UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                   For the Fiscal Year Ended January 31, 2004

                        Commission File Number 000-31989


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


                  Delaware                                 54-1987541
         (State or other jurisdiction of                   (I.R.S. Employer
         incorporation or organization)                    Identification No.)

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

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

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

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

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

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

     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, 2003 (based on the closing sales price as reported
on the NASDAQ National Market System) was $65,314,829.

     The number of shares  outstanding of the registrant's  Class A common stock
as of April 13, 2004 was 33,940,025.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant's Proxy Statement for the 2004 Annual Meeting of
Shareholders are incorporated by reference into Part III.


                     The Index to Exhibits begins on Page 35


<PAGE>



                               CONVERA CORPORATION

                           ANNUAL REPORT ON FORM 10-K
                   FOR THE FISCAL YEAR ENDED JANUARY 31, 2004

                                TABLE OF CONTENTS
                                                                      Page

                                     PART I

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

Item 2.  Properties..................................................   15

Item 3.  Legal Proceedings...........................................   15

Item 4.  Submission of Matters to a Vote of Security Holders.........   15

                                     PART II

Item 5.  Market for Registrant's Common Equity, Related Stockholder
          Matters and Issuer Purchases of Equity Securities............. 16

Item 6.  Selected Financial Data....................................... 17

Item 7.  Management's Discussion and Analysis of Financial   Condition
         and Results of Operations..................................... 18

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 32

Item 8.  Financial Statements and Supplementary Data................... 32

Item 9.  Changes in and Disagreements with Accountants on Accounting
         and Financial Disclosure...................................... 32

Item 9A. Controls and Procedures....................................... 32

                                    PART III

Item 10. Directors and Executive Officers of the Registrant............ 33

Item 11. Executive Compensation ....................................... 33

Item 12. Security Ownership of Certain Beneficial Owners and Management
           and Related Stockholder Matters ............................ 33

Item 13. Certain Relationships and Related Transactions................ 33

Item 14. Principal Accounting Fees and Services........................ 33

                                     PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports
            on Form 8-K...............................................  34



<PAGE>





                                     PART I

Item 1. Business

FORWARD-LOOKING STATEMENTS

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
and  categorization  solutions  that  enable a broad  range of mission  critical
applications  within  commercial  enterprises  and  government  agencies.  These
applications  include knowledge  management,  enterprise  portals,  intelligence
gathering and analysis, safety and national security, law enforcement,  research
and discovery,  regulatory compliance and customer service. Convera believes its
RetrievalWare(R)  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.
The  Company's   RetrievalWare  8  software  contains   additional   proprietary
technologies for the categorization  and dynamic  classification of unstructured
content.  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, 2004 and 2003,  Allen  Holding,  Inc.,  together  with Allen &
Company   Incorporated   and  Herbert  A.  Allen  and  certain  related  parties
(collectively "Allen & Company")  beneficially owned 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.


                                       1
<PAGE>



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,  Original Equipment  Manufacturers  ("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.


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.

Convera's products are designed to address the search and  categorization  needs
of a diverse customer base within government agencies and commercial enterprises
around  the  world.  From  supporting  the most  demanding  requirements  of the
intelligence  and  law  enforcement   communities  within  government   agencies
worldwide, to providing the enterprise search backbone of Fortune 500 companies,
Convera products are often a critical part of customers'  information management
infrastructure.

RetrievalWare is a secure, highly scalable platform for mission-critical, search
and  categorization   applications.   RetrievalWare's  distributed  architecture
provides a high  performance,  high  scalability  infrastructure  for  indexing,
searching,  categorizing and linking information across a broad range of content
sources.

Convera  products  are best  suited for  organizations  that face the  following
challenges:

     o    Searching  a  large  collection  of  unstructured  information  assets
          distributed in information silos across the enterprise,

     o    Dealing with large  volumes of incoming  unstructured  data on a daily
          basis,

     o    Searching disparate collections of documents and records regardless of
          their format,  including scanned paper, text, audio, video, images and
          relational databases,

     o    Tightly  integrating  the  search  solution  as part of the  corporate
          security infrastructure,

     o    Providing  a  robust,   scalable  and  highly  available   information
          discovery platform,

     o    Searching for information that exists in multiple languages.


With the release of RetrievalWare 8, the most current version of  RetrievalWare,
in May 2003,  Convera enhanced its product offerings with new categorization and
classification   software,   additional   tools  for  developing  and  deploying
taxonomies,  and architectural  enhancements that allow  RetrievalWare to easily
fit within J2EE and Web Services environments.

