UNITED STATESSECURITIES
AND EXCHANGE COMMISSIONWashington, D.C. 20549

# FORM 10-K

# (Mark One)

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

# For the Fiscal Year Ended January 31, 2003

# Commission File Number 000-31989

CONVERACORPORATION(Exact name of registrant as specified in its charter)

|Delaware
(State or other jurisdiction ofincorporation or organization)                 |                 | 54-1987541
(I.R.S. EmployerIdentification No.)
|-------------------------------------------------------------------------------------- | --------------- | ----------------------------------------------
|1921 Gallows Road, Suite 200, Vienna, Virginia(Address of principal executive offices) | 22182(Zip Code)
|Registrant's telephone number, including area code: (703) 761 - 3700                  
|Securities registered pursuant to Section 12(b) of the Act: None                      
|Securities registered pursuant to Section 12(g) of the Act: Common Stock              

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

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

Indicate by check mark whether the  registrant  is an  accelerated
filer as defined in Rule 12b-2 of the  Securities  Exchange Act of 1934.  Yes __   No |X|

The aggregate market value
of the voting stock held by non-affiliates of the registrant as of July 31, 2002
(based on the closing sales price as reported on the NASDAQ National Market
System) was $22,159,993.

The number of shares
outstanding of the registrants Class A common stock as of April 4, 2003
was 29,032,697.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the
Registrants Proxy Statement for the 2003 Annual Meeting of Shareholders
are incorporated by reference into Part III.

The Index to Exhibits begins on Page 30

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|CONVERA CORPORATION
ANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED JANUARY 31, 2003TABLE OF CONTENTS
|---------------------------------------------------------------------------------------------------------
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|PART I.                                                                                                  
|Item 1.                                                                                                  
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|PART II.                                                                                                 
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|Item 7A.                                                                                                 
|Item 8.                                                                                                  
|Item 9.                                                                                                  
|PART III.                                                                                                
|Item 10.                                                                                                 
|Item 11.                                                                                                 
|Item 12.                                                                                                 
|Item 13.                                                                                                 
|Item 14.                                                                                                 
|PART IV.                                                                                                 
|Item 15.                                                                                                 

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# Table of Contents

# PART I

Item 1.  Business

The statements contained in
this report 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 Convera Corporation (Convera or the
Company.) All forward-looking statements included in this report are
based on information available to the Company on the date hereof, and the
Company assumes 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. The Companys
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 report.

## OVERVIEW

Convera designs, develops,
markets, implements and supports enterprise search, retrieval and categorization
solutions to power a broad range of mission critical applications including
enterprise portals, knowledge management, intelligence gathering, profiling,
corporate policy compliance, regulatory compliance, customer service and more.
Convera believes its RetrievalWare® solutions offer customers a way to
maximize their return on investment in vast stores of unstructured information
by providing highly scalable, fast, accurate and secure search across more than
200 forms of text, video, image and audio information, in more than 45
languages. Convera also offers professional implementation services to ensure
Convera products integrate seamlessly into customer environments, as well as
training, consulting and maintenance services to facilitate full implementation
and optimal use of its technologies.

Convera maintains an
extensive portfolio of patented and proprietary technologies. Its core
technologies include: advanced computational linguistics and semantic networking
that leverage lexical knowledge using built-in knowledge bases to search not
only for specific word meanings, but also for related terms and concepts;
Adaptive Pattern Recognition Processing (APRP) that identifies
patterns in digital data, providing the capability to build content-based
analysis and retrieval applications for any type of digital information; and
intelligent real-time video analysis that detects scene changes as they occur.
In combination, these core technologies form the foundation on which Convera
builds its products.

Convera was established
through the combination of the former Excalibur Technologies Corporation
(Excalibur) and Intel Corporations (Intel)
Interactive Media Services (IMS) division. On December 21, 2000,
Excalibur and Intel consummated a business combination transaction (the
Combination) pursuant to an Agreement and Plan of Contribution and
Merger, dated as of April 30, 2000, as amended, by and among Excalibur, Intel,
the Company and Excalibur Transitory, Inc., a wholly owned subsidiary of the
Company. All references in this Form 10-K to financial results for the Company
for the period prior to December 21, 2000 reflect the historical financial
results of Excalibur and its subsidiaries.

As of January 31, 2003 and
2002, Allen Holding, Inc., together with Allen & Company Incorporated and
Herbert A. Allen (collectively Allen & Company) beneficially
owns more than 50% of the voting power of Convera.

The Company can be
contacted via email at invest@convera.com and visited at
its web site, www.convera.com. Information on the Convera
web site is not part of this Form 10-K.

Business Strategy

The Company licenses its
software products directly to commercial businesses and government agencies
throughout North America, Europe and other parts of the world and also
distributes its software products through license agreements with systems
integrators, OEMs, value-added resellers, and other strategic partners. The
Companys technology may also be customized to meet specific needs of its
customers. Convera conducts international sales activities through Convera
Technologies International, Limited (CTIL), its wholly owned
subsidiary in the United Kingdom, and CTIL offices in Germany and France.

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# Table of Contents

## CONVERA PRODUCTS

## PRODUCTS

Convera develops, markets,
licenses, services and supports the Convera RetrievalWare product line of
mission critical search and categorization products which form the basis for
information retrieval and knowledge management solutions for corporate
intranets, Internet e-commerce, online publishing and the OEM market. The
RetrievalWare product line includes:

RetrievalWare® Search;
RetrievalWare® Categorization and Dynamic Classification;
RetrievalWare® Profiling;
Language Cartridges;
Domain Cartridges;
Taxonomy Cartridges;
RetrievalWare® Synchronizers;
Internet Spider;
RetrievalWare® FileRoom;
Screening Room®;
Screening Room® Capture;
RetrievalWare® SDK;
Screening Room® API's; and
Visual RetrievalWare®.

## RetrievalWare®

RetrievalWare® Search

RetrievalWare provides a
secure, scalable information retrieval and knowledge discovery infrastructure
utilizing advanced indexing, search and categorization technology. Offering what
the Company believes to be unsurpassed scalability and accuracy,
RetrievalWares distributed process architecture powers comprehensive
software solutions that enable government agencies, commercial enterprises and
any information-driven organization to integrate all information assets into a
single point of access, to intuitively interact with and navigate that information
to retrieve needed answers, and to effectively collaborate on retrieved information
as the basis for achieving mission-critical objectives. By utilizing multi-mode
searching built around Converas proprietary semantic network technologies,
pattern matching (APRP) and Boolean search, RetrievalWare empowers users to
securely access and retrieve mission critical information assets across multiple
data types from a common user interface.

With Converas
semantic networks and natural language processing, users easily find needed
information. RetrievalWare incorporates syntax, morphology and the actual
meaning of words. The baseline semantic network in the English language version
was created from dictionary, thesauri and other reference sources, giving users
a built-in knowledge base of approximately 500,000 word meanings, 50,000
language idioms and 1.6 million word associations. Users submit plain English
queries that are automatically expanded to include related terms and concepts,
thereby increasing the likelihood that highly relevant content will be returned.
The software recognizes words at the root level, idioms and the multiple
meanings of words. This approach eliminates the costs associated with defining
keywords, building topic trees, establishing expert rules and sorting and
labeling information in database fields. RetrievalWare also supports domain
specific semantic networks to further enhance precision and recall in specific
fields of interest, including: Biology, Chemistry, Computers, Electronics,
Finance, Food Science, Geography, Geology, Health Sciences, Information Science,
Law, Mathematics, MeSH, Military, Petroleum, Natural Gas & Petrochemicals,
Pharmaceutical, Pharmacology, Physics, Plastics, Rubber and Telecommunications,
as well as other disciplines which can be supported through standard development
tools.

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# Table of Contents

APRP identifies patterns in
digital information. In text applications, it provides fuzzy searching with a
high degree of precision and recall, giving end users the ability to retrieve
even approximations of search queries with a high degree of confidence that all
of the requested information will be returned regardless of errors in spelling
or the existence of inconsistencies in the data which may be caused by poor
quality of optical character recognition processes. The software works at high
speed and supports the rapid development of multi-language text-retrieval
systems.

RetrievalWare supports more
than 200 document formats stored on file servers, in groupware systems,
relational databases, document management systems, intranets and the Internet.
RetrievalWare provides real time profiling which enables users to create and
save Real Time Agent Queries (Profiles) that will automatically collect incoming
documents of interest. The RetrievalWare Profiling Server filters, stores and
distributes incoming data from many sources including real-time news feeds,
relational databases, paper repositories and the RetrievalWare Internet Spider.

RetrievalWare 7.0, released
in March of 2002, provided what the Company believes was the industrys
first enterprise search product to offer multimedia and cross-lingual search as
off-the-shelf product features. By providing users with a single product that
simultaneously searches and organizes all data types (such as text, video, image
and audio files) in multiple languages from a single user interface, customers
do not have to buy and piece together several disparate systems to manage
multiple data types and languages.

RetrievalWare provides
access to both unstructured and structured information across enterprise
networks, workgroup LANs, and intranets. The software may be deployed on a
single server or across any number of distributed physical servers.
RetrievalWare server solutions can be run on multiple platforms including
leading UNIX and Windows NT platforms.

The RetrievalWare product
line includes the following optional components:

Categorization and Dynamic Classification

RetrievalWares
innovative and highly scalable Categorization and Dynamic Classification
solution enables the enterprise to bring consistency and scalability to the
organizational structure of its information assets through the use of stable,
industry standard taxonomy hierarchies. RetrievalWare uses one or more
taxonomies to extract concepts and context from information assets. These assets
can then be organized dynamically into specific views that reflect the unique
information needs of the organization, as well as the personalized knowledge
requirements of each individual. This powerful and flexible approach to
organizing information facilitates knowledge discovery and collaboration among
knowledge workers.

Profiling

The RetrievalWare profiling
capability automatically detects, routes and stores relevant documents in one or
more user defined profiles, thus accelerating the proactive discovery of
relevant information as it enters the RetrievalWare environment.

Language, Domain and Taxonomy Cartridges

RetrievalWare provides
highly accurate and relevant search and categorization results based upon its
powerful and unparalleled linguistic processing capability. Through the use of
robust semantic networks and taxonomies, covering many languages and domain
specific fields of interest, RetrievalWare recognizes and processes words,
phrases and concepts intelligently in the context within which they exist. The
result is a comprehensive information search and retrieval solution enabling
basic keyword search, advanced natural language and conceptual search, as well
as information categorization in many languages and specified fields of
interest. RetrievalWares scalable and robust linguistic processing
methodology ensures complete, precise results and discovery of knowledge with
the highest possible relevance. Language, Domain and Taxonomy Cartridges are
provided as pre-packaged optional components to RetrievalWare. Convera also
provides development tools that allow customers, partners or integrators to
develop, edit and customize cartridge content to accommodate implementation
specific needs and requirements.

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# Table of Contents

Synchronizers

RetrievalWare Synchronizers
provide document-level security for users to search the contents of multiple
native repositories from a single point of access including Lotus Notes,
Microsoft Exchange, Documentum, FileNET Panagon, native file systems and major
relational database management systems and interfaces including MS SQL, Oracle,
Sybase, Informix, Teradata and ODBC.

Internet Spider

Internet Spider is a
multimedia, high-performance Web spider/crawler for augmenting the retrieval
capabilities of RetrievalWare, for stand-alone use, or for integration with
other applications. In addition to HTML-based Web pages, Internet Spider also
retrieves word processing, PDF and multimedia assets including audio, video and
images. It is highly configurable and multi-threaded and can provide deep, broad
and repetitive crawling. Users who want immediate notification when items of
interest arrive can post Agent Profiles to pull links to related documents to
their desktops. Components can be deployed on multiple machines for optimum
performance and bandwidth.

FileRoom

RetrievalWare FileRoom is
built on RetrievalWare technology and is an optional component to allow loading,
indexing, viewing and managing scanned documents, images and text. Users access
the FileRoom through a hierarchy consisting of FileRoom documents, where each
tier in the hierarchy is a container for storing documents. Users can directly
view the scanned image of a retrieved document from the FileRoom. Graphs,
diagrams, handwritten notations and signatures in the retrieved document are
immediately accessible. Fuzzy searching capabilities provided by
APRP give users a high level of confidence that their queries will return all of
the requested information regardless of the quality of Optical Character
Recognition (OCR) data. Document-level security lets organizations
control user access at the FileRoom (library), cabinet, drawer, folder and
document level.

Screening Room®

Screening Room is an
optional product to RetrievalWare Search that enables a comprehensive solution
for video asset management providing scalable access, search and retrieval of
video assets, both analog and digital, from any desktop. Used in conjunction
with RetrievalWare Search, it provides for real-time capturing, encoding,
analyzing, cataloging, browsing, searching and retrieving of video, as well as
related captured text (closed captions or speech-to-text conversions) and
metadata, over corporate intranets/extranets. Designed to manage video content
in Internet portal and corporate intranet environments, Screening Room also
supports media, broadcast and entertainment video asset management solutions. It
enables users to easily capture analog or digital video, automatically create an
intelligent video storyboard, and play it back in any of the industrys
standard video file formats. Screening Room users then can automatically browse,
search and retrieve precisely what video clips they are looking for without
having to play or watch the video in its entirety.

Screening Room consists of
four components: Screening Room Capture, Screening Room Metadata Edit, Screening
Room Explorer and Screening Room Video Asset Server. Screening Room Capture
ingests, analyzes and storyboards analog or digital video assets, including live
feeds, and extracts, indexes and searches associated metadata such as captured
text (both closed-caption text and spoken audio content converted to text),
keyframe images of significant scenes and annotations. Screening Room Metadata
Edit enables users to browse, search, edit and annotate storyboards. In
addition, users can select and compile clips from multiple video assets to
create new derivative works, export files and metadata in industry-standard XML
format, or output rough-cut edit segments to Edit Decision Lists
(EDLs) for import into high-end offline editing systems. Screening
Room Explorer allows user access to catalogs of video assets through any
standard Web browser. The Video Asset Server indexes and stores captured video
assets for instantaneous browsing, or search and retrieval via RetrievalWare.

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# Table of Contents

Screening Room Capture (Stand-alone)

Screening Room Capture
(Stand-alone) can be deployed as a stand-alone product. It provides the ability
to log, analyze and encode video, and save the data and video assets in a
non-proprietary (XML) format. Screening Room Capture does not require purchase
of the entire RetrievalWare or Screening Room system, enabling loading of video
assets and metadata into a third party database or content management system, or
otherwise repurposing the asset. Screening Room Capture is also a suitable
component for sale to OEM customers.

RetrievalWare SDK

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

Screening Room and Screening Room Capture API's

The Screening Room and
Screening Room Capture APIs (Application Programming Interface) enable
developers to integrate and control the Screening Room components from other
programs and applications.

Visual RetrievalWare

Leveraging the APRP
technology, Visual RetrievalWare is a visual retrieval engine and a
comprehensive image processing library and programmers toolkit that
enables the development of client/server systems that automatically index and
retrieve digital images. Users can search for visual information directly from
their intranet, a corporate database, the Internet, or other sources using
images or video clips as clues. Visual data is reduced to a searchable index
that is typically less than 10% of the size of the original image and is
automatically recognized based on its shape, color and texture. Users submit
queries using examples of visual data or by authoring a visual clue with a
graphical product. Based on the shape, color and texture of the visual clue, a
list of similar or exact matches is returned. The product delivers its advanced
retrieval capabilities in an open, flexible, scalable and secure architecture
designed for ease of implementation, integration or extension.

## TECHNICAL
SUPPORT, IMPLEMENTATION SERVICES AND EDUCATION

Convera provides technical
support, or maintenance, to customers through its technical support personnel
located in the Companys Columbia, Maryland, Carlsbad, California and
Bracknell, United Kingdom facilities and through certain product distributors.
Technical support consists of bug fixes, telephone support and upgrades or
enhancements of particular software product releases when and if they become
generally available. Technical support typically is provided to customers under
a renewable annual contract. All Convera service plan customers have access to
the Convera Online Technical Support Web site that provides the latest product
information, general service updates and Web forums for technical discussions.
The Web site also provides electronic forms for opening technical support cases
and suggesting product, service and Company enhancements.

The Company also provides
on-site implementation and consulting services to its customers through
employees and independent consultants who have been trained and certified by the
Company. Implementation and consulting services are offered as a package or on a
time-and-materials or fixed price basis. The Company conducts training seminars
at its offices in Vienna, Virginia; Carlsbad, California; and Bracknell, UK, as
well as on-site training for its customers and distribution channel partners.
Training customers typically pay on a per-course basis for regularly scheduled
classes and on a per-day basis for on-site or dedicated courses.

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# Table of Contents

## MARKETING AND
DISTRIBUTION

The Companys sales
and marketing strategy focuses on the licensing of Convera products to customers
both through a direct sales force and through strategic partners and OEMs.
Members of the North American sales team are primarily located throughout the
United States, and the majority of the international sales team is located in
the United Kingdom. The Company typically licenses its products to end-users as
either an enterprise-wide or work-group level solution.

Convera focuses its sales
and marketing efforts on enterprises that have large, rapidly changing content
collections in diverse formats and have large numbers of knowledge workers. In
that regard, the Company concentrates a significant amount of sales and
marketing resources on vertical markets such as government, financial services,
life sciences and technology.

Marketing efforts focus on
building brand awareness and establishing demand for the Companys products
and include public relations, trade show participation, direct mail and
electronic marketing campaigns, advertising and telemarketing/lead management
activities. The Companys home page on the World Wide Web,
www.convera.com, is an integral part of its marketing and
sales efforts, but information on the Companys Web site is not a part of
this Form 10-K. Through the Web site, prospective customers can learn about
Converas suite of products and view online demonstrations of products.
Existing customers can enroll in training courses and access password-protected
areas for technical and other customer support.

