us to concentrations of credit risk consist
primarily of cash equivalents and accounts receivable.  We believe
that our investment policy limits our exposure to concentrations of credit
risk.  Our customers are primarily large publishing companies, many of
which are located outside the United States.  For the years ended
January 31, 2009, 2008 and 2007, total revenues derived from international sales
were approximately $1.0 million, $1.0 million and $0.1 million, representing
approximately 76%, 88% and 53% of total revenues, respectively.  Most
of our international sales are to customers in the United
Kingdom.  Our international operations have historically exposed us to
longer accounts receivable and payment cycles and fluctuations.  We
extend credit to our customers based on an evaluation of the customer’s
financial condition, typically without requiring a deposit or collateral.
Exposure to losses on receivables is principally dependent on each customer’s
financial condition.  We perform ongoing evaluations of our exposure
for credit losses, examining our historical collection experience and our
portfolio of customers, taking into consideration the general economic
environment as well as the industry in which we operate.  We currently
maintain an allowance of $165,000 for anticipated losses.  As our
customer base grows, we will periodically review whether adjustments to the
provision are required.  For the year ended January 31, 2009 two
customers accounted for 47% and 19% of total revenues,
respectively.  One customer accounted for 82% of total revenues for
the year ended January 31, 2008 and for the year ended January 31, 2007, three
customers accounted for 53%, 29%, and 17% of total revenues,
respectively.





Valuation
Accounts








Balance
      at Beginning of
Period
                  
                  
                  Charged to
      Costs and Expenses
                  
                  
                  Uncollectible
      Accounts Written Off, Net of Recoveries
                  
                  
                  Balance
      at End of PeriodYear
      Ended January 31, 2009:Deducted
      from asset accounts:Allowance
      for doubtful accounts
                  
                  $
                  -
                  
                  
                  $
                  165
                  
                  
                  $
                  -
                  
                  
                  $
                  165








Long-lived
Assets





Equipment
and Leasehold Improvements





Office
furniture and computer equipment are recorded at cost.  Depreciation
of office furniture and equipment is provided on a straight-line basis over the
estimated useful lives of the assets, generally three to five
years.  Amortization of leasehold improvements and leased assets are
provided on a straight-line basis over the shorter of the term of the applicable
lease or the useful life of the asset.  Expenditures for normal
repairs and maintenance are charged to operations as incurred.  The
cost of property and equipment retired or otherwise disposed of and the related
accumulated depreciation or amortization are removed from the accounts and any
resulting gain or loss is reflected in current operations.





We
evaluate all of our long-lived assets for impairment in accordance with the
provisions of Statement of Financial Accounting Standard No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). SFAS No.
144 requires that long-lived assets, including property and equipment, be
evaluated for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable based on expected
undiscounted cash flows attributable to that asset.  Should events
indicate that any of our assets are impaired, the amount of such impairment will
be measured as the difference between the carrying value and the fair value of
the impaired asset and the impairment will be recorded in earnings during the
period of such impairment.  During the fourth quarter of the fiscal
year 2009 the Company determined that certain assets in the Company’s web
hosting asset group were impaired and accordingly has recorded an impairment
charge of $3.1 million in the fiscal year 2009. (See note 3 for additional
information related to impairment charges.)





F-10
 Index to Consolidated Financial
Statements


Exit
and Disposal Activities





We
recognized restructuring costs in accordance with SFAS 146, “Accounting for
Costs Associated with Exit or Disposal Activities”.SFAS 146 generally requires
the recognition of an expense and related liability for one-time employee
termination benefits at the communication date and contract termination costs at
the cease-use date. The expense and liability are measured at fair value, which
is generally determined by estimating the future cash flows to be used in
settling the liability.





Recent
Pronouncements





In
December 2007, the FASB issued SFAS No. 141(R). SFAS No. 141
(R) establishes principles and requirements for how the acquirer in a
business combination should recognize and measure in its financial statements
the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree, recognize and measure the goodwill
acquired in the business combination or a gain from a bargain purchase and
determine what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. The provisions of SFAS No. 141(R) shall be applied
prospectively to business combinations with acquisition dates on or after the
beginning of the first annual reporting period in which it is initially applied.
SFAS No. 141(R) is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. We do not
expect SFAS No. 141(R) to have a significant impact on our consolidated
financial statements upon adoption.








(2)            DISCONTINUED
OPERATIONS





In the
third quarter of fiscal year 2008, we completed the sale of the RetrievalWare
Enterprise Search business to FAST for $23.0 million, including $22.1
million of cash and the assumption of approximately $0.9 million in
employee-related liabilities. FAST acquired the assets of the Enterprise Search
business, assumed certain obligations of the business and retained certain
employees serving its Enterprise Search customers.  Apayment of approximately
$1.0 million was made to FAST in the first quarter of the current fiscal year to
finalize the working capital adjustment stipulated in the agreement for the sale
of the RetrievalWare Enterprise Search business. The working capital adjustment
had been accrued at January 31, 2008 as an offset to the $4.0 million held in
escrow.  The escrow balance was paid to Convera in August
2008.





During
the year ended January 31, 2008, we recorded a net gain on the sale of
approximately $17.9 million, net of approximately: $0.8 million of net assets
transferred to FAST, the working capital adjustment of $1.0 million and
transaction fees and other costs.  Allen & Company LLC, a company
affiliated with the majority shareholder, acted as financial advisor for the
transaction and was paid a fee of 1.5% of the consideration plus expenses, which
totaled approximately $0.4 million.  Due to our accumulated net
operating loss carryforwards, no federal or state income taxes for the gain on
the sale of this business were provided or otherwise required at January 31,
2008.