## PRODUCT
DEVELOPMENT AND ADVANCED RESEARCH

The Companys research
and development program focuses on enhancing and expanding the capabilities of
its products to address additional markets and market requirements. Over time
and as the technology evolves, RetrievalWare will remain the basic building
block of a modular suite of products. In addition to providing seamless access
to both structured and unstructured data in the enterprise, this modular
approach simplifies system administration for the customer and makes it easier
for Convera to update existing features and add new components such as support
for new data types and taxonomies for specific vertical markets.

In March of 2002, Convera
announced the acquisition of Semantix Inc., a private Canadian software company
specializing in cross-lingual processing and computational linguistics
technology. The acquisition of Semantix, including its engineering personnel and
intellectual property, broadens the linguistic capabilities of RetrievalWare,
specifically in the areas of cross-lingual search and the continued development
of language capabilities to support the needs of specialized vertical markets,
such as the government intelligence community. Semantix became a wholly owned
subsidiary of Convera under the name Convera Canada Inc.

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

The Company has conducted
research and product development of pattern recognition and natural language
systems since 1980. Research and product development expenditures for the
development of new products and enhancements to existing products were
approximately $11.6 million, $22.5 million and $12.7 million, respectively, in
the fiscal years ended January 31, 2003, 2002 and 2001.

## PROTECTION OF
PROPRIETARY TECHNOLOGY

The Company regards its
software as proprietary and relies primarily on a combination of patents,
copyright, trademark and trade secret laws of general applicability, employee
confidentiality and invention assignment agreements, software distribution
protection agreements and other intellectual property protection methods to
safeguard its technology and software products. The Company also obtains
trademark protection for its various product and corporate brand names and
design logos. The Company has four patents and seven patent applications
currently pending before the Patent and Trademark Office, each intended to
protect technology-related assets of the Company. The Company also relies upon
its efforts to design and produce new products and upon improvements to existing
products to maintain a competitive position in the marketplace.

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# Table of Contents

## COMPETITION

Competition in the
information technology industry in general, and the software development
industry in particular, is intense. Convera competes primarily in the search,
retrieval and categorization market. Within this market, there are
current and potential competitors who are larger and more established than
Convera and have significantly greater financial, technical, marketing and other
resources. Convera considers its principal competitive advantages to be an
environment that is: (1) more scalable due to the distributed-processing
architecture, (2) more accurate results due to the semantic network and APRP
technologies, and (3) more comprehensive results due to its ability to manage
and retrieve information in multiple languages and in rich media file formats.

Convera competes with
numerous companies depending on the target market for its products. Most often,
Convera competes directly with companies such as Verity, Inc. and Autonomy Corporation plc.
to provide search solutions to the corporate intranet, Internet e-commerce,
online publishing and the OEM market. There can be no assurance that the Company
will be able to compete successfully against current or future competitors or
that competition will not materially adversely affect the Companys
operating results and financial condition.

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

## SEGMENT
INFORMATION

The Company has one reportable
segment. All of the Companys revenues are from third party customers.

Revenues derived from
contracts and orders issued by agencies of the U.S. Government were
approximately $6.6 million, $4.9 million and $5.0 million, respectively, in the
fiscal years ended January 31, 2003, 2002 and 2001. These revenues, expressed as
a percentage of total revenues for the fiscal year, were approximately 28%, 14%
and 10%, respectively. For the fiscal year ended January 31, 2003, no individual
customer accounted for more than 10% of the Companys total revenues.

Financial information is
located in the consolidated financial statements beginning on page F-2.
Additional information related to segment reporting can be found in Note 15 to
the consolidated financial statements contained herein.

## EMPLOYEES

The Company had 241
employees at January 31, 2003, of whom 94 were in research and development, 77
in sales and marketing, 39 in technical support, professional services and
training and 31 in finance and administration. The employees are not covered by
collective bargaining agreements, and the management of the Company considers
relations with employees to be good. Competition for qualified personnel within
the Companys industry is intense. There can be no assurance that the
Company will be able to continue to attract, hire or retain qualified personnel
and the inability to do so could have a material adverse effect upon the
Companys operating results and financial condition.

## RISK FACTORS

The risks and uncertainties
described below are not the only risks and uncertainties the Company faces.
Additional risks and uncertainties not presently known to the Company or that it
currently deems immaterial also may impair the Companys business
operations. If any of the following risks actually occur, the Companys
business, results of operations and financial condition would suffer. In that
event, the trading price of Convera common stock could decline, and
Converas stockholders may lose all or part of their investment in
Converas common stock. The discussion below and elsewhere in this report
also includes forward-looking statements, and the Companys actual results
may differ substantially from those discussed in these forward-looking
statements as a result of the risks discussed below.

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# Table of Contents

The Company has had a history of operating losses and may incur future losses

The Company believes that
its future profitability will depend on its ability to effectively market
existing and newly-developed software products through a balanced multi-channel
distribution network. Convera cannot assure that its costs to develop, introduce
and promote enhanced or new products will not exceed its expectations, or that
these products will generate revenues sufficient to offset these expenses. The
Company has operated at a loss for each of the past three fiscal years. These
losses reflect the Companys expenditures associated with selling software
products and further developing software products during these years. Convera
plans to continue to invest in the development, sales and marketing of its
products and, accordingly, the Company cannot assure that its operating losses
will not continue in the future.

The Company experiences quarterly fluctuations in its operating results, which may
adversely affect the Companys stock price

Converas quarterly
operating results have varied substantially in the past and are likely to vary
substantially from quarter to quarter in the future, due to a variety of factors
including the following:

- the downturn in capital
spending by customers as a result of the current economic slowdown;
- the delay or deferral of customer implementations;
- the budget cycles of the Companys customers;
- seasonality of individual customer buying patterns;
- an increase in competition in the software industry;
- the size and timing of individual transactions;
- the timing of new software introductions and
software enhancements by the Company and its competitors;
- changes in operating expenses and personnel;
- changes in accounting principles, such as a
requirement that stock options be included in compensation, as is currently
being considered by Congress and, which, if adopted, would increase the Companys
compensation expense and have a negative effect on earnings;
- the overall trend towards industry consolidation; and
- changes in general  economic  and  geo-political  conditions  and
specific  economic  conditions  in the computer and software industries.

In particular,
Converas period-to-period operating results have historically been
significantly dependent upon the timing of the closing of significant license
agreements. Because purchasing the Companys products often requires
significant capital investment, Converas customers may defer or decide not
to make their purchases. This means sales can involve long sales cycles of six
months or more. The Company has generally recorded a significant portion of its
total quarterly license revenues in the third month of a quarter, with a
concentration of these revenues occurring in the last half of that third month.
This is in part because customers tend to make significant capital expenditures
at the end of a fiscal quarter. The Company expects these revenue patterns to
continue. Despite these uncertainties in Converas revenue patterns, its
operating expenses are based upon anticipated revenue levels and are incurred on
an approximately ratable basis throughout a quarter. As a result, if expected
revenues are deferred or otherwise not realized in a quarter for any reason, the
Companys business, operating results and financial condition would be
materially adversely affected.

A portion of the Companys revenues is derived from sales to federal
government agencies, which are subject to budget cuts. The ability to complete
contracts with the federal government, and size and timing of those contracts
may materially affect the Companys operating results

Revenues derived from sales
to federal government agencies were approximately 28%, 14% and 10% of total
revenues in fiscal years 2003, 2002 and 2001, respectively. While the federal
government has recently increased spending on defense and homeland security
initiatives, many government agencies have had budget freezes or reductions
which may adversely impact their purchasing decisions and timing.

8

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# Table of Contents

The Company is actively
pursuing several opportunities for business with certain U.S. Government
agencies. While the nature and timing of these opportunities, as well as the
ability to complete business transactions related to these opportunities, is
subject to certain risks and uncertainties, successful completion of any of
these transactions could have a material impact on the future operating results
and financial position of the Company. There can be no assurance that the
Company will complete any of these potential transactions.

The Company is dependent on international sales, which expose it to foreign political and economic risks

A material portion of
Converas revenues is derived from international sales. The Companys
international operations expose it to a variety of risks that could impede the
Companys financial condition and growth. These risks include the
following:

- difficulties in complying
with regulatory requirements and standards;
- political, social and economic instability;
- longer accounts receivable and payment cycles;
- trade restrictions and changes in tariffs;
- potentially adverse tax consequences;
- import and export license requirements and restrictions;
- fluctuations in currency exchange rates; and
- uncertainty of the effective protection of the
Companys intellectual property rights in certain foreign countries.

If any of these risks
described above materialize, the Companys international sales could
decrease and its foreign operations could suffer.

Convera is in a competitive market, and if the Company fails to compete effectively or
respond to rapid technological change, its revenues and market share will be adversely affected

The Companys business
environment and the software industry in general are characterized by intense
competition, rapid technological changes, changes in customer requirements and
emerging new market segments. Converas competitors include many companies
which are larger and more established and have substantially more resources than
it does. 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 served by Convera.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. Increased competition
may result in price reductions, reduced gross margins and loss of market share,
any of which could have a material adverse effect on the Companys
business, financial condition or results of operations.

In order for Converas
strategy to succeed and to remain competitive, it must leverage its core
technology to develop new product offerings. These development efforts are
expensive. If these products do not generate substantial revenues, the
Companys business and results of operations will be adversely affected.
The Company cannot assure that any of these products will be successfully
developed, completed on a timely basis or at all, achieve market acceptance or
generate significant revenues.

Convera designs its products to work with certain systems and changes to such systems
may render Converas products incompatible with these systems

Converas ability to
sell its products depends on the compatibility of its products with other
software and hardware products. These products may change or new products may
appear that are incompatible with the Companys products. If the Company
fails to adapt its products to remain compatible with other vendors
software and hardware products or fails to adapt its products as quickly as its
competitors, Convera may be unable to sell its products.

9

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The Companys software products are complex and may contain errors that could
damage its reputation and decrease sales

Converas complex
software products may contain errors that may be detected at any point in the
products life cycles. The Company cannot assure that, despite
Converas testing and quality assurance efforts and similar efforts by
current and potential customers, errors will not be found. The discovery of an
error may result in loss of or delay in market acceptance and sales.

The Company is dependent on proprietary technology licensed from third parties, the
loss of which could delay shipments of products incorporating this technology and could be costly

Some of the technology used
by the Companys products is licensed from third parties, generally on a
nonexclusive basis. The Company believes that there are alternative sources for
each of the material components of technology it licenses from third parties.
However, the termination of any of these licenses, or the failure of the
third-party licensors to adequately maintain or update their products, could
result in delay in the Companys ability to ship these products while the
Company seeks to implement technology offered by alternative sources. Any
required replacement licenses could prove costly. Also, any delay, to the extent
it becomes extended or occurs at or near the end of a fiscal quarter, could harm
the Companys quarterly results of operations. While it may be necessary or
desirable in the future to obtain other licenses relating to one or more of the
Companys products or relating to current or future technologies, the
Company cannot assure that it will be able to do so on commercially reasonable
terms or at all.

Because of the technical nature of Converas business, its intellectual property is
extremely important to Converas business, and adverse changes to its
intellectual property would harm the Companys competitive position

Convera believes that its
success depends, in part, on its ability to protect its proprietary rights and
technology. Historically, Convera has relied primarily on a combination of
copyright, patents, trademark and trade secret laws, employee confidentiality
and invention assignment agreements, distribution and OEM software protection
agreements and other methods to safeguard the Companys technology and
software products. Risks associated with the Companys intellectual
property, include the following:

- pending patent applications may not be issued;
- intellectual property
laws may not protect the Companys intellectual property rights;
- third parties may challenge, invalidate, or circumvent any patent issued to the
Company;
- rights granted under patents issued to Convera may not provide
competitive advantages to the Company;
- unauthorized parties may attempt to obtain and use information that Convera
regards as proprietary despite Converas efforts to protect its proprietary rights;
- others may independently develop similar technology
or design around any patents issued to Convera; and
- effective protection of intellectual property rights may be limited or
unavailable in some foreign countries in which the Company operates.

The Company's operations could infringe on the intellectual property rights of others

The Company cannot assure
that a third party will not assert that the Companys technology violates
its intellectual property rights. Particular aspects of Converas
technology could be found to infringe on the intellectual property rights of
others. Other companies may hold or obtain patents on inventions or may
otherwise claim proprietary rights to technology necessary to the Companys
business. The Company cannot predict the extent to which it may be required to
seek licenses or alter its products so that they no longer infringe the rights
of others. The Company cannot guarantee that the terms of any licenses it may be
required to seek will be reasonable. Similarly, changing Converas products
or processes to avoid infringing the rights of others may be costly or
impractical or could detract from the value of the Companys products.

10

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# Table of Contents

If Convera is unable to manage its growth successfully, it may divert
Converas resources and harm its operating results

The Companys future
operating results will be affected by its ability to expand its product
distribution channels and to manage its expected growth. Converas future
results may also be impacted by its ability to execute future acquisitions and
integrate the operations of acquired companies with Converas. If Convera
cannot effectively manage its expanding operations, it may not be able to grow,
or the Company may grow at a slower pace. Converas failure to successfully
manage growth and to develop financial controls and accounting and operating
systems or to add and retain personnel that adequately support the
Companys growth would harm its business and financial results.

Convera depends on its key personnel and may have difficulty attracting and retaining skilled employees

Converas success
depends to a significant degree upon the continued contributions of its key
management, marketing, technical and operational personnel. The Company
generally does not utilize employment agreements for its key employees. The loss
of the services of one or more key employees could have a material adverse
effect on the Companys operating results. The Company also believes its
future success will depend in large part upon its ability to attract and retain
additional highly skilled management, technical, marketing, product development,
and operational personnel. Competition for such personnel is intense, and pay
scales in the software industry have significantly increased. There can be no
assurance that the Company will be successful in attracting and retaining such
personnel.

The Company may not be able to use net operating loss carryforwards

As of January 31, 2003, the
Company had net operating loss carryforwards of approximately $142 million. The
deferred tax assets representing the benefits of these carryforwards have been
offset completely by a valuation allowance due to the Companys 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 Converas ability to utilize these carryforwards.
Additionally, past or future changes in Converas ownership and control
could limit the ability to utilize these carryforwards. Despite the
carryforwards, the Company 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.

The Company may need additional capital in the future, and it may not be available on acceptable terms, or at all

The Company expects that
its current cash and cash equivalents will be sufficient to meet its working
capital and capital expenditure requirements for the foreseeable future.
However, the Company may need to raise additional funds for the following purposes:

- to fund the Company's operations;
- to fund any growth the Company experiences;
- to enhance and/or expand the range of services Convera offers;
- to increase the Company's promotional and marketing activities; or
- to respond to competitive pressures and/or perceived opportunities, such as
investment, acquisition and international expansion activities.

The Company canno assure that necessary capital
will be available, and if so, on terms beneficial to the Company.

11

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# Table of Contents

Convera's stock price may fluctuate which may make it difficult to resell shares of Convera stock

The market price of
Converas common stock and its trading volume have been highly volatile. This volatility may
adversely affect the price of Converas common stock, and Convera
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. The Company anticipates that this volatility, which frequently
affects the stock of software companies, will continue. Factors that could cause
such volatility include:

- future announcements concerning Convera or its competitors;
- quarterly variations in the Company's operating results;
- actual or anticipated announcements of technical innovations or new
product developments by Convera or its competitors;
- general conditions in the Companys industry;
- intellectual property or other litigation; and
- worldwide economic and financial conditions.

On occasion, the equity
markets, and in particular the markets for software companies, have experienced
significant price and volume fluctuations. These fluctuations have affected the
market price for many companies securities even though the fluctuations
are often unrelated to the companies operating performance.

The Companys amended and restated certificate of incorporation, bylaws, ownership and
Delaware law contain provisions that could discourage a third party from
acquiring the Company and consequently decrease the market value of an
investment in Convera stock

Some provisions of the
Companys amended and restated certificate of incorporation and bylaws and
of Delaware law could delay or prevent a change of control or changes in the
Companys 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 the Companys common stock to decline.

Further, Allen Holding,
Inc., together with Allen & Company Incorporated and Herbert A. Allen
(collectively Allen & Company) beneficially owns more than 50%
of the voting power of Convera, and would therefore be able to control the
outcome of matters requiring a stockholder vote. These matters could include
offers to acquire Convera and elections of directors. Allen & Company may
have interests which are different than the interests of other Convera
stockholders.

Item 2.  Properties

The Companys
corporate headquarters facility is occupied under a lease agreement that expires
in calendar year 2004 for a total of approximately 20,500 square feet of space
in an office building located at 1921 Gallows Road, Vienna, Virginia 22182.

The Companys
principal development and customer support centers are located in Carlsbad,
California and Columbia, Maryland. The Company leases additional space in San
Jose, California and Montreal, Canada.

The Company also leases
space in Bracknell, England and commercial office suites in Paris, France, and
in Munich, Germany in support of its international sales operation.

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

12

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# Table of Contents

Item 3.  Legal Proceedings

On November 1, 2001, DSMC,
Incorporated (DSMCi) filed a complaint against the Company in the
U.S. District Court for the District of Columbia in which it alleged that the
Company misappropriated DSMCis trade secrets, engaged in civil conspiracy
with the NGT Library, Inc. (NGTL), an affiliate of the National
Geographic Society, to obtain access to DSMCis trade secrets, and was
unjustly enriched by the Companys alleged access to and use of such trade
secrets. In its complaint, DSMCi seeks $5.0 million in actual damages and $10.0
million in punitive damages from the Company. DSMCi subsequently amended its
complaint to add copyright infringement-related claims. The Company is in the
process of investigating the allegations and at this time believes that they are
without merit. From time to time, the Company is a party to various legal
proceedings, claims, disputes and litigation arising in the ordinary course of
business, including that noted above. The Company believes 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, Converas
financial position, operations and cash flows could be materially and adversely
affected.

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

None.

13

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# Table of Contents

# PART II

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

The Companys Class A common
stock is traded in the over-the-counter market and is listed on the National
Market System of the NASDAQ Stock Market under the symbol CNVR. As a
result of the Combination, the Excalibur common stock, traded under the symbol
EXCA, ceased to be listed on the Nasdaq National Market. In the
Combination, the Excalibur common stock was converted on a one-for-one basis
into Convera Class A common stock.

The following table sets
forth the high and low sale prices for Convera common stock for the period from
February 1, 2001 through January 31, 2003, as reported by the National Market
System of NASDAQ. The number of shareholders of record as of January 31, 2003
was 990. The Company has never declared or paid dividends on its common stock
and anticipates that, for the foreseeable future, it will not pay dividends on
its common stock.

| |                                                   |   | High  |   | Low 
| | ------------------------------------------------- | - | ----- | - | ----
| | Fiscal 2003 (February 1, 2002 - January 31, 2003) |   |       |   |     
| | First Quarter                                     | $ | 4.20  | $ | 3.30
| | Second Quarter                                    |   | 4.50  |   | 1.40
| | Third Quarter                                     |   | 1.94  |   | 1.25
| | Fourth Quarter                                    |   | 3.42  |   | 1.74
| | Fiscal 2002 (February 1, 2001 - January 31, 2002) |   |       |   |     
| | First Quarter                                     | $ | 18.88 | $ | 4.88
| | Second Quarter                                    |   | 7.58  |   | 3.37
| | Third Quarter                                     |   | 4.00  |   | 2.05
| | Fourth Quarter                                    |   | 4.84  |   | 2.20

The following table sets forth, as of January 31, 2003,
information with respect to the Company's equity compensation plans:

|Plan Category                                               | Number ofSecurities to beIssued Upon Exerciseof OutstandingOptions, Warrants
and Rights(a) | Weighted-AverageExercise Price ofOutstanding Options,
Warrants and Rights(b) | Number of SecuritiesRemaining Available for
Future Issuance UnderEquity Compensation Plans(excluding securitiesreflected in column (a))(c)
|----------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders:     |                                                                                           
|1.                                                          | Convera Stock Option Plan                                                                  | 8,813,654                                                                    |                                                                                                                                           
|2.                                                          | Convera Employee Stock Purchase Plan                                                       | -                                                                            |                                                                                                                                           
|Equity compensation plans not approved by security holders: | None                                                                                       |                                                                              | Not Applicable                                                                                                                            

During our fiscal year
ended January 31, 2003, the Company issued shares of Class A common stock that
were not registered under the Securities Act of 1933, as amended (the 1933
Act), at the time of issuance, as described below:

On March 7, 2002, the
Company issued 900,000 shares of restricted Class A common stock and
approximately $24,000 in cash for 100% of the outstanding capital stock of
Semantix Inc., a private Canadian software company specializing in cross-lingual
processing and computational linguistics technology. Exemption from registration
for this transaction was claimed under Regulation D of the 1933 Act because this
transaction did not involve a public offering within the meaning of Section 4(2)
of the 1933 Act, and all of the conditions of Regulation D were met.

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# Table of Contents

Item 6.  Selected Financial Data

The selected financial data
presented below have been derived from the Companys consolidated financial
statements. The balance sheet data as of January 31, 2003 and 2002, and the
statement of operations data for the fiscal years ended January 31, 2003, 2002
and 2001 should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Annual Report on Form
10-K.

All references in this Form
10-K to financial results of the Company for the period prior to December 21,
2000 reflect the historical financial results of Excalibur and its subsidiaries.

|                                                                                                                                                                                                                                                                                |                                                              |                                       | Fiscal Years Ended January 31,
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------- | ------------------------------
|                                                                                                                                                                                                                                                                                |                                                              |                                       | 2003                          
|Statement of Operations Data:                                                                                                                                                                                                                                                   |                                                              | (in thousands, except per share data)
|Revenues                                                                                                                                                                                                                                                                        | $                                                            | 23,614                                | $                             
|Cost of revenues                                                                                                                                                                                                                                                                |                                                              | 10,455                                |                               
|Gross margin                                                                                                                                                                                                                                                                    |                                                              | 13,159                                |                               
|Operating expenses:                                                                                                                                                                                                                                                             |                                                              |                                       |                               
|                                                                                                                                                                                                                                                                                | Sales and marketing                                          |                                       | 20,018                        
|                                                                                                                                                                                                                                                                                | Research and product development                             |                                       | 11,639                        
|                                                                                                                                                                                                                                                                                | General and administrative                                   |                                       | 8,642                         
|                                                                                                                                                                                                                                                                                | Amortization of goodwill and other intangible assets (3)     |                                       | 242                           
|                                                                                                                                                                                                                                                                                | Incentive bonus payments to employees                        |                                       | (138)                         
|                                                                                                                                                                                                                                                                                | Restructuring charges                                        |                                       | 2,337                         
|                                                                                                                                                                                                                                                                                | Reduction in goodwill and other
long-lived intangible assets |                                       | -                             
|                                                                                                                                                                                                                                                                                | Acquired in-process research and development                 |                                       | 126                           
|                                                                                                                                                                                                                                                                                |                                                              |                                       | 42,866                        
|Operating loss                                                                                                                                                                                                                                                                  |                                                              | (29,707)                              |                               
|Other income, net                                                                                                                                                                                                                                                               |                                                              | 636                                   |                               
|Equity in net loss of affiliate                                                                                                                                                                                                                                                 |                                                              | -                                     |                               
|Write-off of investment in affiliate                                                                                                                                                                                                                                            |                                                              | -                                     |                               
|Net loss before income taxes                                                                                                                                                                                                                                                    |                                                              | (29,071)                              |                               
|Income tax benefit                                                                                                                                                                                                                                                              |                                                              | -                                     |                               
|Net loss                                                                                                                                                                                                                                                                        |                                                              | (29,071)                              |                               
|Dividends on cumulative, convertible
preferred stock                                                                                                                                                                                                                            |                                                              | -                                     |                               
|Net loss applicable to common stock                                                                                                                                                                                                                                             | $                                                            | (29,071)                              | $                             
|Net loss per common share - basic and diluted                                                                                                                                                                                                                                   | $                                                            | (1.01)                                | $                             
|Weighted-average number of common shares
outstanding - basic and diluted                                                                                                                                                                                                        |                                                              | 28,854                                |                               
|Balance Sheet Data (1) (at end of period)                                                                                                                                                                                                                                       |                                                              |                                       |                               
|Cash and cash equivalents                                                                                                                                                                                                                                                       | $                                                            | 10,318                                | $                             
|Working capital                                                                                                                                                                                                                                                                 |                                                              | 24,434                                |                               
|Total assets                                                                                                                                                                                                                                                                    |                                                              | 49,139                                |                               
|Accumulated deficit                                                                                                                                                                                                                                                             |                                                              | (1,018,540)                           |                               
|Total shareholders' equity (2)                                                                                                                                                                                                                                                  |                                                              | 32,372                                |                               
|(1) The Company had no significant long-term debt for any of the periods presented.
(2) No dividends have been declared or paid on the Company's common stock.
(3) Fiscal years 2002 and 2001 amortization primarily related to business combination with Intels
IMS division.

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# Table of Contents

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

## Overview

The Company principally
earns revenues from the licensing of its software products and the provision of
services in deployment of the Companys technology to commercial businesses
and government agencies throughout North America, Europe and other parts of the
world. The Company licenses its software to end users directly and also
distributes its software products through license agreements with system
integrators, original equipment manufacturers, value-added resellers,
application service providers and other strategic partners. Revenues are
generated from software licenses with customers and from the related sale of
product maintenance, training and implementation support services. Additions to
the number of authorized users, licenses issued for additional products and the
renewal of product maintenance arrangements by customers pursuant to existing
licenses also provide revenues to the Company. Under software maintenance
contracts, customers are typically entitled to receive telephone support,
software bug fixes and upgrades or enhancements of particular software products
when and if they are released.

Convera was established
through the combination of the former Excalibur Technologies Corporation and
Intel Corporations Interactive Media Services division (the
Combination). On December 21, 2000, Excalibur and Intel consummated
the Combination pursuant to an Agreement and Plan of Contribution and Merger,
dated as of April 30, 2000, as amended, by and among Excalibur, Intel, the
Company and Excalibur Transitory, Inc., a wholly owned subsidiary of the
Company. At the completion of the Combination, Excalibur became a wholly owned
subsidiary of the Company, each outstanding share of Excalibur common stock was
converted into one share of Class A common stock of the Company, and Intel
contributed to the Company its IMS division, intellectual property assets and
other assets used by that division, as well as $150 million in cash at closing,
in exchange for 14,949,384 shares of Class A common stock of the Company and
12,207,038 shares of Class B non-voting common stock of the Company.

The Combination was
accounted for using the purchase method of accounting. The purchase price for
the IMS division was determined to be approximately $925.1 million, which
included approximately $2 million in transaction costs, less approximately $0.6
million in costs to register and issue the shares. The shares issued to Intel as
consideration for the contributed assets were valued based on the existing
market price when the Combination was announced. The purchase price was
allocated to the assets acquired based on their estimated fair values on the
acquisition date. In connection with the Combination, the Company recorded
approximately $769.8 million in goodwill and recorded a charge for acquired
in-process research and development (IPRD) of approximately $0.8
million in the fiscal year ended January 31, 2001. The purchased IPRD
represented the present value of the estimated after-tax cash flows to be
generated by the purchased technology, which, at December 21, 2000, had not yet
reached technological feasibility. The cash flow projections for revenues were
based on estimates of market size and growth factors, expected industry trends,
the anticipated nature and timing of product introduction and the estimated life
of the underlying technology. Estimated operating expenses and income taxes were
deducted from estimated revenue projections to arrive at estimated after tax
cash flows. Projected operating expenses include cost of sales, sales and
marketing and general and administrative expenses. The other intangible assets
acquired from Intel included certain developed technology and an existing
workforce as well as certain existing and in-process customer contracts.

In September 2000, Intel
and the NBA entered into a master services agreement, which Intel contributed to
Convera on December 21, 2000, for the distribution of personalized highlights,
archival material, television broadcast enhancements and real time distribution
of NBA games over broadband networks. In addition to the services agreement,
Convera entered into a contribution agreement with the NBA, under which the NBA
contributed certain intangible assets such as all of the NBA know-how related to
the creation, development, distribution, marketing and deployment, over the
Internet and broadband networks, of products using sports and entertainment
content; a database of customer profiles of NBA fans; the right to use certain
NBA personnel and a non-exclusive license to the NBA trademark. In exchange for
the contribution of these assets, Convera issued 4,746,221 shares of Class A
common stock to the NBA, representing 10% of the total outstanding stock of the
Company on that date.

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# Table of Contents

At the time of the
Combination, the IMS division had contracts in process that were being accounted
for using the completed contract method, and accordingly, revenue was deferred
until all remaining costs, obligations and potential risks were insignificant
and the contract deliverables were agreed to and accepted by the customer.
Convera continued to account for the existing contributed contracts using the
completed contract method of accounting. For purposes of determining the value
of these contributed contracts at the date of acquisition, management considered
the total amounts to be received under each contract. When each of these
contracts was completed by Convera, revenue and the related costs were
recognized. During fiscal year 2002, the Company completed all obligations under
the in-process contracts assigned by the IMS division, and accordingly
recognized revenue during the year of about $1.7 million related to these
contracts. The costs associated with these contracts recorded during fiscal year
2002 were approximately $0.9 million. Existing contracts that were completed
prior to January 31, 2001 resulted in aggregate revenue recognition for fiscal
year 2001 of approximately $7.6 million in services revenues and approximately
$0.7 million in software revenues. The costs associated with these contracts
were approximately $7.5 million included in cost of services revenues and
approximately $0.4 million included in cost of software revenues.

On September 20, 2001, the
Company announced that it had terminated its agreement with the NBA to provide
interactive content services. On October 3, 2001, the Company announced a
restructuring plan to consolidate all operations around the development,
marketing, sales and support of its enterprise class information infrastructure
software products, RetrievalWare and Screening Room. The Company also announced
that it was eliminating operations supporting the development of the
Companys digital content security technology and interactive services
offerings and closing offices in Hillsboro, Oregon and Lafayette, Colorado.

Following the termination
of the NBA contract and the Companys change in focus, the Company
evaluated the recoverability of the intangible and other long-lived assets
including goodwill associated with the Combination and associated with the NBA
agreement. The intangible assets acquired in the Combination, including
developed technology, customer contracts and assembled workforce, were primarily
related to the interactive media services offerings. As a result of the
evaluation, the Company recorded a charge of $754.4 million in the third quarter
of fiscal year 2002 for reduction of goodwill and other long-lived assets.

On December 5, 2001, the
Company reported that it purchased the 4,746,221 shares of Convera Class A
common stock owned by the NBA for $11 million in a privately negotiated
transaction. On January 7, 2002, the Company reported that it purchased
2,792,962 shares of Converas voting Class A common stock and 12,207,038
shares of Converas non-voting Class B common stock from Intel, which were
all of the outstanding shares of Class B common stock, for a total of $42
million in a privately negotiated transaction. The Company also reported a
simultaneous transaction between Allen Holding Inc. and Intel Corporation,
whereby Allen Holding Inc. purchased the remaining 12,156,422 shares of Convera
Class A common stock owned by Intel, resulting in Allen Holding Inc., together
with its President and CEO, Herbert A. Allen, and its wholly owned subsidiary,
Allen & Company Incorporated, beneficially owning 55.2% of the outstanding
shares of Convera Class A common stock. Intel and the NBA hold no ownership
interest in Convera as of January 31, 2003.

All references in this Form
10-K to financial results for the Company for the period prior to December 21,
2000 reflect the historical financial results of Excalibur and its subsidiaries.

17

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# Table of Contents

## Critical
Accounting Policies

Converas consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States. For a comprehensive discussion of the
Companys accounting policies, see Note 2 in the accompanying consolidated
financial statements included in this Form 10-K. Convera does not have any
material ownership interest in any entities that are not wholly owned and
consolidated subsidiaries of the Company. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Management bases those
estimates, including those related to bad debts, goodwill and other intangible
assets, restructuring costs, income taxes and litigation, 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.

Convera believes the
following accounting policies affect the more significant judgments and
estimates used in the preparation of the Companys financial condition and
results of operations.

Revenue Recognition

Converas recognition
of revenues requires judgment, particularly in the areas of collectibility and
whether the fee is fixed and determinable at the time the sales are made. The
Company bases its judgment on a variety of factors, including the payment and
other terms of the individual customer contracts, credit history of the
customer, prior dealings with specific customers, and certain other factors. If
the Company determines that the price under the contract is fixed and
determinable, and that collectibility is assured, then the Company recognizes
revenue related to the software license at the time of sale. To the extent the
Company determines that the price of a sales agreement is not fixed, the Company
delays revenue recognition until payments under the contract become due.
Alternatively, to the extent the Company determines that the collection of
payments under the contract is not assured, the Company delays revenue
recognition until the payments under the contract are received. Thus, the
assessment as to whether the fee is fixed and determinable at the time of sale
and that the fees are collectible is critical in determining the extent of the
revenue recognized in a given period.

The revenue associated with
other elements of the contract, such as maintenance or training and
implementation services, are deferred and recognized as those elements are
delivered. Generally, the Company receives payments for maintenance fees in
advance and they are non-refundable. Maintenance revenues are recognized ratably
over the term of the applicable maintenance agreement, which is typically twelve
months.

Customization work is
sometimes required to ensure that the Companys software functionality
meets the requirements of its customers. In those instances where the
Companys revenues are generated from fixed price contracts related to this
customization work, then revenue is generally recognized using the percentage of
completion method based on the relationship of actual costs incurred to total
costs estimated over the duration of the contract. These cost estimates underlie
the Companys determinations as to overall contract profitability and the
timing of revenue recognition. If the Company does not accurately estimate the
resources required or the scope of the work to be performed, or does not manage
its projects properly within the planned periods of time or satisfy its
obligations under the contracts, then actual results may differ from projected
results and losses on contracts may need to be recognized.

Provision for Doubtful Accounts

Convera maintains an
allowance for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. A considerable amount of
judgment is required in assessing the ultimate realization of individual
accounts receivable balances. Management analyzes specific account balances,
including the credit worthiness of each customer, as well as historical bad
debts and current economic trends to assess the adequacy of the allowance for
doubtful accounts.

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To the extent Convera does
not recognize deterioration in its customers financial condition in the
period it occurs, or to the extent Convera does not accurately estimate its
customers ability to pay, the amount of bad debt expense recognized in a
given reporting period will be impacted.

Goodwill and Other Intangible Assets

Converas acquisitions
of other companies typically result in the acquisition of certain intangible
assets and goodwill. During the fiscal year ended January 31, 2003, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. Any goodwill resulting from
such acquisitions is associated with the Companys corporate reporting
unit, since the Company does not have multiple reporting units. The impairment
of goodwill is assessed on an annual basis or whenever changes in circumstances
indicate that the fair value of the Company is less than the carrying value.
This assessment is performed by comparing the market value of the Companys
outstanding common stock with the carrying amount of the Companys net
assets. If the market value exceeds the carrying amount of the Companys
net assets, impairment of Goodwill does not exist. If the market value is less
than the carrying amount of the Companys net assets, the Company will
perform further analysis and may be required to record an impairment.