We
      entered into a transition services agreement under which we were
      reimbursed for services rendered and expenses incurred related to the
      transfer of finance, accounting and contracts functions of the Enterprise
      Search business to FAST.





Revenue
from the RetrievalWare product line generally consisted of software licenses,
training, professional services and software maintenance. We recognized revenue
for our RetrievalWare product in accordance with American Institute of Certified
Public Accountants’ Statement of Position (“SOP”) 97-2, Software Revenue
Recognition, as amended by Statement of Position 98-9, Software Revenue
Recognition, with respect to certain transactions.  Software licenses
were sold to customers as a permanent license (“Perpetual License”) or as a
license for a definitive period of time (“Term License”). Provided that the fee
was fixed and determinable, persuasive evidence of an arrangement existed and
collection of the resulting receivable was considered probable, revenue from the
sale of Perpetual Licenses and Term Licenses was recognized upon shipment of
product if VSOE existed using the residual method. When VSOE could not be
established, Term License revenue was recorded ratably over the term of the
license.  We utilized the residual methodology as described in
paragraph 12 of SOP 97-2 as amended by SOP 98-9 for recognizing revenue related
to multi-element software agreements.




F-11
 Index to Consolidated Financial
Statements




The
Company previously capitalized software development costs under the provisions
of Statement of Financial Accounting Standards No.
86, “Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed” (“SFAS 86”).  SFAS 86
requires that research and development costs incurred prior to establishing
technological feasibility are charged to operations as such costs are incurred.
Once technological feasibility is established costs are capitalized until the
software is available for general release.  We capitalized $8.1
million of software development costs related to our web hosting product until
“commercial availability” was determined in the third quarter of fiscal year
2006, at which time amortization of these capitalized costs
commenced.  For the year ended January 31, 2007 we recognized
amortization expense of capitalized software development costs of $3.0 million
which is included in continuing operations on the consolidated statements of
operations and comprehensive loss.  In the third quarter of fiscal
year 2007, the unamortized balance of the capitalized software was written-off
as impaired.  See Note 3, “Impairment of Long-Lived Assets” for
additional information related to the impairment charge.




The
following table presents the summarized financial information for the
discontinued operations presented in the Consolidated Statements of Operations
(amounts in thousands):





For
      the Year Ended January 312008
                  
                  
                  2007Revenue
                  
                  $
                  5,729
                  
                  
                  $
                  16,402ExpensesCost
      of revenues
                  
                  
                  2,019
                  
                  
                  
                  4,452Sales
      and marketing
                  
                  
                  1,423
                  
                  
                  
                  7,120Research
      and product development
                  
                  
                  2,000
                  
                  
                  
                  4,035General
      and administrative
                  
                  
                  267
                  
                  
                  
                  339Total
      expenses
                  
                  
                  5,709
                  
                  
                  
                  15,946Gain
      on sale of discontinued operations
                  
                  
                  17,925
                  
                  
                  
                  -Income
      from discontinued operations
                  
                  $
                  17,945
                  
                  
                  $
                  456








(3)           IMPAIRMENT
OF LONG-LIVED ASSETS





During
the quarter ended January 31, 2009, an analysis of our Ad server and related
hosting group identified several asset impairment indicators.  These
indicators included failure to achieve forecasted operating results, the lack of
significant new contracts and the general economic downturn that has slowed
investment in online publishing.  These conditions and events indicated
that the carrying value of this asset group, consisting primarily of network
hosting equipment and related software, may not be recoverable.
 Accordingly, we completed an impairment test in accordance with our
accounting policy for this asset group, which resulted in an impairment charge
of $3.1 million.  To determine the amount of the impairment charge, we were
required to make estimates of the fair value of the assets in this group, and
these estimates were based on the use of the income approach to determine the
fair value of the software and a third party appraisal for the
equipment.





In the
fourth quarter of fiscal 2008, we terminated our hosting agreement with AT&T
for our San Diego data center in order to appropriately scale our hosting
capabilities to our business plan.  As a result of the data center
closing, the assets consisting of servers and related hosting equipment that
were previously employed at the facility, were no longer of use to our
operations.  The assets were relocated to storage in our Carlsbad, CA
facility and remain classified as “held and used” for financial statement
reporting purposes.  We made the determination that the asset group
was clearly impaired since the equipment became idle as a consequence of the
data center closing and was expected to remain idle for the foreseeable future,
generating no future cash flows.  The estimated fair value of the
equipment, determined using a third-party appraisal, was $0.4
million.  We recorded an impairment charge of $0.6 million related to
the equipment.




F-12
 Index to Consolidated Financial
Statements




During
the year ended January 31, 2007, we made the determination that, due to the lack
of revenues generated to date and the loss of a significant potential contract,
the asset group related to our vertical search services, previously known as the
Excalibur web hosting product, was impaired.  The asset group included
capitalized software development costs and computer equipment used to host the
Excalibur product as well as prepaid royalties and prepaid maintenance contracts
supporting the web hosting product.  Based on our recoverability
analysis, we recorded an impairment loss of $6.4 million for the year ended
January 31, 2007.







(4)           OPERATIONAL
RESTRUCTURINGS





In the
fourth quarter of the current fiscal year we modified our sales process and took
action to reduce the cost structure of our sales, marketing and customer service
functions.  This action resulted in reducing our sales, marketing and
customer service headcount by nine and led to the shut down of our U.K. sales
office in January 2009. As a result of this action, the Company recorded
severance expense of approximately $403,000 for the year ended January 31, 2009.
Expenses related to the action appear in the accompanying Consolidated
Statements of Operations and Comprehensive Loss as follows: Cost of revenues,
$29,000; Sales and marketing, $374,000.  As of January 31, 2009 there
was approximately $14,000 of accrued severance remaining to be
paid.  We believe that this action will allow us to continue to serve
our customers effectively while substantially reducing our operating
costs.