The Company evaluates all
of its long-lived assets, including intangible assets other than goodwill, 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 long-lived assets and intangible assets other than goodwill 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 the
Companys 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 recorded in earnings during the period of such impairment.

During the fiscal year
ended January 31, 2002, prior to the adoption of SFAS No. 142 and SFAS No. 144,
Convera determined that the goodwill and certain intangible assets associated
primarily with the Combination were impaired, and Convera recorded a charge of
approximately $754 million related to that impairment.

Deferred Taxes

Convera records a valuation
allowance to reduce its 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, the Company may be
required to adjust its valuation allowance against its deferred tax assets,
resulting in a benefit or a charge to income in the period such determination is
made. As of January 31, 2003, the Company has recorded a full valuation
allowance against the net deferred tax asset.

Stock Option Accounting

SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123),
allows companies to account for stock-based compensation either under the
provisions of SFAS No. 123 or under the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25), as amended by FASB Interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation (an interpretation of APB
Opinion No. 25). The Company has elected to account for its stock-based
compensation in accordance with the provisions of APB 25. No stock-based
employee compensation cost is reflected in net income, as all options granted
under the Companys stock option plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.

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## Results of Operations

For the fiscal year ended
January 31, 2003, total revenues were $23.6 million, a decline of 31% over total
revenues of $34.2 million in fiscal year 2002. The net loss for fiscal year 2003
was $29.1 million, or $1.01 per common share, compared to a net loss of $910.5
million, or $20.08 per common share in the prior year. For the fiscal year ended
January 31, 2002, total revenues decreased 34% over total revenues of $51.5
million in fiscal year 2001. The net loss for fiscal year 2001 was $22.8
million, or $1.22 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, 2003 (dollars in thousands).

|                             |                                                      | Components of Revenues and Expenses |        |     
|---------------------------- | ---------------------------------------------------- | ----------------------------------- | ------ | ----
|                             |                                                      | Fiscal year ended January 31,       |        |     
|                             |                                                      |                                     | 2003   |     
|Revenues:                    |                                                      | $                                   | %      |     
|                             | License                                              | $                                   | 13,062 | 55% 
|                             | Professional services                                |                                     | 4,018  | 17% 
|                             | Maintenance                                          |                                     | 6,534  | 28% 
|                             |                                                      |                                     | 23,614 | 100%
|                             | Interactive services                                 |                                     | -      | 0%  
|                             | Total revenues                                       | $                                   | 23,614 | 100%
|Expenses:                    |                                                      |                                     |        |     
|                             | Cost of license revenue                              | $                                   | 3,243  | 14% 
|                             | Cost of professional services revenue                |                                     | 5,446  | 23% 
|                             | Cost of maintenance revenue                          |                                     | 1,766  | 7%  
|                             | Cost of interactive services revenue                 |                                     | -      | 0%  
|                             | Sales and marketing                                  |                                     | 20,018 | 85% 
|                             | Research and product development                     |                                     | 11,639 | 49% 
|                             | General and administrative                           |                                     | 8,642  | 37% 
|                             | Amortization of goodwill and other intangible assets |                                     | 242    | 1%  
|                             | Incentive bonus payments to employees                |                                     | (138)  | (1)%
|                             | Restructuring charge                                 |                                     | 2,337  | 10% 
|                             | Reduction in goodwill and other long-lived assets    |                                     | -      | 0%  
|                             | Acquired in-process research and development         |                                     | 126    | 1%  
|                             | Total expenses                                       | $                                   | 53,321 | 226%
|Operating loss               | $                                                    | (29,707)                            |        | $   
|                             | Other income, net                                    |                                     | 636    |     
|Net loss before income taxes | $                                                    | (29,071)                            |        | $   
|                             | Income tax benefit                                   |                                     | -      |     
|Net loss                     | $                                                    | (29,071)                            |        | $   

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# Table of Contents

Revenues

License revenues for the
year ended January 31, 2003 decreased 46% to $13.1 million from $24.2 million in
fiscal year 2002 and decreased 30% in fiscal year 2002 from $34.6 million for
the year ended January 31, 2001. The decrease in software revenues in the
current year as well as in the prior year was due to the general downturn in the
economy, which has resulted in a lengthier sales cycle, particularly in the
commercial marketplace. Further, reduced information technology budgets and
customer cash constraints caused by the difficult business environment have
negatively impacted the business, reducing the average license revenue per deal
from approximately $100 thousand in the year ended January 31, 2002 to
approximately $65 thousand in the year ended January 31, 2003.

Professional services
revenues, which include training and implementation support services, were $4.0
million for the year ended January 31, 2003, representing an increase of 57%
over services revenues of $2.6 million for the year ended January 31, 2002. For
fiscal year 2001, services revenues were $2.7 million. Services revenues
increased during the current year primarily as a result of an increased focus on
the provision of professional services in Europe as well as an increased level
of professional services at several of the Companys existing government
customers. During the year ended January 31, 2003, the number of dedicated
professional services consultants was expanded in Europe to address an increased
demand from our customers. The Company also experienced an improved level of
productivity from its domestic consultants.

Maintenance revenues were
$6.5 million for both of the years ended January 31, 2003 and 2002, and $6.6
million for the year ended January 31, 2001. The maintenance revenues have
remained essentially flat over the last three-year period as a result of the
Companys continued pursuit of maintenance renewals from the existing
installed base of customers.

Revenues from interactive
services in fiscal year 2002 were approximately $1.0 million compared to $7.6
million in fiscal year 2001. In the third quarter of fiscal year 2002, the
Company announced that it was eliminating operations supporting its interactive
services offerings. There were no revenues from interactive services during the
year ended January 31, 2003. The services revenue recorded in fiscal year 2001
represented the completion of one of the contracts assigned in the Combination
and accounted for under the completed contract method of accounting.

Revenues from international
operations are generated primarily by software licenses with various European
commercial and government customers and a well-established European reseller
network. The Companys international sales operation, Convera Technologies
International, Ltd. (CTIL), is headquartered in the United Kingdom,
with offices in Germany and France. International revenues from CTIL declined
12% to $8.0 million in fiscal year 2003 from $9.1 million in fiscal year 2002.
In fiscal year 2002, revenues were down 29% from $12.9 million in fiscal year
2001. The decrease in revenues both this year and last year can again be
generally attributed to the economic downturn.

Revenues derived from
contracts and orders issued by agencies of the U.S. Government were
approximately 28%, 14% and 10% of total revenues for fiscal years 2003, 2002 and
2001, respectively. No customer accounted for more than 10% of revenues in
fiscal years 2003 and 2002, while one customer accounted for 15% of revenues
during fiscal year 2001.

Cost of Revenues

Cost of license revenues
decreased 45% to $3.2 million in fiscal year 2003 from $5.9 million in fiscal
year 2002. In fiscal year 2002, cost of license revenues increased 32% from $4.5
million in fiscal year 2001. As a percentage of license revenues, cost of
license revenues was 25% for both of the years ended January 31, 2003 and 2002,
and 13% for the year ended January 31, 2001. The increase in cost of license
revenues as a percentage of license revenues from fiscal year 2001 to fiscal
year 2002 can be attributed to an increase in the amount of fixed amortization
of prepaid royalties in that period of declining license revenues.

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# Table of Contents

Cost of professional
services revenues decreased 27% to $5.4 million for the year ended January 31,
2003 from $7.5 million in fiscal year 2002. Cost of services revenues were $3.8
million for the year ended January 31, 2001. The reduction in cost of
professional services revenue is mainly attributable to a reduction in the
overall number of employees responsible for the management and delivery of the
implementation services. During the year ended January 31, 2003, the Company
reduced the number of employees in that organization and retained only those
individuals who were directly responsible for the management and delivery of
professional services to the Companys customers, resulting in improved
utilization rates for those employees retained.

Cost of maintenance
decreased 11% to $1.8 million in fiscal year 2003 from $2.0 million in fiscal
year 2002. In fiscal year 2002, cost of maintenance increased 34% from $1.5
million in fiscal year 2001. As a percentage of maintenance revenues, cost of
maintenance was 27%, 30%, and 22% in fiscal years 2003, 2002 and 2001,
respectively. The decrease in cost of maintenance in fiscal year 2003 is
attributable to changes that were made during the latter part of fiscal year
2002 and the beginning of fiscal year 2003 that streamlined the customer support
organization, thus reducing overall costs of maintenance. The increase from
fiscal year 2001 to fiscal year 2002 was the result of an increase in personnel
in that organization that was designed to support interactive services
customers.

Cost of interactive
services represented the personnel and other direct costs incurred in connection
with performing on the Companys interactive service related contracts.
There were no such costs during fiscal year 2003. For the year ended January 31,
2002, the cost of services was approximately $4.0 million compared to $7.8
million in fiscal year 2001. The decrease in costs for each of the periods
presented is a reflection of the change in the Companys business strategy
away from the interactive media services to focus exclusively on the enterprise
search products business.

Operating Expenses

Sales and marketing
expenses decreased 41% to $20.0 million in fiscal year 2003 compared to $33.7
million in fiscal year 2002, representing 85% and 99% of total revenues,
respectively. In fiscal year 2002, sales and marketing expenses increased 49%
from $22.6 million in fiscal year 2001. Sales and marketing expenses were 44% of
total revenues in fiscal year 2001. The decrease in sales and marketing expenses
in fiscal year 2003 was mainly attributable to a reduction in personnel as well
as a decrease in commissions, bad debt expense and marketing program expenses.
Growth in sales and marketing personnel and increased spending on marketing
programs were responsible for the expense increase in fiscal year 2002 as well
as an increase in the provision for doubtful accounts. The number of sales and
marketing personnel decreased to 77 employees at January 31, 2003 from 134 and
89 employees at January 31, 2002 and January 31, 2001, respectively.

Research and product
development costs decreased 48% to $11.6 million in fiscal year 2003 from $22.5
million in fiscal year 2002, representing 49% and 66% of total revenues,
respectively. In fiscal year 2002, research and product development costs
increased 77% from $12.7 million in fiscal year 2001. Research and product
development costs were 25% of revenues in fiscal year 2001. The decrease in
fiscal year 2003 was largely due to a reduction in engineering personnel and
contractors supporting the interactive services initiative exited in the third
quarter of fiscal year 2002 as well as a reduction in a number of engineering
management positions early in fiscal year 2003. At January 31, 2003, the number
of engineering personnel was 94 employees compared to 108 at January 31, 2002.
The increase in fiscal year 2002 was largely due to the addition of a
significant number of engineering personnel in connection with the Combination,
as well as the Companys continued investment to enhance the RetrievalWare
and Screening Room products. The restructuring action taken in the second and
third quarter of fiscal year 2002 reduced the number of engineers by 64
employees. During the current fiscal year, the Company released RetrievalWare
7.0, Screening Room 2.3 and Visual RetrievalWare 5.0. The Company also released
twenty domain-specific semantic network cartridges, which allow customers to
work with vocabularies more relevant to their specific business or industry.

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# Table of Contents

General and administrative
expenses decreased 15% to $8.6 million in fiscal year 2003 from $10.2 million in
fiscal year 2002, representing 37% and 30% of revenues, respectively. In fiscal
year 2002, general and administrative expenses increased 63% from $6.3 million
in fiscal year 2001, which was 12% of total revenues. The decline in general and
administrative expenses in fiscal year 2003 was due to a reduction in personnel.
At January 31, 2003, the number of general and administrative personnel was 31,
compared to 38 at January 31, 2002. The increase in general and administrative
expenses in fiscal year 2002 was partially attributable to increased corporate
expenses such as legal, insurance and accounting fees. There were also
additional general and administrative personnel required to support the
Companys operations during fiscal year 2002. The restructuring action
taken in the third quarter of fiscal year 2002 reduced the number of general and
administrative employees by seven.

Amortization of goodwill and other intangible assets

Amortization of intangible
assets was approximately $0.2 million for the fiscal year ended January 31,
2003. This amount represents amortization of developed technology related to the
Companys acquisition of Semantix Inc., which was accounted for using the
purchase method of accounting. Amortization of goodwill and other intangible
assets was approximately $98.3 million for the year ended January 31, 2002 and
$15.7 million for the year ended January 31, 2001. The majority of these amounts
relate to amortization of goodwill and intangible assets related to the
Combination, which was accounted for using the purchase method. The amounts also
include amortization of the intangible assets acquired from the NBA pursuant to
the contribution agreement. Amortization of goodwill and other intangible assets
related to the Combination was stopped effective October 3, 2001, when the
Company determined that such assets were impaired and wrote down the remaining
unamortized balance to zero (see further explanation below). The amount of
amortization recorded for the year ended January 31, 2001 primarily represented
amortization associated with the Combination from the December 21, 2000 closing
date to the end of the fiscal year.

Incentive bonus payments to employees

In the first quarter of
fiscal year 2003, the Company reversed approximately $0.1 million of previously
provided for incentive bonus payments to be made to certain former Intel
employees as they were no longer employees of the Company as of April 30, 2002.
Specified former Intel employees who became Convera employees and remained
employed through September 30, 2002 by agreement received or are receiving
payments representing the excess of the calculated aggregate gain they would
have realized on forfeited Intel stock options that would have vested between
2002 and 2005, based on the fair value of Intel shares at a fixed date prior to
the closing of the Combination, over the calculated aggregate gain on Convera
stock options as of September 30, 2002. As of January 31, 2003, the incentive
bonus payments have been fully expensed. The Company made payments of $0.4
million related to these incentive bonuses in fiscal year 2003, and the
remaining $0.9 million will be paid out in fiscal year 2004. Incentive bonus
payments to employees were approximately $6.7 million for the year ended January
31, 2002. Included in the $6.7 million incentive bonus payment amount was $5.4
million in bonuses paid to specified former employees of Intel that remained
employed by Convera as of April 30, 2001. These bonus payments were funded
through an additional capital contribution from Intel. The bonus amounts were
contingent upon the former Intel employees continued employment at Convera
through April 30, 2001, and accordingly, the Company recorded this bonus in
operations.

Restructuring charges

During the fiscal year
2003, the Company adopted restructuring plans in its continued effort to align
its sales efforts around key vertical markets and to streamline operations. As a
result of these restructuring plans in the first, second and fourth quarters of
fiscal year 2003, the Company reduced its workforce by 115 employees, including
39 from the sales group, 32 from the engineering group, 23 from the professional
services group, 13 from the marketing group and eight from the general and
administrative group. The Company recorded restructuring charges of
approximately $2.5 million related to employee severance costs for the year
ended January 31, 2003. During the first quarter of fiscal year 2003, the
Company reduced the restructuring reserve by approximately $0.2 million,
reflecting the payment of lower than estimated severance amounts related to
previous restructuring actions. A non-cash charge of approximately $0.2 million
relating to the write-down to their net realizable value of capitalized assets
no longer in use was also recorded during fiscal year 2003.

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# Table of Contents

The Company had previously
adopted restructuring plans in the second and third quarters of fiscal year 2002
in response to the downturn in the economy and in conjunction with the
integration of the IMS divisions operations following the Combination. The
Companys total workforce was reduced by 92 employees worldwide, including
64 from the engineering group, 13 from the professional services group, seven
from the general and administrative group, five from the sales group and two
from the marketing group. As part of these restructuring plans, the Company
eliminated operations supporting the digital content security and interactive
services business units and closed offices in Hillsboro, Oregon and Lafayette,
Colorado. The Company also reduced the number of independent contractors that
were working on behalf of the Company by approximately 40 contractors. The
Company recorded approximately $8.1 million in restructuring charges for the
year ended January 31, 2002. The restructuring charges included approximately
$1.3 million in costs incurred under contractual obligations with no future
economic benefit to the Company, accruals of approximately $1.6 million for
employee severance costs and approximately $5.2 million related to future
facility losses for the offices closed in Hillsboro, Oregon and Lafayette,
Colorado. A non-cash charge of approximately $1.8 million relating to the
write-down of facility improvements to their net realizable value was also
recorded during fiscal year 2002.

The Company paid
approximately $3.0 million and $2.6 million against the restructuring reserve in
the fiscal years ended January 31, 2003 and 2002, respectively. Non-cash charges
represent the write-down of facility improvements included in the estimated
costs of facilities closings. As of January 31, 2003, unpaid amounts of $1.3
million and $1.5 million have been classified as current and long-term accrued
restructuring costs, respectively, in the accompanying consolidated balance
sheet. Remaining cash expenditures relating to employee severance costs and
contractual obligations will be substantially paid during the next three
quarters. The Company expects to settle amounts associated with facility
closings over the remaining term of the related facility leases, which is
through February 2006.

Reduction in goodwill and other long-lived assets

The Company recorded a
charge of $754.4 million in the third quarter of fiscal year 2002 for reduction
of goodwill and other long-lived assets. On September 20, 2001, the Company
announced that it had terminated its agreement with the NBA to provide
interactive content services. The termination of this agreement led to the
Companys decision to exit the interactive media services market and focus
on its enterprise information infrastructure software products. Following the
termination of the NBA contract and the Companys change in focus, the
Company evaluated the recoverability of the intangible and other long-lived
assets including goodwill associated with the Combination and associated with
the NBA agreement. The intangible assets acquired in the Combination, including
developed technology, customer contracts and assembled workforce, were primarily
related to the interactive media services offerings. The assessment of
recoverability was performed pursuant to SFAS No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed
Of.