Throughout
the year ended January 31, 2008, we implemented actions to restructure our
expenses.  These restructuring actions were not performed pursuant to
a formal plan to restructure this business; rather, they occurred throughout the
year to focus our resources on the strategy to expand our presence in the online
publishing market.  In fiscal year 2008 we reduced our workforce by 54
employees worldwide, closed facilities in Montreal, Canada and Lyon, France and
terminated our hosting agreement with AT&T for our San Diego data center in
order to appropriately scale our hosting capabilities. Total costs recognized in
connection with these efforts were approximately $2.0 million, consisting of
severance costs of $1.0 million, facility closing costs of $0.2 million and
contract termination costs of $0.8 million.  During the years ended
January 31, 2009 and 2008, we paid approximately $0.1 million and $1.1 million,
respectively, against these accruals.




Expenses
related to the fiscal year 2008 operational restructuring effort appear in the
accompanying Consolidated Statements of Operations and Comprehensive Loss as
follows (amounts in thousands):




Year
      Ended
                            January
      31, 2008Continuing
      OperationsCost
      of revenues
                          
                          $
                          70Sales
      and marketing
                          
                          
                          29Research
      and product development
                          
                          
                          739General
      and administrative
                          
                          
                          948Continuing
      Operations Total
                          
                          $
                          1,786Discontinued
      Operations
                          
                          
                          207Total
                          
                          $
                          1,993







F-13
 Index to Consolidated Financial
Statements




(5)            EQUIPMENT
AND LEASEHOLD IMPROVEMENTS





Equipment
and leasehold improvements at January 31, 2009 and 2008 consisted of the
following (in thousands):





2009
                    
                    
                    2008Computer
      equipment
                    
                    $
                    7,300
                    
                    
                    $
                    13,106Office
      furniture
                    
                    
                    2,295
                    
                    
                    
                    2,812Leasehold
      improvements
                    
                    
                    537
                    
                    
                    
                    53010,132
                    
                    
                    
                    16,448Less
      accumulated depreciation
                    
                    
                    (9,672
                    )
                    
                    
                    (11,535
                    )$
                    460
                    
                    
                    $
                    4,913





Equipment
and leasehold improvements are recorded at cost.  Depreciation is
calculated on the straight-line method over three years for computer equipment,
five years for office furniture and over the shorter of the depreciable life or
the life of the related lease for leasehold
improvements.  Depreciation expense for fiscal years 2009, 2008, and
2007 was $2.7 million, $2.6 million and $3.7 million, respectively.





(6)           ACCRUED
EXPENSES





Accrued
expenses at January 31, 2009 and 2008 consisted of the following (in
thousands):





2009
                  
                  
                  2008Accrued
      payroll and bonuses
                  
                  $
                  406
                  
                  
                  $
                  719Accrued
      audit and accounting fees
                  
                  
                  257
                  
                  
                  
                  462Restructuring
      reserve
                  
                  
                  780
                  
                  
                  
                  878Other
                  
                  
                  232
                  
                  
                  
                  223$
                  1,675
                  
                  
                  $
                  2,282






(7)           FAIR
VALUE MEASUREMENTS




Effective
February 1, 2008, we adopted SFAS 157, except as it applies to the
nonfinancial assets and nonfinancial liabilities subject to FSP SFAS
157-2.  SFAS 157 defines fair value as a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or a liability.  SFAS 157 requires that assets and
liabilities carried at fair value be classified and disclosed according to the
following three-tier value hierarchy, which prioritizes the inputs used in the
valuation methodologies in measuring fair value:




Level 1
- Observable inputs that reflect quoted prices for identical assets or
liabilities in active markets.




Level 2
– Inputs that are directly or indirectly observable in the
marketplace.




Level 3
- Unobservable inputs which are not supported by market data




The fair
value hierarchy also requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value.




The fair
value of our cash equivalents is based on Level 1, quoted prices in active
markets for identical assets.




F-14
 Index to Consolidated Financial
Statements




Assets
measured at fair value on a recurring basis are summarized below (amounts in
thousands):





Fair value measurement at reporting date usingDescription
                  
                  January
      31, 2009
                  
                  
                  Quoted Prices in Active
                    Markets for
                    Identical Assets
                    (Level
      1)
                  
                  
                  Significant Other
                    Observable Inputs
                    (Level
      2)
                  
                  
                  Significant
                    Unobservable
                    Inputs
                    (Level
      3)AssetsCash
      equivalents:Money
      market funds
                  
                  $
                  21,580
                  
                  
                  $
                  21,580
                  
                  
                  $
                  -
                  
                  
                  $
                  -







The
assets related to our Ad server group were evaluated for impairment during the
quarter ended January 31, 2009.  The fair-value measurement of this
asset group is summarized below (amounts in thousands):





January
      31, 2009
                          
                          
                          Quoted Prices in Active
                            Markets for
                            Identical
                            Assets
                            (Level
      1)
                          
                          
                          Significant
                            Other
      Observable
                            Inputs
                            (Level
      2)
                          
                          
                          Significant
                            Unobservable
                            Inputs
                            (Level
      3)
                          
                          
                          Total
      Gains (Losses)Ad
      server group AssetsEquipment
      and purchased software
                          
                          $
                          334
                          
                          
                          $
                          -
                          
                          
                          $
                          334
                          
                          
                          $
                          -
                          
                          
                          $
                          (3,132
                          )





The fair
value of the purchased software was determined by the Company using a model
discounting forecasted future cash flows of revenue and expenses expected to be
generated by the Ad server asset group.  The fair value of the
equipment was determined by a professional appraiser.  In accordance
with SFAS 144, equipment and purchased software with a carrying value of $3.4
million were written down to their fair value of $0.3 million.  As a
result an impairment charge of $3.1 million was included in earnings for the
period ended January 31, 2009.  See Note 3, “Impairment of Long-Lived
Assets” for additional information related to the impairment
charge.