The unamortized balance of
intangible assets associated with the NBA agreement was approximately $67.3
million. Having no future economic benefit to the Company, this unamortized
balance was written down to zero. As a result of the Companys shift in
focus, there were no future cash flows expected to be generated from the
intangible assets acquired in the Combination; thus, the unamortized balance of
approximately $9.8 million related to these intangible assets was also written
down to zero. Since the assets acquired from Intel were never integrated into
the Companys overall operations, the goodwill associated with the
Combination was evaluated for impairment along with the other intangible assets
acquired from Intel. As a result, the unamortized goodwill balance of $675.9
million was written down to zero. In addition, there was an impairment charge of
approximately $1.4 million to reflect the fair value of certain computer
equipment and furniture to be disposed of in connection with the closing of the
facilities described above.

Acquired in-process research and development

In connection with the
acquisition of Semantix Inc., the Company recorded a charge for acquired
in-process research and development (IPRD) of $0.1 million in the
first quarter of the current fiscal year. In fiscal year 2001, the write-off of
acquired in-process research and development related to the Combination was $0.8
million. The acquired IPRD was immediately expensed since the related technology
had not reached technological feasibility as of the date of the acquisition.

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# Table of Contents

Other Income

Other income decreased to
$0.6 million for fiscal year 2003, compared to $4.2 million in fiscal year 2002.
Other income was $1.4 million in fiscal year 2001. The decrease in fiscal years
2003 was a result of lower interest income largely due to a lower level of
invested funds as well as to lower interest rates in the current fiscal year.

Income Tax Benefit

The income tax benefit of
$4.5 million for the year ended January 31, 2002 represents the reversal of the
net deferred tax liability established as of January 31, 2001, primarily as a
result of the Combination with Intel and the NBA contract.  The Company has net
deferred tax assets of $64.2 million as of January 31, 2003.  Given the
Companys inability to predict sufficient taxable income to realize the
benefits of its net deferred tax asset as of January 31, 2003, the Company
provided a full valuation allowance against such deferred tax asset.

## Liquidity and Capital Resources

The Companys combined
balance of cash, cash equivalents and short-term investments at January 31, 2003
as compared to January 31, 2002 is summarized below (in thousands).

|                          |       |        | January 31, |        | January 31, |          |         
|------------------------- | ----- | ------ | ----------- | ------ | ----------- | -------- | --------
|                          |       |        | 2003        |        | 2002        |          | Change  
|Cash and cash equivalents | $     | 10,318 | $           | 17,628 | $           | (7,310) 
|Investments               |       | 20,148 |             | 40,087 |             | (19,939)
|                          | Total | $      | 30,466      | $      | 57,715      | $        | (27,249)

As of January 31, 2003, the
Companys balances of cash, cash equivalents and short-term investments
were $30.5 million. The Company believes that its current balance of cash, cash
equivalents, investments and its funds generated from operations, if any, will
be sufficient to fund the Companys current projected cash needs for the
foreseeable future. Prior to fiscal year 2001, the Company had primarily used
cash provided by sales of its common stock to finance its operations. If the
actions taken by management are not effective in achieving profitable operating
results, the Company may be required to pursue additional external sources of
financing in the future to support its operations and capital requirements.
There can be no assurances that external sources of financing will be available
if required, or that such financing will be available on terms acceptable to the
Company.

The Company has the
following contractual obligations associated with its lease commitments and
other contractual obligations:

|Contractual Obligations       | Payments Due By Period (in thousands)
|----------------------------- | -------------------------------------
|                              |                                      
|Operating leases              | $                                    
|Other contractual obligations |                                      

The number of days sales
outstanding (DSO) increased to 100 days at January 31, 2003 from 97
days at January 31, 2002. Management believes that the allowance for doubtful
accounts of $1.6 million at January 31, 2003 is adequate.

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# Table of Contents

Operating Activities

In fiscal year 2003, the
Companys operating activities used $26.2 million compared to $44.6 million
in fiscal year 2002. The fiscal year 2003 net loss of $29.1 million was offset
by non-cash charges totaling $3.5 million, consisting primarily of depreciation
of $2.3 million; restructuring charges, net of cash paid, of $0.4 million; bad
debt expense of $0.4 million; amortization of goodwill and other intangibles of
$0.2 million and acquired in-process research and development expense of $0.1
million. Cash was also provided by a reduction in accounts receivable of $1.8
million and a reduction in prepaid expenses and other of $2.3 million. A
decrease in accounts payable and accrued expenses together with a decrease in
deferred revenues used cash of $3.6 million. A decrease in the restructuring
reserve also used cash of $1.1 million. In fiscal year 2002, the net loss of
$910.5 million included non-cash charges totaling $861.2 million, consisting
primarily of $754.4 million from the reduction of goodwill and other long-lived
assets. Non-cash charges included amortization of $98.3 million; restructuring
charges, net of cash paid, of $1.8 million; bad debt expense of $3.4 million and
depreciation of $2.3 million. Cash was also provided by a reduction in accounts
receivable of $4.3 million, an increase in the restructuring reserve of $3.8
million and an increase in accounts payable and accrued expenses of $3.2
million. A decrease in deferred revenues together with an increase in prepaid
expenses and other used cash of $1.6 million. The Companys operating
activities used cash of $7.8 million in fiscal year 2001. The net loss of $22.8
million included non-cash charges of $18.6 million, including $15.7 million of
amortization of goodwill and other intangibles, $0.8 million of acquired
in-process research and development, $1.3 million of depreciation, and $0.8
million in bad debt expense. Increases in accounts receivable and prepaid
expenses used $5.1 million and $1.8 million, respectively, while increases in
accounts payable, accrued expenses and deferred revenues together contributed
$3.3 million.

Investing Activities

Cash flows from investing
activities provided the Company $19.4 million in fiscal year 2003. Net cash
provided from the maturity of U.S. Treasury bills provided cash of $20.0
million, while purchases of equipment and leasehold improvements used cash of
$0.7 million. Cash acquired as a result of the purchase of Semantix Inc. was
approximately $0.4 million, netted against direct acquisition costs of
approximately $0.2 million. In fiscal year 2002, investing activities provided
the Company $71.7 million. Net cash provided from the maturity of U.S. Treasury
bills provided cash of $78.7 million, while purchases of equipment and leasehold
improvements used cash of $5.6 million. The Company also used cash of $1.4
million for direct acquisition costs in connection with the Combination.
Investing activities contributed $27.5 million in fiscal year 2001. The Company
received cash of $150.0 million in connection with the Combination. Shortly
after consummation of the Combination, the Company purchased short-term
investments, in the form of United States Treasury Bills, totaling approximately
$118.6 million. Additionally, costs incurred in relation to the Combination used
$2.0 million. Equipment and leasehold improvement purchases used $1.8 million.

Financing Activities

Financing activities
provided approximately $0.3 million in fiscal year 2003, mainly from the
issuance of stock under the employee stock purchase plan. In fiscal year 2002,
the Companys financing activities used $46.6 million. The repurchase of
the Companys common stock from Intel and the NBA used $53.0 million. A
capital contribution by Intel in the amount of approximately $5.4 million was
used to fund bonus payments to specified former Intel employees that remained
employed by Convera as of April 30, 2001. Proceeds from the issuance of stock
under the employee stock purchase plan and the exercise of employee stock
options provided cash of $0.9 million during fiscal year 2002. In fiscal year
2001, financing activities provided $6.1 million. Approximately $5.7 million
represented proceeds from the issuance of common stock upon the exercise of
outstanding stock options, while approximately $0.4 million represented
purchases of shares of the Company through its employee stock purchase plan.

26

---

# Table of Contents

## Other Factors

EURO Conversion

On January 1, 1999, the
exchange rates of eleven countries (Germany, France, the Netherlands, Austria,
Italy, Spain, Finland, Ireland, Belgium, Portugal and Luxembourg) were fixed
amongst one another and became the currencies of the EURO. The EURO currency was
introduced on January 1, 2002. The EURO conversion has not had a material impact
on the Companys operations or financial results.

Inflation

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

Item 7A.  
Quantitative and Qualitative Disclosures about Market Risk

The Companys market
risk is principally confined to changes in foreign currency exchange rates and
potentially adverse effects of differing tax structures. International revenues
from CTIL, the Companys foreign sales subsidiary located in the United
Kingdom, along with entities established in Paris, France and Munich, Germany,
were approximately 34% of total revenues in fiscal year 2003. International
sales are made mostly from the Companys foreign subsidiary and are
typically denominated in British pounds or EUROs. As of January 31, 2003,
approximately 14% and 15% of total consolidated accounts receivable were
denominated in British pounds and EUROs, respectively. The majority of these
receivables are due within 90 days of the end of fiscal year 2003, and all
receivables are due within one year. Additionally, the Company is exposed to
potential foreign currency gains or losses resulting from intercompany accounts
that are not of a long-term nature. The Company is 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, 2003,
approximately 2% and 6% of the Companys cash and cash equivalents were
denominated in British pounds and EUROs, respectively. Cash equivalents consist
of funds deposited in money market accounts with original maturities of three
months or less. The Companys short-term investments consist primarily of
U.S. Government treasury bills, with maturity dates ranging from three to six
months. Given the relatively short maturity periods of cash equivalents and
short-term investments, the cost of these investments approximates their fair
values and the Companys exposure to fluctuations in interest rates is
limited.

Item 8.  
Financial Statements and Supplementary Data

Financial statements and
supplementary data of the Company 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.

27

---

# Table of Contents

# PART III

Item 10.  
Directors and Executive Officers of the Registrant

Information regarding
directors and executive officers of the Company will be included in the
Companys definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on June 25, 2003 and is incorporated in this report by reference.

Item 11.  
Executive Compensation

Information regarding
executive compensation will be included in the Companys definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on June 25, 2003 and
is incorporated in this report by reference.

Item 12.  
Security Ownership of Certain Beneficial Owners and Management

Information regarding
security ownership of certain beneficial owners and management will be included
in the Companys definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on June 25, 2003 and is incorporated in this report by
reference.

Item 13.  
Certain Relationships and Related Transactions

Information concerning
certain relationships and related transactions will be included in the
Companys definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on June 25, 2003 and is incorporated in this report by reference.

Item 14.  
Controls and Procedures

Within the 90-day period
prior to the filing of this Annual Report on Form 10-K, the Company, under the
supervision and with the participation of its management, including the Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of the Companys disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities
Exchange Act of 1934 (the Exchange Act). Based on that evaluation,
the Chief Executive Officer and the Chief Financial Officer concluded that the
Companys disclosure controls and procedures are effective in making known
to them, on a timely basis, material information required to be disclosed in the
Companys reports filed or submitted under the Exchange Act. There have
been no significant changes in the Companys internal controls or in other
factors that could significantly affect the internal controls subsequent to the
date the Company completed its evaluation.

28

---

# Table of Contents

# PART IV

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

|(a) | Documents filed as part of Form 10-K                                                                         
|--- | -------------------------------------------------------------------------------------------------------------
|    | 1                                                                                                            
|    |                                                                                                              
|    |                                                                                                              
|    | 2                                                                                                            
|    |                                                                                                              
|    | 3                                                                                                            
|    |                                                                                                              
|(b) | Reports on Form 8-K                                                                                          
|    | The Company did not
file any report on Form 8-K during the last quarter of the period covered by this Report.

29

---

# Table of Contents

|Exhibit Index
|-------------
|Exhibit No.  
|3.1          
|3.2          
|10.1         
|10.2         
|10.3         
|10.5         
|10.6         
|10.7         
|10.8         
|10.9         
|10.10        
|10.11        
|10.12        
|10.13        
|10.14        
|10.16        
|10.17        
|10.18        

30

---

# Table of Contents

|Exhibit Index
|-------------
|Exhibit No.  
|10.19        
|21.01        
|23.01        
|99.1         
|99.2         

31

---

# 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.
|                                                                                                                                                                                                                
|                                                                                                                                                                                                                
|Date: April 29, 2003                                                                                                                                                                                            

|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                                                                                                                                                                                                    
|/s/Patrick C. CondoPatrick C. Condo                                                                                                                                                                          
|/s/Christopher M. MannChristopher M. Mann                                                                                                                                                                    
|/s/Ronald J. WhittierRonald J. Whittier                                                                                                                                                                      
|/s/Herbert A. AllenHerbert A. Allen                                                                                                                                                                          
|/s/Herbert A. Allen, IIIHerbert A. Allen, III                                                                                                                                                                
|/s/Stephen D. GreenbergStephen D. Greenberg                                                                                                                                                                  
|/s/Eli S. JacobsEli S. Jacobs                                                                                                                                                                                
|/s/Donald R. KeoughDonald R. Keough                                                                                                                                                                          
|/s/William S. ReedWilliam S. Reed                                                                                                                                                                            
|Carl J. Rickertson                                                                                                                                                                                           

32

---

# Table of Contents

|                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT OF 1934RULES 13A-14 AND 15D-14                                                                                                                                                                                                                                                                                                     
|In
connection with the Annual Report of Convera Corporation (the
Company) on Form 10-K for the period ended January 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the
Report), I, Patrick C. Condo, President and Chief Executive Officer
of the Company, certify, pursuant to Securities Exchange Act of 1934 Rules
13a-14 and 15d-14, that:
|(1)                                                                                                                                                                                                                                                                                                                                                                                   | I have reviewed this annual report on Form 10-K
of Convera Corporation;                                                                                                                                                                                                                                                                                                                                          
|(2)                                                                                                                                                                                                                                                                                                                                                                                   | Based on my knowledge,  this annual  report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the  circumstances  under
which such  statements  were made,  not  misleading  with respect to the period  covered by this annual report;                                                                               
|(3)                                                                                                                                                                                                                                                                                                                                                                                   | Based on my  knowledge,  the  financial  statements,  and other  financial  information  included  in this
         annual report,  fairly present in all material respects the financial condition,  results of operations
         and cash flows of the registrant as of, and for, the periods presented in this annual report;                                                                               
|(4)                                                                                                                                                                                                                                                                                                                                                                                   | The  registrant's  other  certifying  officers and I are  responsible  for  establishing  and  maintaining
         disclosure  controls  and  procedures  (as  defined  in  Exchange  Act Rules  13a-14 and  15d-14)  for the
         registrant and we have:                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                      | a)                                                                                                                                                                                                                                                                                                                                                                                                                | designed such  disclosure  controls and  procedures to ensure that material  information  relating to
              the registrant,  including its consolidated subsidiaries,  is made known to us by others within those
              entities, particularly during the period in which this annual report is being prepared;        
|                                                                                                                                                                                                                                                                                                                                                                                      | b)                                                                                                                                                                                                                                                                                                                                                                                                                | evaluated the  effectiveness  of the  registrant's  disclosure  controls and  procedures as of a date
              within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                      | c)                                                                                                                                                                                                                                                                                                                                                                                                                | presented  in this  annual  report  our  conclusions  about the  effectiveness  of the  disclosure
              controls and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                            
|(5)                                                                                                                                                                                                                                                                                                                                                                                   | The registrant's other certifying officers and I have disclosed,  based on our most recent evaluation,  to
         the  registrant's  auditors  and the audit  committee  of  registrant's  board of  directors  (or  persons
         performing the equivalent function):                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                      | a)                                                                                                                                                                                                                                                                                                                                                                                                                | all  significant  deficiencies  in the design or  operation  of internal  controls  which could  adversely
              affect the  registrant's  ability to record,  process,  summarize and report  financial data and have
              identified for the registrant's auditors any material weaknesses in internal controls; and
|                                                                                                                                                                                                                                                                                                                                                                                      | b)                                                                                                                                                                                                                                                                                                                                                                                                                | any fraud,  whether or not material,  that involves  management or other  employees who have a significant
              role in the registrant's internal controls; and                                                                                                                                                               
|(6)                                                                                                                                                                                                                                                                                                                                                                                   | The registrant's other certifying officers and I have indicated in this annual report whether or not
         there were significant changes in internal controls or in other factors that could significantly affect
         internal controls subsequent to the date of our most recent evaluation, including any corrective actions
         with regard to significant deficiencies and material weaknesses.
|By: /s/ Patrick C. CondoPatrick C. CondoPresident and Chief Executive OfficerApril 30, 2003                                                                                                                                                                                                                                                                                          

33

---

# Table of Contents

|                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT OF 1934RULES 13A-14 AND 15D-14                                                                                                                                                                                                                                                                                          
|In
connection with the Annual Report of Convera Corporation (the
Company) on Form 10-K for the period ended January 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the
Report), I, Christopher M. Mann, Chief Financial Officer
of the Company, certify, pursuant to Securities Exchange Act of 1934 Rules
13a-14 and 15d-14, that:
|(1)                                                                                                                                                                                                                                                                                                                                                                        | I have reviewed this annual report on Form 10-K
of Convera Corporation;                                                                                                                                                                                                                                                                                                                                          
|(2)                                                                                                                                                                                                                                                                                                                                                                        | Based on my knowledge,  this annual  report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the  circumstances  under
which such  statements  were made,  not  misleading  with respect to the period  covered by this annual report;                                                                               
|(3)                                                                                                                                                                                                                                                                                                                                                                        | Based on my  knowledge,  the  financial  statements,  and other  financial  information  included  in this
         annual report,  fairly present in all material respects the financial condition,  results of operations
         and cash flows of the registrant as of, and for, the periods presented in this annual report;                                                                               
|(4)                                                                                                                                                                                                                                                                                                                                                                        | The  registrant's  other  certifying  officers and I are  responsible  for  establishing  and  maintaining
         disclosure  controls  and  procedures  (as  defined  in  Exchange  Act Rules  13a-14 and  15d-14)  for the
         registrant and we have:                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                           | a)                                                                                                                                                                                                                                                                                                                                                                                                                | designed such  disclosure  controls and  procedures to ensure that material  information  relating to
              the registrant,  including its consolidated subsidiaries,  is made known to us by others within those
              entities, particularly during the period in which this annual report is being prepared;        
|                                                                                                                                                                                                                                                                                                                                                                           | b)                                                                                                                                                                                                                                                                                                                                                                                                                | evaluated the  effectiveness  of the  registrant's  disclosure  controls and  procedures as of a date
              within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                           | c)                                                                                                                                                                                                                                                                                                                                                                                                                | presented  in this  annual  report  our  conclusions  about the  effectiveness  of the  disclosure
              controls and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                            
|(5)                                                                                                                                                                                                                                                                                                                                                                        | The registrant's other certifying officers and I have disclosed,  based on our most recent evaluation,  to
         the  registrant's  auditors  and the audit  committee  of  registrant's  board of  directors  (or  persons
         performing the equivalent function):                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                           | a)                                                                                                                                                                                                                                                                                                                                                                                                                | all  significant  deficiencies  in the design or  operation  of internal  controls  which could  adversely
              affect the  registrant's  ability to record,  process,  summarize and report  financial data and have
              identified for the registrant's auditors any material weaknesses in internal controls; and
|                                                                                                                                                                                                                                                                                                                                                                           | b)                                                                                                                                                                                                                                                                                                                                                                                                                | any fraud,  whether or not material,  that involves  management or other  employees who have a significant
              role in the registrant's internal controls; and                                                                                                                                                               
|(6)                                                                                                                                                                                                                                                                                                                                                                        | The registrant's other certifying officers and I have indicated in this annual report whether or not
         there were significant changes in internal controls or in other factors that could significantly affect
         internal controls subsequent to the date of our most recent evaluation, including any corrective actions
         with regard to significant deficiencies and material weaknesses.
|By: /s/ Christopher M. MannChristopher M. MannChief Financial OfficerApril 30, 2003                                                                                                                                                                                                                                                                                       

34

---

|Index to Consolidated Financial Statements                                                                                     | Page
|------------------------------------------------------------------------------------------------------------------------------ | ----
|Report of Independent
Auditors                                                                                                 | F-1 
|Consolidated Balance Sheets       
As of January 31, 2003 and 2002                                                             | F-2 
|Consolidated
Statements of Operations and Comprehensive Loss       
For the fiscal years ended January 31, 2003, 2002 and 2001 | F-3 
|Consolidated Statements of Shareholders' Equity       
For the fiscal years ended January 31, 2003, 2002 and 2001              | F-4 
|Consolidated Statements of Cash Flows       
For the fiscal years ended January 31, 2003, 2002 and 2001                        | F-5 
|Notes to Consolidated Financial Statements                                                                                     | F-6 

35

---

|REPORT OF
INDEPENDENT AUDITORS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Board of Directors and ShareholdersConvera Corporation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|We have audited the
accompanying consolidated balance sheets of Convera Corporation as of January
31, 2003 and January 31, 2002, and the related consolidated statements of
operations and comprehensive loss, shareholders equity, and cash flows for
each of the three years in the period ended January 31, 2003. These consolidated
financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.                                                                                                                                                                        
|We conducted our audits in
accordance with auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
|In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Convera Corporation as
of January 31, 2003 and January 31, 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 2003, in conformity with accounting principles generally accepted in
the United States.                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|McLean, VirginiaMarch 15, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-1

---

|CONVERA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS(in thousands, except share data)         
|----------------------------------------------------------------------------------------------------------
|                                                                                                          
|ASSETS                                                                                                    
|Current Assets:                                                                                           
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Equipment and leasehold improvements, net of
accumulated depreciation of $10,843 and $10,493, respectively
|Other assets                                                                                              
|Goodwill and other intangible assets                                                                      
|                                                                                                          
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                      
|Current Liabilities:                                                                                      
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Restructuring reserve, net of current portion                                                             
|                                                                                                          
|Commitments and Contingencies                                                                             
|Shareholders' Equity:                                                                                     
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|See accompanying notes.                                                                                   

F-2

---

|CONVERA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(in thousands, except share data)
|----------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                  
|                                                                                                                                  
|Revenues:                                                                                                                         
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Cost of revenues:                                                                                                                 
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Gross margin:                                                                                                                     
|Operating expenses:                                                                                                               
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Operating loss                                                                                                                    
|Other income, net                                                                                                                 
|Net loss before income taxes                                                                                                      
|Income tax benefit                                                                                                                
|Net loss                                                                                                                          
|Dividends on preferred stock                                                                                                      
|Net loss applicable to common shareholders                                                                                        
|Basic and diluted net loss per common share                                                                                       
|Weighted-average number of common shares
outstanding - basic and diluted                                                          
|Comprehensive loss:                                                                                                               
|                                                                                                                                  
|                                                                                                                                  
|Comprehensive loss                                                                                                                
|See accompanying notes.                                                                                                           

F-3

---

|CONVERA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(in thousands, except share data)
|---------------------------------------------------------------------------------------------------------------------
|                                                                                                                     
|                                                                                                                     
|Balance, January 31, 2000                                                                                            
|Issuance of common stock upon exercise of options                                                                    
|Issuance of common stock for Employee Stock Purchase Plan                                                            
|Conversion of preferred stock                                                                                        
|Issuance of common stock related to IMS merger                                                                       
|Issuance of common stock to NBA                                                                                      
|Tax benefit related to common options                                                                                
|Foreign currency translation adjustment                                                                              
|Net loss                                                                                                             
|Balance, January 31, 2001                                                                                            
|Issuance of common stock upon exercise of options                                                                    
|Issuance of common stock for Employee Stock Purchase Plan                                                            
|Capital contribution from Intel                                                                                      
|Purchase and retirement of common stock                                                                              
|Foreign currency translation adjustment                                                                              
|Net loss                                                                                                             
|Balance, January 31, 2002                                                                                            
|Stock adjustment for previously retired treasury stock                                                               
|Issuance of common stock upon exercise of options                                                                    
|Issuance of common stock for Employee Stock Purchase Plan                                                            
|Issuance of common stock for Employee Stock Purchase Plan                                                            
|Issuance of common stock related to Semantix merger                                                                  
|Foreign currency translation adjustment                                                                              
|Net loss                                                                                                             
|Balance, January 31, 2003                                                                                            
|See accompanying notes.                                                                                              

F-4

---

|CONVERA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)
|----------------------------------------------------------------------------------------
|                                                                                        
|                                                                                        
|Cash Flows from Operating Activities:                                                   
|Net loss                                                                                
|Adjustments to reconcile net loss to net cash used in operating activities:             
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Changes in operating assets and liabilities,net of effects from acquisition:            
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Cash Flows from Investing Activities:                                                   
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Cash Flows from Financing Activities:                                                   
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Effect of Exchange Rate Changes on Cash                                                 
|Net Increase (Decrease) in Cash and Cash Equivalents                                    
|Cash and Cash Equivalents, beginning of year                                            
|Cash and Cash Equivalents, end of year                                                  
|See accompanying notes.                                                                 

F-5

---

|CONVERA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except share and per share data)
|--------------------------------------------------------------------------------------------------------------------------------------

## (1)     THE COMPANY

## Operations and
Organization

Convera Corporation
(Convera or the Company) 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). The Combination was accounted for using the purchase
method of accounting.

As of January 31, 2003 and
2002, Allen Holding, Inc., together with Allen & Company Incorporated and
Herbert A. Allen (collectively Allen & Company) beneficially
owns more than 50% of the voting power of Convera.

Convera principally earns
revenues from the licensing of its software products and the provision of
services in deployment of the Companys technology to commercial businesses
and government agencies throughout North America, Europe and other parts of the
world. The Company licenses its software to end users directly and also
distributes its software products through license agreements with system
integrators, original equipment manufacturers, value-added resellers,
application service providers and other strategic partners. Revenues are
generated from software licenses with customers and from the related sale of
product maintenance, training and implementation support services.

The Companys
operations are subject to certain risks and uncertainties including, but not
limited to: the dependence upon the timing of the closing on sales of software
licenses; the effect of general economic conditions on demand for the
Companys products and services, including reduced corporate IT spending
and lengthier sales cycles; actual and potential competition by entities with
greater financial resources, experience and market presence than the Company;
rapid technological changes; the success of the Companys product marketing
and product distribution strategies; changes in the nature or timing of the
product development plan as determined by the Company; the risks associated with
acquisitions and international expansion; the need to manage growth; the need to
retain key personnel and protect intellectual property; possible disruption in
commercial activities caused by terrorist activity and armed conflict, such as
changes in logistics and security arrangements; and the availability of
additional capital financing on terms acceptable to the Company.

## (2)     SIGNIFICANT ACCOUNTING POLICIES

## 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 generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

## Revenue
Recognition

The Company recognizes
revenue in accordance with American Institute of Certified Public
Accountants Statement of Position 97-2, Software Revenue Recognition
(SOP 97-2), as amended by Statement of Position 98-9, Software
Revenue Recognition, with respect to certain transactions.

F-6

---

Revenue from the sale of
software licenses is recognized upon shipment of product, provided that the fee
is fixed and determinable, persuasive evidence of an arrangement exists and
collection of the resulting receivable is considered probable. Historically, the
Company has not experienced significant returns or exchanges of its products.

Revenue from training and
systems implementation services is recognized when the services are performed.
Such services are sold as part of a bundled software license agreement as well
as separately to customers who have previously purchased software licenses. When
training or systems implementation services that are not essential to the
functionality of the software are sold as part of a bundled license agreement,
the fair value of these services, based on the price charged for the services
when sold separately, is deferred and recognized when the services are
performed.

Customization work is
sometimes required to ensure that the Companys software functionality
meets the requirements of its customers. Under these circumstances, the
Companys revenues are derived from fixed price contracts and revenue is
recognized using the percentage of completion method based on the relationship
of actual costs incurred to total costs estimated over the duration of the
contract. Estimated losses on such contracts are charged against earnings in the
period such losses are identified.

Maintenance revenue related
to customer support agreements is deferred and recognized ratably over the term
of the respective agreements. Customer support agreements generally include bug
fixes, telephone support and product release upgrades on a when and if available
basis. When the Company provides a software license and the related customer
support arrangement for one bundled price, the fair value of the customer
support, based on the price charged for that element when sold separately, is
deferred and recognized ratably over the term of the respective agreement.

The Company incurs shipping
and handling costs which are recorded in cost of license revenues.

## Research and
Development Costs

Software development costs
are included in research and development and are expensed as incurred. Statement
of Financial Accounting Standards (SFAS) No. 86, Accounting
for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed
requires the capitalization of certain software development costs once
technological feasibility is established, which for the Company generally occurs
upon completion of a working model. Capitalization ceases when the products are
available for general release to customers, at which time amortization of the
capitalized costs begins on a straight-line basis over the estimated product
life, or on the ratio of current revenues to total projected product revenues,
whichever is greater. To date, the period between achieving technological
feasibility and the general availability of such software has been short, and
software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any software
development costs.

## Advertising

Advertising costs are
expensed as incurred. The Company incurred approximately $20, $195 and $347 in
advertising costs for the years ended January 31, 2003, 2002 and 2001,
respectively.

## Stock Based
Compensation

SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123),
allows companies to account for stock-based compensation either under the
provisions of SFAS No. 123 or under the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25), as amended by FASB Interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation (an interpretation of APB
Opinion No. 25). The Company has elected to account for its stock-based
compensation in accordance with the provisions of APB 25. No stock-based
employee compensation cost is reflected in net income, as all options granted
under the Companys stock option plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.

F-7

---

Had compensation cost for
the Companys stock-based compensation plans been determined based on the
fair value at the grant dates for awards made under the respective plans made in
fiscal years 2003, 2002 and 2001 consistent with the method of SFAS No. 123, the
Companys net loss and basic and diluted net loss per common share would
have been increased to the pro forma amounts indicated below.

|                                                         |   |        | 2003 |         | 2002 |        | 2001
|-------------------------------------------------------- | - | ------ | ---- | ------- | ---- | ------ | ----
|Net loss, as reported                                    | $ | 29,071 | $    | 910,509 | $    | 22,782
|Pro forma compensation expense                           |   | 8,246  |      | 10,327  |      | 10,798
|Pro forma net loss                                       | $ | 37,317 | $    | 920,836 | $    | 33,580
|Basic and diluted net loss per common share, as reported | $ | (1.01) | $    | (20.08) | $    | (1.22)
|Basic and diluted net loss per common share, pro forma   | $ | (1.29) | $    | (20.31) | $    | (1.79)

The pro forma net loss
after applying the provisions of SFAS No. 123 is not necessarily representative
of the effects on reported net loss for future years due to, among other things,
vesting period of the stock options and the fair value of additional options in
future years.

The fair value of each
option was estimated on the date of grant using the Black-Scholes option-pricing
model. The following table shows the assumptions used for the grants that
occurred in each fiscal year.

|                         | 2003         | 2002         | 2001        
|------------------------ | ------------ | ------------ | ------------
|Expected volatility      | 95%          | 90%          | 80%         
|Risk free interest rates | 3.0% to 4.6% | 4.2% to 4.8% | 5.2% to 6.5%
|Dividend yield           | None         | None         | None        
|Expected lives           | 5 years      | 5 years      | 5 years     

The weighted average fair
value per share for stock option grants that were awarded in fiscal years 2003,
2002 and 2001 was $2.69, $3.38 and $10.98, respectively. See Note 13 for
additional information related to the Companys stock compensation plans.

## Net Loss Per
Common Share

The Company follows 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
equivalent shares and unexercised stock options as the computation would be
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 in Note 12.

## Translation of
Foreign Financial Statements

The functional currency of the
Companys foreign subsidiaries is their local currency. Accordingly, assets
and liabilities of the Companys foreign subsidiary are translated into
U.S. dollars at exchange rates in effect at the balance sheet date. Income and
expense items are translated at average rates for the period. Foreign currency
translation adjustments are accumulated in a separate component of
shareholders equity. Foreign currency transaction gains or losses are
recorded in operating expenses and were not significant for the years ended
January 31, 2003, 2002 and 2001.

## Financial
Instruments

The carrying value of the
Companys financial instruments, including cash and cash equivalents,
short-term investments, accounts receivable, accounts payable and accrued
expenses, approximates fair value.

F-8

---

## Concentrations
of Credit Risk

Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
equivalents, short-term investments and accounts receivable. Management believes
that the Companys investment policy limits the Companys exposure to
concentrations of credit risk. The Company sells its products primarily to major
corporations, including distributors that serve a wide variety of U.S. and
foreign markets, and to government agencies. The Company extends credit to its
corporate customers based on an evaluation of the customers financial
condition, generally without requiring a deposit or collateral. Exposure to
losses on receivables is principally dependent on each customers financial
condition. The Company monitors its exposure for credit losses and maintains an
allowance for anticipated losses.

## Valuation
Accounts

|                             |                               |                                 |   | Balance at Beginning of Period |   | Charged to Costs and Expenses |   | Uncollectible Accounts Written Off, Net of Recoveries |   | Balance at End of Period
|---------------------------- | ----------------------------- | ------------------------------- | - | ------------------------------ | - | ----------------------------- | - | ----------------------------------------------------- | - | ------------------------
|Year Ended January 31, 2003: |                               |                                 |   |                                |   |                               |   |                                                      
|                             | Deducted from asset accounts: |                                 |   |                                |   |                               |   |                                                       |  
|                             |                               | Allowance for doubtful accounts | $ | 2,115                          | $ | 400                           | $ | (946)                                                 | $ | 1,569                   
|Year Ended January 31, 2002: |                               |                                 |   |                                |   |                               |   |                                                      
|                             | Deducted from asset accounts: |                                 |   |                                |   |                               |   |                                                       |  
|                             |                               | Allowance for doubtful accounts | $ | 1,231                          | $ | 3,420                         | $ | (2,536)                                               | $ | 2,115                   
|Year Ended January 31, 2001: |                               |                                 |   |                                |   |                               |   |                                                      
|                             | Deducted from asset accounts: |                                 |   |                                |   |                               |   |                                                       |  
|                             |                               | Allowance for doubtful accounts | $ | 831                            | $ | 828                           | $ | (428)                                                 | $ | 1,231                   

## Cash and Cash
Equivalents

The Company considers 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. Consequently, the carrying amount of cash and cash equivalents
approximates fair value. Substantially all cash and cash equivalents are on
deposit with two major financial institutions.

## Short Term
Investments

Highly liquid investments
with maturities of one year or less at the time of purchase are classified as
short-term investments. Short-term investments consist primarily of U.S.
Government treasury bills and are carried at amortized cost. The Company also
has a certificate of deposit for $71, which is pledged to collateralize a letter
of credit required for a leased facility.

## Income Taxes

Deferred taxes are provided
utilizing the liability method, whereby deferred tax assets are recognized for
deductible temporary differences and operating loss and tax credit carryforwards
and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities for financial reporting purposes and the amounts for income tax
purposes at the tax rates expected to be in effect when the differences reverse.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
The Company provided a full valuation allowance against its net deferred tax
assets as of January 31, 2003.

F-9

---

## 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.

## Goodwill and
Other Intangible Assets

Converas acquisitions
of other companies typically result in the acquisition of certain intangible
assets and goodwill. During the year ended January 31, 2003, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. Any goodwill resulting from
such acquisitions is associated with the Companys corporate reporting
unit, since the Company does not have multiple reporting units. The impairment
of goodwill is assessed on an annual basis or whenever changes in circumstances
indicate that the fair value of the Company is less than the carrying value.
This assessment is performed by comparing the market value of the Companys
outstanding common stock with the carrying amount of the Companys net
assets, including goodwill. If the market value exceeds the carrying amount of
the Companys net assets, impairment of Goodwill does not exist. If the
market value is less than the carrying amount of the Companys net assets,
the Company will perform further analysis and may be required to record an
impairment. The Company continues to amortize intangible assets that are deemed
to have a finite useful life, and amortization is being charged to income on a
straight-line basis over the periods estimated to benefit. Developed technology
recorded as a result of Semantix acquisition is being amortized on a
straight-line basis over five years.