F-15
 Index to Consolidated Financial
Statements


(8)           INCOME
TAXES







The items
accounting for the difference between income taxes computed at the federal
statutory rate and the provision for income taxes consisted of (in
thousands):





For
      the Fiscal Years Ended January 31,2009
                                  
                                  2008
                                  
                                  2007Federal
      benefit at statutory rate
                                  
                                  $
                                  (7,905
                                  )
                                  
                                  
                                  (35
                                  )
      %
                                  
                                  $
                                  (3,184
                                  )
                                  
                                  
                                  (35
                                  )
      %
                                  
                                  $
                                  (15,690
                                  )
                                  
                                  
                                  (35
                                  )
      %Effect
      of:State
      benefits, net of federal benefits
                                  
                                  
                                  (881
                                  )
                                  
                                  
                                  (4
                                  )
                                  
                                  
                                  (355
                                  )
                                  
                                  
                                  (4
                                  )
                                  
                                  
                                  (1,748
                                  )
                                  
                                  
                                  (4
                                  )Lower
      effective foreign tax rate
                                  
                                  
                                  909
                                  
                                  
                                  
                                  4
                                  
                                  
                                  
                                  867
                                  
                                  
                                  
                                  9
                                  
                                  
                                  
                                  (130
                                  )
                                  
                                  
                                  0Expiration/use
      of NOL carryforward
                                  
                                  
                                  2,182
                                  
                                  
                                  
                                  10
                                  
                                  
                                  
                                  4,892
                                  
                                  
                                  
                                  54
                                  
                                  
                                  
                                  1,871
                                  
                                  
                                  
                                  4Effect
      of stock options
                                  
                                  
                                  543
                                  
                                  
                                  
                                  2
                                  
                                  
                                  
                                  279
                                  
                                  
                                  
                                  3
                                  
                                  
                                  
                                  438
                                  
                                  
                                  
                                  1Other
                                  
                                  
                                  1,136
                                  
                                  
                                  
                                  5
                                  
                                  
                                  
                                  254
                                  
                                  
                                  
                                  30
                                  
                                  
                                  
                                  129
                                  
                                  
                                  
                                  0Valuation
      allowance
                                  
                                  
                                  4,016
                                  
                                  
                                  
                                  18
                                  
                                  
                                  
                                  (2,753
                                  )
                                  
                                  
                                  (30
                                  )
                                  
                                  
                                  15,130
                                  
                                  
                                  
                                  34Net
      deferred tax assets
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  0
                                  %
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  0
                                  %
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  0
                                  %





Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.





Our net
deferred tax assets at January 31, 2009 and 2008 were as follows:





2009
                      
                      
                      2008Deferred
      tax assets:Net
      operating loss carryforwards
                      
                      $
                      85,349
                      
                      
                      $
                      78,850Capitalized software
      development costs
                      
                      
                      17,202
                      
                      
                      
                      19,441Stock
      Compensation
                      
                      
                      1,096
                      
                      
                      
                      1,193Deferred
      revenue
                      
                      
                      1
                      
                      
                      
                      255Restructuring
      Reserve
                      
                      
                      291
                      
                      
                      
                      308Other
                      
                      
                      37
                      
                      
                      
                      (87
                      )Total
      deferred tax assets
                      
                      
                      103,976
                      
                      
                      
                      99,960Valuation
      allowance
                      
                      
                      (103,976
                      )
                      
                      
                      (99,960
                      )Net
      deferred tax assets
                      
                      $
                      -
                      
                      
                      $
                      -








On August
9, 2007, we completed the sale of our Enterprise Search business and recognized
income from discontinued operations of $17.9 million for the year ended January
31, 2008 and a total net loss for the year of $9.1 million. No federal or state
income taxes were provided on the income generated from discontinued operations
due to the substantial net operating loss carryforwards available for federal
and state income taxes.  We offset the deferred tax provision
triggered by the gain recognized on the sale of the Enterprise Search business
by the reversal of a portion of the previously recorded valuation
allowance.








F-16
 Index to Consolidated Financial
Statements














(9)            CAPITALIZATION





Our
authorized capital stock consists of 100 million shares of Class A voting common
stock, par value $0.01 per share, 40 million shares of Class B non-voting common
stock, par value $0.01 per share, and five million shares of cumulative
convertible preferred stock, par value $0.01 per share.




In the
first quarter of fiscal year 2007, we completed a private placement of 5,103,333
newly-issued shares of common stock to a group of institutional investors
resulting in net proceeds of approximately $36.7 million. The shares were sold
at a price of $7.50 per share, which represented a 6.58% discount to Convera’s
trailing 10-day average closing price preceding the date of Board
approval.  Allen & Company LLC, a company affiliated with the
majority shareholder, acted as placement agent for the private placement and was
paid a commission of $1.5 million, or 4%.







No shares
of the Company’s Class B common stock are issued or outstanding at January 31,
2009.








(10)            NET
LOSS PER COMMON SHARE





We follow SFAS No. 128,“Earnings
Per Share,”for computing and presenting
net loss per share information.  Basic income or loss per common share
for continuing and discontinued operations is computed by dividing net income or
(loss) available to common stockholders by the weighted average number of common
shares outstanding for the period.  Diluted loss per common share
excludes common stock equivalent shares and unexercised stock options as the
computation would be anti-dilutive.When discontinued operations are
present, income (loss) before discontinued operations on a per share basis
represents the “control number” in determining whether potential common shares
are dilutive or anti-dilutive. Since there is a loss from continuing operations,
potential common shares have also been excluded from the denominator used to
calculate diluted income per common share from discontinued
operations.