## Impairment of
Long-Lived Assets

The Company evaluates all of
its long-lived assets, including intangible assets other than goodwill, 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
long-lived assets and intangible assets other than goodwill 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 the
Companys 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 year ended
January 31, 2002, prior to the adoption of SFAS No. 142 and SFAS No. 144,
Convera determined that the goodwill and certain intangible assets associated
primarily with the Combination were impaired, and Convera recorded a charge of
$754,424 related to that impairment. See Note 4. The Company believes there are
no other intangible asset impairments in fiscal year 2003 and there were no
asset write-downs in fiscal year 2003.

## Reclassifications

Certain amounts presented
in the prior years financial statements have been reclassified to conform
with the fiscal year 2003 presentation.

## Recent
Pronouncements

In July 2002, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) 146, Accounting for Costs Associated with Exit or
Disposal Activities.  SFAS No. 146 requires that a liability for the
costs associated with exit or disposal activities be recognized and measured
initially at fair value when the liability is incurred rather than the date the
Company commits to a disposal plan.  SFAS No. 146 is effective for all exit
or disposal activities initiated after December 31, 2002. The principal effect
of applying FAS No. 146, which was not significant, to the Companys
January 31, 2003 financial statements, will be on the timing of cost recognition
of any such disposal activities.

F-10

---

In December 2002, the FASB
issued SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair-value for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
SFAS No. 148 is effective for fiscal years ending after December 15,
2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after
December 15, 2002.

## (3)     ACQUISITIONS

On March 7, 2002, the
Company acquired 100% of the outstanding capital stock of Semantix Inc., a
private Canadian software company specializing in cross-lingual processing and
computational linguistics technology, for 900,000 shares of restricted Convera
common stock and approximately $24 in cash. Semantix Inc. became a wholly owned
subsidiary of Convera under the name Convera Canada, Inc. This acquisition
broadened the linguistic capabilities of the Convera RetrievalWare® search
and retrieval technology, specifically in the areas of cross-lingual search and
the continued development of language capabilities to support the needs of
specialized vertical markets. It also enabled the Company to derive greater
revenues through the direct sales of language modules to new and existing
customers.

This acquisition has been
accounted for using the purchase method of accounting, and the results of
operations of Convera Canada, Inc. have been included in the Companys
consolidated statements of operations from the date of acquisition. The
purchase price was determined to be approximately $4,403, which
included liabilities assumed of approximately $748 and approximately $224 of
transaction and direct acquisition costs. The shares issued to Semantix Inc. as
consideration were valued based on the average market price of Convera stock
from March 5, 2002 through March 11, 2002, or two business days before and after
the date the terms of the acquisition were agreed to and announced, which was
March 7, 2002. The purchase price was allocated to the assets
acquired based on their estimated fair values on the acquisition date as follows
(in thousands):

| | Tangible assets acquired                     | $ | 663  
| | -------------------------------------------- | - | -----
| | Developed technology                         |   | 1,346
| | Acquired in-process research and development |   | 126  
| | Goodwill                                     |   | 2,268
| | Total purchase price                         | $ | 4,403

Developed technology is
being amortized on a straight-line basis over five years. To determine the fair
market value of the developed technology, the Company used the relief from
royalty method, which uses the amount of royalty expense the Company would have
incurred if the developed technology was licensed in an arms length transaction
instead of purchased. The acquired in-process research and development
(IPRD) of $126 was expensed immediately since the related technology
had not reached technological feasibility as of the date of the acquisition. To
determine the value of the IPRD, the discounted cash flow method, which entails
a projection of the prospective cash flows to be generated from the sale of the
technology over a discrete period of time, discounted at a rate in order to
calculate present value, was used. The remainder of the purchase price minus the
tangible assets acquired and the intangible assets created was allocated to
goodwill. Goodwill is not being amortized but is reviewed at least annually for
impairment in accordance with SFAS No. 142. There was no impairment of goodwill
recorded for the year ended January 31, 2003.

F-11

---

The following unaudited pro
forma information has been prepared assuming that the acquisition had taken
place at the beginning of the year ended January 31, 2003 and the beginning of
the year ended January 31, 2002, respectively. The amount of the purchase price
allocated to IPRD has been excluded from the pro forma information, as it is a
non-recurring item. The pro forma financial information is not necessarily
indicative of the combined results that would have occurred had the acquisitions
taken place at the beginning of the period, nor is it necessarily indicative of
results that may occur in the future.

Pro forma information
(unaudited):

| |                                             |   | Year ended January 31,
| | ------------------------------------------- | - | ----------------------
| |                                             |   | 2003                  
| | Revenues                                    | $ | 23,625                
| | Net loss                                    |   | (30,104)              
| | Basic and diluted net loss per common share |   | (1.04)                

On December 21, 2000, Excalibur
and Intel consummated the Combination. At the completion of the Combination,
Excalibur became a wholly owned subsidiary of the Company, each outstanding
share of Excalibur common stock was converted into one share of Class A common
stock of the Company. Intel contributed to the Company its IMS division,
intellectual property and other assets used by that division, as well as
approximately $155,000 in cash, with $150,000 paid at closing and the balance
payable in fiscal year 2002 to fund retention bonuses to former Intel employees,
in exchange for 14,949,384 shares of Class A common stock of the Company and
12,207,038 shares of Class B non-voting common stock.

The Combination was
accounted for using the purchase method of accounting and accordingly, the
results of operations of the IMS division have been included in the
Companys financial statements from the date of acquisition. The purchase
price for the IMS division was determined to be approximately $925,125, which
included approximately $2,047 of transaction and direct acquisition costs less
approximately $593 in costs to register and issue the shares. The shares issued
to Intel as consideration for the contribution of assets were valued based on
the market price when the Combination was originally announced. The purchase
price was allocated to the assets acquired based on their estimated fair values
on the acquisition date as follows:

| | Net tangible assets acquired                 | $ | 150,711 
| | -------------------------------------------- | - | --------
| | Developed technology                         |   | 9,090   
| | Assembled workforce                          |   | 4,070   
| | Customer contracts                           |   | 3,010   
| | Acquired in-process research and development |   | 800     
| | Net deferred tax liabilities                 |   | (12,322)
| | Goodwill                                     |   | 769,766 
| | Total purchase price                         | $ | 925,125 

In connection with the
Combination, the Company recorded a charge for acquired in-process research and
development (IPRD) of approximately $800 in the year ended January
31, 2001. The purchased IPRD represented the present value of the estimated
after-tax cash flows expected to be generated by the purchased technology,
which, at December 21, 2000, had not yet reached technological feasibility. The
cash flow projections for revenues were based on estimates of market size and
growth factors, expected industry trends, the anticipated nature and timing of
product introduction and the estimated life of the underlying technology.
Estimated operating expenses and income taxes were deducted from estimated
revenue projections to arrive at estimated after tax cash flows. Projected
operating expenses included cost of sales, sales and marketing and general and
administrative expenses.

F-12

---

## (4)     REDUCTION
IN GOODWILL AND OTHER LONG-LIVED ASSETS

The Company recorded a
charge of $754,424 during fiscal year 2002 for reduction of goodwill and other
long-lived assets. On September 20, 2001, the Company announced that it had
terminated its agreement with the National Basketball Association
(NBA) to provide interactive content services. The termination of
this agreement was part of the Companys decision to exit the interactive
media services market and focus on its enterprise information infrastructure
software products. In connection with this shift in focus, on October 4, 2001,
the Company closed facilities in Hillsboro, Oregon and Lafayette, Colorado, and
all positions supporting the interactive media services offerings and the
related content security technology development were eliminated.

Following the termination
of the NBA contract and the Companys change in focus, the Company
evaluated the recoverability of the intangible and other long-lived assets,
including goodwill, associated with the Combination and associated with the NBA
agreement. The intangible assets acquired in the Combination, including
developed technology, customer contracts and assembled workforce, were primarily
related to the interactive media services offerings. The assessment of
recoverability was performed pursuant to SFAS No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed
Of.

The unamortized balance of
intangible assets associated with the NBA agreement was approximately $67,318.
Having no future economic benefit to the Company, this unamortized balance was
written down to zero during fiscal year 2002. As a result of the Companys
shift in focus, there were no future cash flows expected to be generated from
the intangible assets acquired in the Combination; thus, the unamortized balance
of approximately $9,764 related to these intangible assets was written down to
zero during fiscal year 2002. Since the assets acquired from Intel were never
integrated into the Companys overall operations, the goodwill associated
with the Combination was evaluated for impairment along with the other
intangible assets acquired from Intel. As a result, the unamortized goodwill
balance of $675,896 was written down to zero during fiscal year 2002. In
addition, there was an impairment charge of approximately $1,446 to reflect the
value of certain computer equipment and furniture that was either written down
to fair value or disposed of in connection with the closing of the various
facilities described above.

## (5)     RESTRUCTURINGS

During the fiscal year
2003, the Company adopted restructuring plans in its continued effort to align
its operations around key vertical markets and to streamline operations. As a
result of these restructuring plans in the first, second and fourth quarters of
fiscal year 2003, the Company reduced its workforce by a total of 115 employees,
including 39 from the sales group, 32 from the engineering group, 23 from the
professional services group, 13 from the marketing group and eight from the
general and administrative group. The Company recorded restructuring charges of
approximately $2,518 related to employee severance costs for the year ended
January 31, 2003. The amount presented in the statement of operations for the
year ended January 31, 2003 is recorded net of approximately $180, reflecting
the payment of lower than estimated severance amounts related to previous
restructuring actions. A non-cash charge of approximately $245 relating to the
write-down to their net realizable value of capitalized assets no longer in use
was also recorded during fiscal year 2003.

The Company had previously
adopted restructuring plans in the second and third quarters of fiscal year 2002
in response to the downturn in the economy and in conjunction with the
integration of the IMS divisions operations following the Combination. The
Companys total workforce was reduced by 92 employees worldwide, including
64 from the engineering group, 13 from the professional services group, seven
from the general and administrative group, five from the sales group and two
from the marketing group. As part of these restructuring plans, the Company
eliminated operations supporting the digital content security and interactive
services business units and closed offices in Hillsboro, Oregon and Lafayette,
Colorado. The Company also reduced the number of independent contractors that
were working on behalf of the Company by approximately 40 contractors. The
Company recorded approximately $8,128 in restructuring charges for the year
ended January 31, 2002. The restructuring charges included approximately $1,338
in costs incurred under contractual obligations with no future economic benefit
to the Company, accruals of approximately $1,578 for employee severance costs
and approximately $5,212 related to future facility losses for the offices
closed in Hillsboro, Oregon and Lafayette, Colorado. A non-cash charge of
approximately $1,769 relating to the write-down of facility improvements to
their net realizable value was also recorded during fiscal year 2002.

F-13

---

The following table sets
forth a summary of the restructuring charges, the payments made against those
charges and the remaining restructuring liability as of January 31, 2003:

|                                                  |   | FY02 restructuring charges |   | FY03 restructuring charges |   | Total  |   | Non-cash reserve adjustments |   | FY02 payments |   | FY03 payments |   | Accrued restructuring costs at January 31, 2003
|------------------------------------------------- | - | -------------------------- | - | -------------------------- | - | ------ | - | ---------------------------- | - | ------------- | - | ------------- | - | -----------------------------------------------
|Employee severance and other termination benefits | $ | 1,578                      | $ | 2,518                      | $ | 4,096  | $ | (180)                        | $ | (1,362)       | $ | (2,167)       | $ | 387                                            
|Estimated costs of facilities closing             |   | 5,212                      |   | -                          |   | 5,212  |   | (2,014)                      |   | (359)         |   | (726)         |   | 2,113                                          
|Contractual obligations                           |   | 1,338                      |   | -                          |   | 1,338  |   | -                            |   | (888)         |   | (130)         |   | 320                                            
|Total                                             | $ | 8,128                      | $ | 2,518                      | $ | 10,646 | $ | (2,194)                      | $ | (2,609)       | $ | (3,023)       | $ | 2,820                                          

The Company paid
approximately $3,023 and $2,609 against the restructuring reserve in the fiscal
years ended January 31, 2003 and 2002, respectively. Non-cash charges represent
the write-down of facility improvements included in the estimated costs of
facilities closings. As of January 31, 2003, unpaid amounts of $1,326 and $1,494
have been classified as current and long-term accrued restructuring costs,
respectively, in the accompanying consolidated balance sheet. Remaining cash
expenditures relating to employee severance costs and contractual obligations
will be substantially paid during the next three quarters. The Company expects
to settle amounts associated with facility closings over the remaining term of
the related facility leases, which is through February 2006.

## (6)     INCENTIVE
BONUS PAYMENTS

Specified former Intel
employees who became Convera employees and remained employed through September
30, 2002 are receiving payments representing the excess of the calculated
aggregate gain they would have realized on forfeited Intel stock options that
would have vested between 2002 and 2005, based on the fair value of Intel shares
at a fixed date prior to the closing of the Combination, over the calculated
aggregate gain on Convera stock options as of September 30, 2002. The incentive
bonus payments have been fully expensed as of January 31, 2003. The Company made
payments of $438 related to these incentive bonuses in the fiscal year 2003, and
the remaining $876 will be paid out over the next three quarters.

On May 16, 2001, the
Company paid approximately $5,422 in bonuses to specified former employees of
Intel that remained employed by Convera as of April 30, 2001. These bonus
payments were funded through an additional capital contribution from Intel. The
bonus amounts were contingent upon the former Intel employees continued
employment at Convera, and the Company recorded the majority of this bonus in
operations in the first quarter of fiscal year 2002.

F-14

---

## (7)     EQUIPMENT
AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold
improvements at January 31, 2003 and 2002 consisted of the following:

| |                               |   | 2003     |   | 2002    
| | ----------------------------- | - | -------- | - | --------
| | Computer equipment            | $ | 10,174   | $ | 11,338  
| | Office furniture              |   | 2,904    |   | 2,934   
| | Leasehold improvements        |   | 671      |   | 646     
| |                               |   | 13,749   |   | 14,918  
| | Less accumulated depreciation |   | (10,843) |   | (10,493)
| |                               | $ | 2,906    | $ | 4,425   

Depreciation expense for
fiscal years 2003, 2002 and 2001 was $2,258, $2,294 and $1,329 respectively.

## (8) GOODWILL AND
OTHER INTANGIBLE ASSETS

Net goodwill and other
acquisition-related intangibles at fiscal year ends were as follows:

| |                               |   | 2003  |   | 2002 
| | ----------------------------- | - | ----- | - | -----
| | Goodwill                      | $ | 2,268 | $ | 576  
| | Developed technology          |   | 1,346 |   | -    
| |                               |   | 3,614 |   | 576  
| | Less accumulated amortization |   | (242) |   | (547)
| |                               | $ | 3,372 | $ | 29   

Amortization expense for
fiscal years 2003, 2002 and 2001 was $242, $98,304 and $15,672, respectively.
Based on the current amount of intangible assets subject to amortization, the
estimated amortization expense for each of the succeeding 5 years are as
follows: 2004 - $269; 2005 - $269; 2006 - $269; 2007 - $269; and 2008 - $28.

The Companys fiscal year 2002
results of operations do not reflect the provisions of SFAS No. 142. Had the
Company adopted SFAS No. 142 on February 1, 2001, the net loss and basic and
diluted net loss per common share would have been the adjusted amounts indicated
below:

| |                           |   | Fiscal year ended January 31, 2002
| | ------------------------- | - | ----------------------------------
| |                           |   | Net loss                          
| | As reported               | $ | (910,059)                         
| | Add goodwill amortization |   | 118                               
| | Adjusted                  | $ | (910,391)                         

Goodwill is nondeductible for tax purposes.

## (9)     ACCRUED
EXPENSES

Accrued expenses at January
31, 2003 and 2002 consisted of the following:

| |                         |   | 2003  |   | 2002 
| | ----------------------- | - | ----- | - | -----
| | Accrued payroll         | $ | 1,006 | $ | 1,399
| | Accrued facility costs  |   | 4,007 |   | 4,007
| | Accrued consulting fees |   | 917   |   | 917  
| | Other                   |   | 1,290 |   | 1,170
| |                         | $ | 7,220 | $ | 7,493

F-15

---

## (10)     INCOME
TAXES

The Components of the
benefit from income taxes are as follows:

|                     |         |   | For the Fiscal Year Ended January 31,
|-------------------- | ------- | - | -------------------------------------
|                     |         |   | 2003                                 
|Current tax benefit  |         |   |                                      
|                     | Federal | $ | -                                    
|                     | State   |   | -                                    
|                     |         | $ | -                                    
|Deferred tax benefit |         |   |                                      
|                     | Federal | $ | -                                    
|                     | State   |   | -                                    
|                     |         | $ | -                                    

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

|                    |                                         |          | For the Fiscal Year Ended January 31,
|------------------- | --------------------------------------- | -------- | -------------------------------------
|                    |                                         |          | 2003                                 
|Current tax benefit | $                                       | (10,048) | (35)%                                
|Effect of:          |                                         |          |                                      
|                    | State benefits, net of federal benefits |          | (1,039)                              
|                    | Goodwill                                |          | -                                    
|                    | Other                                   |          | 51                                   
|                    | Valuation allowance                     |          | 11,036                               
|                    |                                         | $        | -                                    

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.