F-17
 Index to Consolidated Financial
Statements


The
following table sets forth the computation of basic and diluted net loss per
common share for continuing and discontinued operations: (in thousands except
per share data):





For
      the Fiscal Year EndedJanuary
      31,2009
                    
                    
                    2008
                    
                    
                    2007Continuing
      Operations Numerator:Loss
      from continuing operations
                    
                    $
                    (22,586
                    )
                    
                    $
                    (27,041
                    )
                    
                    $
                    (45,283
                    )Discontinued
      Operations Numerator:Income
      from discontinued operations
                    
                    $
                    -
                    
                    
                    $
                    17,945
                    
                    
                    $
                    456Net
      loss numerator:
                    
                    $
                    (22,586
                    )
                    
                    $
                    (9,096
                    )
                    
                    $
                    (44,827
                    )Denominator
      Continuing and DiscontinuedOperations:Weighted
      average number of common shares outstanding – basic and
      diluted
                    
                    
                    53,328,029
                    
                    
                    
                    53,145,955
                    
                    
                    
                    52,221,644Basic
      and diluted net loss per common share from continuing
      operations
                    
                    $
                    (0.42
                    )
                    
                    $
                    (0.51
                    )
                    
                    $
                    (0.87
                    )Basic
      and diluted net income per common share from discontinued
      operations
                    
                    $
                    -
                    
                    
                    $
                    0.34
                    
                    
                    $
                    0.01Basic
      and diluted net loss per share
                    
                    $
                    (0.42
                    )
                    
                    $
                    (0.17
                    )
                    
                    $
                    (0.86
                    )





Using
      the treasury stock method the following equity instruments were not
      included in the computation of diluted net loss per common share because
      their effect would be
anti-dilutive:





For
      the Fiscal Years Ended January 31,2009
                    
                    
                    2008
                    
                    
                    2007Stock
      options
                    
                    
                    7,371,811
                    
                    
                    
                    5,054,756
                    
                    
                    
                    9,222,546Deferred
      stock
                    
                    
                    -
                    
                    
                    
                    300,000
                    
                    
                    
                    890,000









(11)            EMPLOYEE
BENEFIT PLANS





Our Stock
Option Plans authorize the granting of stock options and other forms of
incentive compensation to purchase up to 14.25 million shares of our Class A
common stock in order to attract, retain and reward key employees.  Of
the total number of shares authorized for stock based compensation, options to
purchase 7,371,811 shares were outstanding as of January 31, 2009. We had a
total of 3,594,151 shares of Class A common stock reserved for the issuance of
warrants, deferred shares and options under the plans as of January 31,
2009.





Each
qualified incentive stock option has an exercise price as determined by a
committee appointed by the Board of Directors, but not less than 100% of the
fair market value of the underlying 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.




F-18
 Index to Consolidated Financial
Statements


The
following table summarizes our activity for all of our stock option
awards:





Number of Options
                
                
                Weighted-Average Exercise Price
                
                
                Weighted-Average Remaining Contractual Term (Years)
                
                
                Aggregate Intrinsic Value
                  (In thousands)Outstanding,
      January 31, 2008
                
                
                5,054,756
                
                
                $
                4.79Granted
                
                
                3,452,000
                
                
                
                1.87Exercised
                
                
                -
                
                
                
                -Pre-Vest
      Cancelled
                
                
                (915,375
                )
                
                
                2.62Post-Vest
      Cancelled
                
                
                (219,570
                )
                
                
                5.24Outstanding,
      January 31, 2009
                
                
                7,371,811
                
                
                $
                3.68
                
                
                
                6.17
                
                
                $
                --Vested
      or expected to vest
                
                
                4,894,379
                
                
                $
                4.56
                
                
                
                4.67
                
                
                $
                -Exercisable,
      January 31, 2009
                
                
                4,278,125
                
                
                $
                4.71
                
                
                
                4.13
                
                
                $
                -





The total
intrinsic value of options exercised during the years ended January 31, 2009,
2008, and 2007 was none, $0.4 million and $1.7 million,
respectively.





Cash
received from option exercises under all share-based arrangements for the years
ended January 31, 2009, 2008, and 2007 was none, $0.8 million and $1.7 million,
respectively.  We have a policy of issuing new shares to satisfy share
option exercises.





Stock
Options





SFAS No.
123(R) requires the use of a valuation model to calculate the fair value of
stock-based awards. We have elected to use the Black-Scholes-Merton
option-pricing model, which incorporates various assumptions including
volatility, expected life, risk free interest rates and dividend yields. The
expected volatility is based on term-matching historical
volatility.  The expected life of an award is computed using a
combination of historical holding periods combined with hypothetical holding
periods on a weighted average basis. Compensation expense for
all share-based payment awards, including stock options with graded vesting, is
recognized using the straight line method over the requisite period for each
separately vesting portion of the award. As stock-based compensation expense
recognized in the Consolidated Statements of Operations is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures.SFAS No. 123(R) requires forfeitures to be estimated at the
time of grant and adjusted, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Our forfeiture rates are estimated
based on historical experience with consideration given to expected future
termination rates. We increased our forfeiture rates in fiscal year 2008 from
fiscal 2007 based on restructuring actions and the sale of our RetrievalWare
business.  Our forfeiture rates for fiscal year 2009 remain unchanged
from the rates established in fiscal year 2008.  We base fair value
estimates and forfeiture rates on assumptions we believe to be reasonable but
that are inherently uncertain.  Actual future results may differ from
those estimates.








The
following table shows the assumptions used for the grants that occurred in each
fiscal year:





For
      the year ended January 31,
                                  
                                  2009
                                  
                                  2008
                                  
                                  2007Expected
      term of stock options
                                  
                                  4.67
      years
                                  
                                  3.16
      years
                                  
                                  6.14
      yearsExpected
      volatility
                                  
                                  68%
                                  
                                  68%
                                  
                                  62%Risk
      free interest rates
                                  
                                  2.5%
      to 3.0%
                                  
                                  4.0%
      to 5.0%
                                  
                                  4.6%
      to 5.0%Dividend
      yield
                                  
                                  None
                                  
                                  None
                                  
                                  NoneWeighted
      average grant date fair value of options granted during the
      period
                                  
                                  $1.06
                                  
                                  $1.38
                                  
                                  $3.29




F-19
 Index to Consolidated Financial
Statements




As of
January 31, 2009, no stock-based compensation costs related to stock options
were capitalized as part of the cost of an asset.  As of January 31,
2009 a total of $1.1 million of unrecognized compensation cost related to stock
options is expected to be recognized over a weighted average period of 1.1
years.





During
the third quarter of fiscal year 2009 the Company completed a transition of its
in-house option tracking software to an online option navigator and reporting
solution.  The currently employed online solution utilizes a dynamic
forfeiture rate calculation that automatically adjusts the forfeiture rate of
each tranche as it approaches its vest-end date as compared to the prior method
which did not adjust the forfeiture rate until all tranches had
vested.  We believe that the current approach provides a more accurate
estimate of our stock option expense.  As a result of this change in
estimate, consistent with FAS 154, the Company recorded a one time true-up
adjustment of $522,000 for the quarter ended October 31, 2008. This change in
accounting estimate increased the net loss by $522,000 or $0.01 per
share. The impact of this adjustment on the results of operations for the
fiscal year ended January 31, 2009 is as follows: Cost of revenues - $83,000;
Sales and marketing - $236,000; Research and product development - $64,000;
General and administrative - $139,000.





Our
Employee Stock Purchase Plan, or “ESPP,” was discontinued as of July 31,
2006.  The ESPP allowed eligible employees to purchase shares at 85%
of the lower of the fair value of the common stock at the beginning of the
offering period or the fair value on the purchase date.  Our ESPP was
deemed to be compensatory, and therefore, ESPP expenses under SFAS 123R have
been included in our Consolidated Statements of Operations for the year ended
January 31, 2007.





Performance Stock
Options:





During
the year ended January 31, 2009, 3.1 million common stock options were issued at
an exercise price of $1.92 per share to members of the senior management team.
The vesting of the options is contingent upon the Company achieving revenue and
EBIDTA of $25 million and $2.5 million, respectively, for the fiscal year ended
January 31, 2011. These options were valued using the Black-Scholes option
pricing model on the grant date and the aggregate compensation expense for these
awards, provided all such options vest, was determined to be $3.4 million.
Performance stock options are evaluated in accordance with SFAS No.123(R) on a
quarterly-basis over the performance period to determine whether achievement of
the underlying performance goals is probable. As of January 31, 2009, the
Company has concluded that the achievement of the performance measurements is
not probable and therefore has recorded no compensation expense.  If
the Company determines in a subsequent period that achievement of the
performance goals is now probable, a cumulative catch-up expense adjustment will
be required equal to that portion of the total compensation expense attributable
to the three year vesting period that has elapsed.





Deferred Stock Compensation
Plan





Beginning
in fiscal year 2004, pursuant to our 2000 Stock Option Plan, several of our
senior officers were awarded shares of deferred stock with varying vesting
provisions. Nonvested shares of stock granted under the stock option plan were
measured at fair value on the date of grant based on the number of shares
granted and the quoted price of our common stock.  Such value was
recognized as compensation expense over the corresponding service
period.  Deferred stock compensation is subject to the provisions of
FAS 123(R) and as such is adjusted for estimated forfeitures.  During
the first quarter of the fiscal year ended January 31, 2008, the employment of
two officers in the plan was terminated prior to vesting their
awards.  The forfeiture of these shares represented a large percentage
of the total plan and as a result increased the forfeiture rate related to this
plan significantly.  The cumulative effect of this adjustment to the
forfeiture rate resulted in a net compensation expense credit of $1.1 million,
or $0.02 per common share, recorded in the first quarter of fiscal year
2008.  As of January 31, 2009 there were no shares of deferred stock
outstanding.






F-20
 Index to Consolidated Financial
Statements


The
following table summarizes the deferred stock compensation plans as of January
31, 2009:





Deferred Stock Plan Shares
                      
                      Shares
                      
                      
                      Weighted-Average
      Grant-Date Fair ValueNonvested
      at February 1, 2008
                      
                      
                      300,000
                      
                      
                      $
                      -Granted
                      
                      
                      -
                      
                      
                      
                      -Vested
                      
                      
                      (300,000
                      )
                      
                      
                      5.50Forfeited
                      
                      
                      -
                      
                      
                      
                      -Nonvested
      at January 31, 2009
                      
                      
                      -
                      
                      
                      $
                      -





As of
January 31, 2009 all costs related to share-based compensation arrangements
granted under the Deferred Stock Plan have been recognized.  The total
fair value of shares vested during the years ended January 31, 2009, 2008 and
2007 was $1.7 million, $1.2 million and $0.7 million, respectively.