The Companys net
deferred tax assets at January 31, 2003 and 2002 were as follows:

| |                                                    |   | 2003     |   | 2002    
| | -------------------------------------------------- | - | -------- | - | --------
| | Deferred tax assets:                               |   |          |   |         
| | Net operating loss carryforwards, not yet utilized | $ | 54,309   | $ | 51,658  
| | Restructuring reserve                              |   | 1,097    |   | 1,459   
| | Other                                              |   | 10,561   |   | 2,926   
| | Total deferred tax assets                          |   | 65,967   |   | 56,043  
| | Valuation allowance                                |   | (65,967) |   | (55,613)
| |                                                    |   | -        |   | 430     
| | Deferred tax liabilities:                          |   |          |   |         
| | Acquired intangibles                               |   | -        |   | -       
| | Other                                              |   | -        |   | (430)   
| | Total deferred tax liabilities                     |   | -        |   | (430)   
| | Net deferred tax assets (liabilities)              | $ | -        | $ | -       

At January 31, 2003, the
Company had net operating loss carryforwards (NOLs) of approximately
$141,614 that expire at various dates through fiscal year 2022. The use of these
NOLS may be limited by Section 382 of the Internal Revenue Code as a result of
the Combination. Approximately $12,500 of the NOLs relate to stock option
exercises, and $8,053 and $631 relate to UK and Canada operations, respectively.
The tax benefit associated with the stock option exercises will be credited to
equity when and if realized.

F-16

---

As of January 31, 2001, the Company had deferred
tax liabilities resulting from intangible assets generated in the Combination
and the NBA contribution agreement. In fiscal year 2002 the Company recorded a
reduction in goodwill and other long-lived assets (see Note 4), which eliminated
the intangible assets that gave rise to the deferred tax liabilities.

As of January 31, 2003, the
Companys deferred tax assets, which are primarily related to NOL
carryforwards generated by the Company, exceeded the deferred tax liabilities.
As the Company has not generated earnings and no assurance can be made of future
earnings needed to utilize these NOLs, a valuation allowance in the amount of
the net deferred tax asset has been recorded.

## (11)     CAPITALIZATION

The authorized capital
stock of Convera 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.

During the fiscal year
2002, the Company announced a stock repurchase program whereby the Company may
repurchase up to $10 million of the Companys common stock in the open
market, through block trades or in privately negotiated transactions. The timing
and amount of any shares repurchased are determined by the Companys
management based on its evaluation of market conditions and other factors. The
repurchase program may be suspended or discontinued at any time without prior
notice. There have been no repurchases under this program.

Stock Repurchases

During the fourth quarter
of the fiscal year ended January 31, 2002, the Company purchased 4,746,221
shares of Class A common stock from NBA Media Ventures, LLC (NBA),
representing the entirety of its holdings, for $11 million, or $2.31 per share.
The Company also purchased a total of 15,000,000 shares of common stock,
consisting of 2,792,962 shares of Class A voting common stock and 12,207,038
shares of Class B non-voting common stock, from Intel Corporation for $42
million, or $2.80 per share. The entirety of the Class B shares and all but
1,000,000 shares of the Class A common stock that was repurchased were retired
in the fourth quarter of fiscal year 2002. The 1,000,000 shares of treasury
stock relate to shares reserved for issuance under the Companys Employee
Stock Purchase Plan and were recorded as a $2,310 reduction to
shareholders equity in the Companys consolidated balance sheets as
of January 31, 2002.

In January 2002, Allen
Holding, Inc., together with Herbert A. Allen and Allen & Company
Incorporated, its wholly owned subsidiary, purchased the remaining 12,156,422
shares of Convera Class A common stock held by Intel. As a result, Allen
Holding, Inc. owns approximately 53.7% of the outstanding shares of Convera
Class A common stock as of January 31, 2003.

## (12) NET LOSS
PER COMMON SHARE

The following table sets
forth the computation of basic and diluted net loss per common share:

|                                                                         |   |            | For the Fiscal Year Ended January 31,
|------------------------------------------------------------------------ | - | ---------- | -------------------------------------
|                                                                         |   |            | 2003                                 
|Numerator:                                                               |   |            |                                      
|Net loss                                                                 | $ | (29,071)   | $                                    
|Less: Dividends on preferred stock                                       |   | -          |                                      
|Net loss applicable to common shareholders                               | $ | (29,071)   | $                                    
|Denominator:                                                             |   |            |                                      
|Weighted average number of
common shares outstanding - basic and diluted |   | 28,854,291 |                                      
|Basic and diluted net loss per common share                              | $ | (1.01)     | $                                    

F-17

---

The following equity
instruments were not included in the computation of diluted net loss per common
share because their effect would be antidilutive:

|              |  |        | For the Fiscal Year Ended January 31,
|------------- |  | ------ | -------------------------------------
|              |  |        | 2003                                 
|Stock options |  | 22,654 |                                      

## (13)     EMPLOYEE
BENEFIT PLANS

## Stock Options

The Convera 2000 stock
option plan was approved by Excalibur shareholders in December 2000 in
connection with and as a condition to the Combination. The stock option plan
authorizes the granting of stock options and other forms of incentive
compensation to purchase up to 11.25 million shares of the Companys Class
A common stock in order to attract, retain and reward key employees. In
addition, at the closing of the Combination, Convera assumed Excaliburs
existing stock option plans. The plans are administered by a Committee appointed
by the Board of Directors, which has the authority to determine which officers,
directors and key employees are awarded options pursuant to the plans and the
terms and option exercise prices of the stock options. Of the total number of
shares authorized for stock options, options to purchase 8,813,654 shares are
outstanding as of January 31, 2003. The Company has a total of 13,643,065 shares
of Class A common stock reserved for the issuance of warrants and options under
the plans as of January 31, 2003.

Each qualified incentive
stock option granted pursuant to the plans has an exercise price as determined
by the Committee 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.

Upon consummation of the
Combination, the Company granted options to purchase 7,028,248 shares of Class A
common stock to employees with an exercise price of $20.52 per share
representing the average of the closing prices of Excalibur common stock for the
five trading days immediately preceding the closing date. There was no
compensation expense recorded in connection with these grants, since the fair
value of the Companys common stock on the date of grant was less than the
exercise price.

During the second quarter
of the fiscal year ended January 31, 2002, the Company announced a voluntary
stock option exchange program (the Offer) for its employees and directors. Under
this program, existing option holders had the opportunity to cancel outstanding
stock options previously granted to them in exchange for an equal number of
replacement options to be granted at a future date. The Offer was open until
12:00 AM Eastern Time on July 9, 2001 (the Expiration Date). Any option holder
electing to participate in the exchange program was also required to exchange
any options granted to him or her during the six months preceding the Expiration
Date, and to not receive any additional option grants until the replacement
grant date. A total of 7,241,569 options were surrendered for exchange under
this program. On January 14, 2002 (the Replacement Grant Date), the Company
granted a total of 6,248,247 shares of the replacement options at $4.38 per
share. The exercise price of the replacement options was equal to the closing
sale price of our common stock on the NASDAQ National Market on the business day
preceding the Replacement Grant Date. The exchange program was designed to
comply with FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation and did not result in any
additional compensation charges or variable plan accounting.

F-18

---

The following table
summarizes the Companys activity for all of its stock option awards:

|                          | Number of Options |   | Range of Exercise Prices |   | Weighted-Average Exercise Price
|------------------------- | ----------------- | - | ------------------------ | - | -------------------------------
|Balance, January 31, 2000 | 2,676,955         | $ | 1.04                     | - | 24.00                          
|Granted                   | 7,809,198         |   | 15.69                    | - | 67.19                          
|Exercised                 | (702,179)         |   | 3.11                     | - | 36.50                          
|Canceled                  | (109,554)         |   | 4.75                     | - | 60.13                          
|Balance, January 31, 2001 | 9,674,420         | $ | 1.04                     | - | 67.19                          
|Granted                   | 8,711,497         |   | 2.34                     | - | 18.81                          
|Exercised                 | (28,150)          |   | 4.75                     | - | 15.00                          
|Canceled                  | (8,873,458)       |   | 3.80                     | - | 67.19                          
|Balance, January 31, 2002 | 9,484,309         | $ | 1.04                     | - | 59.75                          
|Granted                   | 1,413,400         |   | 1.41                     | - | 4.20                           
|Exercised                 | (10,810)          |   | 1.04                     | - | 2.07                           
|Canceled                  | (2,073,245)       |   | 1.41                     | - | 59.75                          
|Balance, January 31, 2003 | 8,813,654         | $ | 1.45                     | - | 52.75                          

Options to purchase 4,734,479,
3,622,523 and 2,418,198 shares of the Companys common stock were vested
and exercisable at January 31, 2003, 2002 and 2001, respectively, at
weighted-average exercise prices of $5.76, $6.36 and $11.84 per share,
respectively.

The following table
summarizes additional information about stock options outstanding at January 31,
2003:

|                         | Options Outstanding | Options Exercisable                     
|------------------------ | ------------------- | ----------------------------------------
|Range of Exercise Prices | Number of Options   | Weighted-AverageRemainingContractualLife
|$                        | 1.45                | to                                      
|$                        | 3.77                | to                                      
|$                        | 4.25                | to                                      
|$                        | 4.42                | to                                      
|$                        | 8.25                | to                                      
|                         | 8,813,654           | 7.52                                    

## Employee Stock
Purchase Plan

In December 2000, the
Excalibur shareholders approved the amendment of the Excalibur 1996 employee
stock purchase plan (ESPP), now in effect for Convera. The employee
stock purchase plan is available for all active employees and provides that
participating employees may purchase common stock each plan quarter at a
purchase price equal to the lesser of 85% of the closing price on the date of
purchase or 85% of the closing price on the date of grant. Payment for the
shares is made through authorized payroll deductions of up to 10% of eligible
annual compensation.

Of the 250,000 shares of
Class A common stock that were reserved for issuance thereunder, 73, 152,778 and
12,252 shares were purchased by employees in fiscal years 2003, 2002 and 2001,
respectively.

During the fourth quarter
of the fiscal year ended January 31, 2002, the Convera shareholders approved an
amendment to the ESPP authorizing an additional 1,000,000 shares to be reserved
for issuance under the plan. These shares were included as treasury stock as of
January 31, 2002 and are released from the treasury as employees purchase the
shares through the ESPP. During the fiscal year 2003, 122,845 shares were
purchased by the employees, leaving 877,155 shares in treasury.

F-19

---

## 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 the
Company 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, 2003, 2002 and 2001, the Company contributed approximately $560,
$760 and $221, respectively, to the employee savings plan.

## (14)     COMMITMENTS AND CONTINGENCIES

## Lease
Commitments

The Company conducts its
operations using leased office facilities. The leases terminate at various dates
through fiscal year 2008 with options to renew. Certain leases provide for
scheduled rent increases and obligate the Company to pay shared portions of the
operating expenses such as taxes, maintenance and repair costs. The Company also
has operating leases for equipment and its foreign subsidiary has operating
leases for automobiles that are included in the figures below. Future minimum
rental payments under non-cancelable operating leases as of January 31, 2003 are
as follows:

| | Year Ending January 31, |   |      
| | ----------------------- | - | -----
| | 2004                    | $ | 3,214
| | 2005                    |   | 2,782
| | 2006                    |   | 1,572
| | 2007                    |   | 851  
| | 2008                    |   | 63   
| |                         | $ | 8,482

Total rental expense under
operating leases was approximately $3,174, $3,604 and $2,453 in fiscal years
2003, 2002 and 2001, respectively.

## Contingencies

On November 1, 2001, DSMC,
Incorporated (DSMCi) filed a complaint against the Company in the
U.S. District Court for the District of Columbia in which it alleged that the
Company misappropriated DSMCis trade secrets, engaged in civil conspiracy
with the NGT Library, Inc. (NGTL), an affiliate of the National
Geographic Society, to obtain access to DSMCis trade secrets, and was
unjustly enriched by the Companys alleged access to and use of such trade
secrets. In its complaint, DSMCi seeks $5,000 in actual damages and $10,000
in punitive damages from the Company. DSMCi subsequently amended its
complaint to add copyright infringement-related claims. The Company is in the
process of investigating the allegations and at this time believes that they are
without merit. From time to time, the Company is a party to various legal
proceedings, claims, disputes and litigation arising in the ordinary course of
business, including that noted above. The Company believes 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, Converas
financial position, operations and cash flows could be materially and adversely
affected.

F-20

---

## (15)     SEGMENT
REPORTING

The Company is principally
engaged in the design, development, marketing and support of enterprise search,
retrieval and categorization solutions. Substantially all of the Companys
revenues result from the sale of the Companys software products and
related services. Accordingly the Company considers itself to be in a single
reporting segment, specifically the license, implementation and support of its
software. The Companys chief operating decision-making group reviews
financial information presented on a consolidated basis, accompanied by
disaggregated information about revenues by geographic region for purposes of
making operating decisions and assessing financial performance.

## Operations by
Geographic Area

The following table
presents information about the Companys operations by geographical area:

|                    |                |   | For the Fiscal Year Ended January 31,
|------------------- | -------------- | - | -------------------------------------
|                    |                |   | 2003                                 
|Sales to customers: |                |   |                                      
|                    | United States  | $ | 15,343                               
|                    | United Kingdom |   | 3,958                                
|                    | All Other      |   | 4,313                                
|                    |                | $ | 23,614                               
|Long-lived assets:  |                |   |                                      
|                    | United States  | $ | 8,706                                
|                    | All Other      |   | 726                                  
|                    |                | $ | 9,432                                

## Major Customers

Revenues derived from
contracts and orders issued by agencies of the U.S. Government were
approximately $6,591, $4,904 and $5,021, respectively, in the fiscal years ended
January 31, 2003, 2002 and 2001. These revenues, expressed as a percentage of
total revenues for the fiscal year, were approximately 28%, 14% and 10%,
respectively. For the fiscal years ended January 31, 2003 and 2002, no
individual customer accounted for more than 10% of the Companys total
revenues. For the fiscal year ended January 31, 2001, one customer accounted for
15% of the Companys total revenues.

## (16)     SUBSEQUENT EVENT

On March 12, 2003, the
Company announced a $1,533 development and investment agreement with In-Q-Tel, a
private venture group funded by the Central Intelligence Agency
(CIA). In conjunction with this transaction, In-Q-Tel received
two-year warrants to purchase 137,711 shares of Convera common stock at an
exercise price of $2.00 per share. The warrants had an aggregate value of
approximately $380 using the Black-Scholes option-pricing model with the
following assumptions: expected volatility  108%; risk free interest rate
 2.12%; dividend yield  none; and expected life  2 years.

F-21

---

## (17)     SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION

|                                                                         |                                                                                 |   | For the Fiscal Year Ended January 31,
|------------------------------------------------------------------------ | ------------------------------------------------------------------------------- | - | -------------------------------------
|                                                                         |                                                                                 |   | 2003                                 
|Supplemental Disclosures of Non-cash Investing and
Financing Activities: |                                                                                 |   |                                      
|                                                                         | Retirement of common stock                                                      | $ | -                                    
|                                                                         | Issuance of common stock for acquisition of Semantix assets                     |   | 3,407                                
|                                                                         | Issuance of common stock for acquisition of IMS assets                          |   | -                                    
|                                                                         | Issuance of Class A common stock in
exchange for certain contributed NBA assets |   | -                                    
|                                                                         | Stock options exercised under deferred
compensation arrangements                |   | -                                    
|                                                                         | Preferred stock converted to Class A common stock                               |   | -                                    

## (18)     SELECTED
QUARTERLY INFORMATION (UNAUDITED)

|                                                                |   | 1st Quarter |   | 2nd Quarter |   | 3rd Quarter |   | 4th Quarter
|--------------------------------------------------------------- | - | ----------- | - | ----------- | - | ----------- | - | -----------
|2003:                                                           |   |             |   |             |   |             |   |            
|Revenues                                                        | $ | 6,293       | $ | 5,036       | $ | 6,250       | $ | 6,035      
|Gross margin                                                    |   | 3,220       |   | 2,502       |   | 3,625       |   | 3,812      
|Operating loss                                                  |   | (9,837)     |   | (9,154)     |   | (6,270)     |   | (4,446)    
|Restructuring charges                                           |   | 847         |   | 1,043       |   | -           |   | 447        
|Net loss                                                        |   | (9,610)     |   | (8,995)     |   | (6,130)     |   | (4,336)    
|Basic and diluted loss per common stock                         | $ | (0.34)      | $ | (0.31)      | $ | (0.21)      | $ | (0.15)     
|2002:                                                           |   |             |   |             |   |             |   |            
|Revenues                                                        | $ | 6,325       | $ | 10,313      | $ | 8,836       | $ | 8,754      
|Gross margin                                                    |   | 148         |   | 4,294       |   | 4,246       |   | 6,160      
|Operating loss                                                  |   | (63,036)    |   | (52,518)    |   | (795,619)   |   | (7,977)    
|Restructuring charges                                           |   | -           |   | 2,933       |   | 5,195       |   | -          
|Reduction in goodwill and other -
 long-lived intangible assets |   | -           |   | -           |   | 754,424     |   | -          
|Net loss                                                        |   | (58,818)    |   | (50,900)    |   | (793,300)   |   | (7,490)    
|Basic and diluted loss per common stock                         | $ | (1.24)      | $ | (1.07)      | $ | (16.64)     | $ | (0.19)     

The Company calculated
earnings per share on a quarter-by-quarter basis in accordance with GAAP.
Quarterly earnings per share figures may not total earnings per share for the
year due to the weighted average number of shares outstanding.

F-22