The
impact on our results of operations of recording stock-based compensation
related to stock options, the ESPP and deferred stock for the years ended
January 31, 2009, 2008 and 2007 was as follows (in thousands):





Fiscal
      Year Ended January 31,2009
                      
                      
                      2008
                      
                      
                      2007Continuing
      OperationsCost
      of revenues
                      
                      $
                      266
                      
                      
                      $
                      269
                      
                      
                      $
                      216Sales
      and marketing
                      
                      
                      431
                      
                      
                      
                      200
                      
                      
                      
                      248Research
      and product development
                      
                      
                      849
                      
                      
                      
                      (795
                      )
                      
                      
                      1,684General
      and administrative
                      
                      
                      1,253
                      
                      
                      
                      751
                      
                      
                      
                      3,819Continuing
      Operations Total
                      
                      
                      2,799
                      
                      
                      
                      425
                      
                      
                      
                      5,967Discontinued
      Operations
                      
                      
                      -
                      
                      
                      
                      176
                      
                      
                      
                      830Total
                      
                      $
                      2,799
                      
                      
                      $
                      601
                      
                      
                      $
                      6,797








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 100 percent of their pre-tax
salary, but not more than statutory limits.  The plan was amended in
the fiscal year ended January 31, 2001 to allow us to match $0.50 on every
dollar up to the maximum of 8% of the employee’s contribution on total
compensation.





For the
fiscal years ended January 31, 2009, 2008 and 2007, the Company contributed
approximately $0.2 million, $0.3 million and $0.4 million, respectively, to the
employee savings plan.






F-21
 Index to Consolidated Financial
Statements


(12)           COMMITMENTS
AND CONTINGENCIES





Lease
Commitments





We
conduct our operations using leased facilities.  The leases terminate
at various dates through fiscal year 2011 with options to
renew.  Certain leases provide for scheduled rent increases and
require us to pay shared portions of the operating expenses such as taxes,
maintenance and repair costs. We also have operating leases for equipment that
are included in the figures below.  Future minimum rental payments
under non-cancelable operating leases as of January 31, 2009 along with sublease
rental receipts are as follows (in thousands):





Year
      EndingJanuary 31,
                    
                    Operating
      Leases
                    
                    
                    Sublease
      Rental
                      Receipts2010
                    
                    $
                    1,138
                    
                    
                    $
                    982011
                    
                    
                    84
                    
                    
                    
                    -2012
                    
                    
                    -
                    
                    
                    
                    -2013
                    
                    
                    -
                    
                    
                    
                    -2014 and beyond
                    
                    
                    -
                    
                    
                    
                    -$
                    1,222
                    
                    
                    $
                    98





Total
rental expense under operating leases was approximately $1.3 million (net of
sublease rental receipts of $0.2 million) for fiscal year 2009 and $1.5 million
and $1.6 million for fiscal years 2008 and 2007, respectively.





Contingencies





From time
to time, we may be a party to various legal proceedings, claims, disputes and
litigation arising in the ordinary course of business.  We believe
that the ultimate outcome of these matters, individually and in the aggregate,
will not have a material adverse affect on its financial position, operations or
cash flow.  However, because of the nature and inherent uncertainties
of litigation, should the outcome of these actions or future actions be
unfavorable, our financial position, operations and cash flows could be
materially adversely affected.








(13)           SEGMENT
REPORTING





We have
one reportable segment.  Prior to our agreement on March 31, 2007 to
sell the assets of the Enterprise Search (RetrievalWare) business to FAST, we
operated under two reportable segments: the Enterprise Search segment and the
vertical search segment (previously called our Excalibur web hosting
product).  Revenue, expenses and cash flows related to the Enterprise
Search business have been reflected as discontinued operations in the
Consolidated Statements of Operations and of Cash Flows.





Operations
by Geographic Area





The
following table presents information about our operations by geographical area
(in thousands):





Fiscal
      Years Ended January 31,2009
                      
                      
                      2008
                      
                      
                      2007Sales
      to customers:United States
                      
                      $
                      318
                      
                      
                      $
                      139
                      
                      
                      $
                      126United Kingdom
                      
                      
                      768
                      
                      
                      
                      979
                      
                      
                      
                      143All Other
                      
                      
                      255
                      
                      
                      
                      -
                      
                      
                      
                      -$
                      1,341
                      
                      
                      $
                      1,118
                      
                      
                      $
                      269Long-lived
      assets:United States
                      
                      $
                      1,042
                      
                      
                      $
                      5,459
                      
                      
                      $
                      4,158All Other
                      
                      
                      14
                      
                      
                      
                      83
                      
                      
                      
                      146$
                      1,056
                      
                      
                      $
                      5,542
                      
                      
                      $
                      4,304








Major
Customers





Two
customers accounted for 47% and 19%, respectively of total revenue for the
fiscal year ended January 31, 2009.  One customer accounted for 82% of
total revenue for the fiscal year ended January 31, 2008 while three customers
accounted for 53%, 29% and 17%, respectively of total revenue for fiscal year
ended January 31, 2007.








F-22
 Index to Consolidated Financial
Statements




(14)            SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION(in thousands):





For
      the Fiscal Years Ended January 31,2009
                  
                  
                  2008
                  
                  
                  2007Supplemental
      Disclosures of Non-cash Investing and Financing
Activities:Cash
      paid related to stock awarded under deferred stock compensation
      arrangements
                  
                  $
                  28
                  
                  
                  $
                  197
                  
                  
                  $
                  365Cash
      paid for interest
                  
                  $
                  2
                  
                  
                  $
                  2
                  
                  
                  $
                  154








(15)            SELECTED
QUARTERLY INFORMATION (UNAUDITED)


(Amounts in thousands
except per share data.)








1st
      Quarter
                  
                  
                  2nd
      Quarter
                  
                  
                  3rd
      Quarter
                  
                  
                  4th
      Quarter2009Revenues
                  
                  $
                  402
                  
                  
                  $
                  469
                  
                  
                  $
                  239
                  
                  
                  $
                  231Operating
      loss from continuing operations
                  
                  
                  (5,605
                  )
                  
                  
                  (4,571
                  )
                  
                  
                  (6,068
                  )
                  
                  
                  (7,599
                  )Other
      income
                  
                  
                  179
                  
                  
                  
                  945
                  
                  
                  
                  98
                  
                  
                  
                  35Impairment
      of long-lived assets
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  3,133Loss
      from continuing operations
                  
                  
                  (5,426
                  )
                  
                  
                  (3,626
                  )
                  
                  
                  (5,970
                  )
                  
                  
                  (7,564
                  )Net
      loss
                  
                  $
                  (5,426
                  )
                  
                  $
                  (3,626
                  )
                  
                  $
                  (5,970
                  )
                  
                  $
                  (7,564
                  )Basic
      and diluted loss per common share – Continuing Operations
                  
                  $
                  (0.10
                  )
                  
                  $
                  (0.07
                  )
                  
                  $
                  (0.11
                  )
                  
                  $
                  (0.14
                  )2008Revenues
                  
                  $
                  324
                  
                  
                  $
                  255
                  
                  
                  $
                  259
                  
                  
                  $
                  280Operating
      loss from continuing operations
                  
                  
                  (8,240
                  )
                  
                  
                  (6,697
                  )
                  
                  
                  (6,400
                  )
                  
                  
                  (7,519
                  )Other
      income
                  
                  
                  491
                  
                  
                  
                  478
                  
                  
                  
                  482
                  
                  
                  
                  364Impairment
      of long-lived assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  603Loss
      from continuing operations
                  
                  
                  (7,749
                  )
                  
                  
                  (6,219
                  )
                  
                  
                  (5,918
                  )
                  
                  
                  (7,155
                  )Gain
      from sale of discontinued operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  17,759
                  
                  
                  
                  166Income
      from discontinued operations
                  
                  
                  206
                  
                  
                  
                  4
                  
                  
                  
                  17,570
                  
                  
                  
                  165Net
      income (loss)
                  
                  $
                  (7,543
                  )
                  
                  $
                  (6,215
                  )
                  
                  $
                  11,652
                  
                  
                  $
                  (6,990
                  )Basic
      and diluted loss per common share – Continuing Operations
                  
                  $
                  (0.15
                  )
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.11
                  )
                  
                  $
                  (0.13
                  )Basic
      and diluted loss per common share – Discontinued
Operations
                  
                  $
                  0.01
                  
                  
                  $
                  0.00
                  
                  
                  $
                  0.33
                  
                  
                  $
                  0.00






F-23
 Index to Consolidated Financial
Statements




The
quarterly financial information reported above reflects the reclassification of
certain Research and Product Development costs during the second and third
quarters of fiscal year 2008.  The following table summarizes these
reclassifications and their effects on the quarterly financial
information.


As
      reported
                  
                  
                  Reclassification
      of R&D expenses
                  
                  
                  As
      restated2008
      – 2nd
      QuarterOperating
      loss from continuing operations
                  
                  $
                  (6,507
                  )
                  
                  $
                  (190
                  )
                  
                  $
                  (6,697
                  )Loss
      from continuing operations
                  
                  
                  (6,029
                  )
                  
                  
                  (190
                  )
                  
                  
                  (6,219
                  )Income
      (loss) from discontinued operations
                  
                  
                  (186
                  )
                  
                  
                  190
                  
                  
                  
                  4Basic
      and diluted loss per common share – Continuing Operations
                  
                  $
                  (0.11
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.12
                  )Basic
      and diluted loss per common share – Discontinued
Operations
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.01
                  
                  
                  $
                  0.002008
      – 3rd
      QuarterOperating
      loss from continuing operations
                  
                  $
                  (6,349
                  )
                  
                  $
                  (51
                  )
                  
                  $
                  (6,400
                  )Loss
      from continuing operations
                  
                  
                  (5,867
                  )
                  
                  
                  (51
                  )
                  
                  
                  (5,918
                  )Income
      from discontinued operations
                  
                  $
                  17,519
                  
                  
                  $
                  51
                  
                  
                  $
                  17,570









(16)           LONG-TERM
DEBT





On March
23, 2005, we secured a $5 million term loan to provide financing for capital
purchases including those for our vertical search product.  The loan
accrued interest at 7% per annum and was secured by a first lien on all
corporate assets, excluding intellectual property.  We retired the
facility in the first quarter of fiscal year 2007. During the fiscal year ended
January 31, 2007 we recorded interest expense of approximately $0.2
million.







(17)  SUBSEQUENT
EVENT


In
February 2009, in response to the slower contracting pace, lower ad revenues and
slower online ad growth, we streamlined our engineering and hosting operations
group, reducing headcount in our Carlsbad, California facility by 23 and thus
reducing our expense base. We incurred approximately $259,000 in severance
expense related to the reduction in our engineering and operations staff.
Convera has 32 employees after the completion of this action.








(18)           RELATED
PARTY TRANSACTIONS





John C.
Botts, a member of the board of directors of Convera, is also Chairman of United
Business Media PLC, the parent company of CMP Information LTD
(“CMP”).  CMP is a customer of Convera.  Due to a
contractual dispute there were no recorded sales to CMP during the third and
fourth quarters of fiscal year 2009 and $50,000 of revenue was
deferred.  Excluding this deferred revenue, sales to CMP for the year
ended January 31, 2009 were $627,000. For the year ended January 31, 2008, sales
to CMP were $914,000.  Amounts due from CMP were $377,000 (excluding
deferred revenue) and $170,000 as of January 31, 2009 and January 31, 2008,
respectively.  As a result of the ongoing dispute with CMP, the
Company has placed a reserve of $101,000 against CMP’s outstanding balance at
January 31, 2009.








F-24