Convera's  Categorization and Dynamic  Classification  software  introduced with
RetrievalWare 8 allows enterprises and government agencies to more easily search
and browse unstructured information from diverse user perspectives and roles. It
also allows organization to more easily discover hidden information that is most
relevant to queries against large repositories of information.

Convera's Cartridge and Classification  Workbench allows enterprises to develop,
import,  change and integrate various  taxonomies and semantic networks that may
be used for organizing and accessing an enterprise's  unstructured content. This
new suite of tools also helps enterprises  measure the quality of the taxonomies
being used to  organize  their  information  assets.  This  provides  predictive
insight  into the user  satisfaction  that  will  result  from  the  search  and
categorization solution being deployed.

                                       2
<PAGE>




RetrievalWare 8 is also built using the modern Application Server  Architecture,
effectively  supporting  those  customers  who have  chosen to adopt the Service
Oriented Application Architecture within their enterprises.  The support of open
Application  Programming Interfaces ("APIs") like Java Services and Web Services
APIs  allows  RetrievalWare  8 to be  integrated  into a variety  of  enterprise
applications with relative ease.


The RetrievalWare 8 product line includes:

RetrievalWare(R) Search (Base Product)

Optional Components:
RetrievalWare(R) Categorization and Dynamic Classification;
RetrievalWare(R) Profiling;
RetrievalWare(R) Cartridge & Classification Workbench
Language Cartridges;
Domain Cartridges;
Taxonomy Cartridges;
RetrievalWare(R) Synchronizers;
Internet Spider;
RetrievalWare(R) FileRoom;
Screening Room(R);
Screening Room(R) Capture;
RetrievalWare(R) SDK;
Screening Room(R) API's; and
Visual RetrievalWare(R).


         RetrievalWare(R) Search (Base Product)

RetrievalWare  provides a secure,  scalable information  retrieval and knowledge
discovery infrastructure utilizing advanced indexing,  search and categorization
technology.  RetrievalWare's distributed process architecture enables government
agencies and commercial  enterprises to integrate all information  assets into a
single  point  of  access,  to  intuitively  navigate  that  information  and to
collaborate  effectively on retrieved  information  to achieve  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.

With Convera's  semantic  networks and natural  language  processing,  users can
easily  find  needed  information  without  having to  specify  exact  keywords.
RetrievalWare incorporates syntax, morphology and the actual meaning of words in
its search  algorithms.  The baseline  semantic  network in the English language
version of RetrievalWare  gives 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 retrieved.  RetrievalWare also supports domain specific
semantic  networks to further  enhance  search  precision and recall in specific
fields of  interest,  including:  Biology,  Chemistry,  Computers,  Electronics,
Finance, Food Science, Geography, Geology, Health Sciences, Information Science,
Law, Mathematics,  Medical, Military,  Petroleum,  Natural Gas & Petrochemicals,
Pharmaceutical,  Pharmacology, Physics, Plastics, Rubber and Telecommunications.
Other  disciplines can be supported through the use of Convera tools that enable
the development of enterprise-specific semantic networks.

APRP identifies patterns in digital information. In text applications, it allows
users to retrieve relevant  information  regardless of spelling errors contained
in queries or the existence of  inconsistencies in the searched data that may be
caused by errors in optical character recognition processes.  The software works
at  high  speed  and   supports   the  rapid   development   of   multi-language
text-retrieval systems.

                                       3
<PAGE>

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  automatically  receive  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.

Convera  provides what it 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, LINUX and Windows platforms.

The RetrievalWare 8 product line includes the following optional components:

         Categorization and Dynamic Classification

RetrievalWare's  Categorization  and  Dynamic  Classification  solution  enables
enterprises to bring  consistency and scalability to the organization and access
of information assets through the use of stable,  industry standard  taxonomies.
RetrievalWare  uses one or more taxonomies to extract  concepts and context from
information assets.  These assets can then be organized into specific views that
reflect the personalized knowledge requirements,  roles and perspectives of each
user. This approach to organizing  information  facilitates  knowledge discovery
and collaboration among knowledge workers.

         Profiling

RetrievalWare  Profiling  automatically  detects,  routes  and  stores  relevant
documents in user-defined  profiles,  thus  accelerating the timely discovery of
relevant information as it enters the RetrievalWare environment.

         Cartridge & Classification Workbench

Convera's  Cartridge &  Classification  Workbench  enables the use of manual and
automated tools to streamline taxonomy classification development, benchmarking,
and deployment.  These tools reduce taxonomy development and deployment times as
well as maintenance costs.

         Language, Domain and Taxonomy Cartridges

RetrievalWare  provides highly  accurate and relevant search and  categorization
results  based upon its  linguistic  processing  capability.  Through the use of
robust  semantic  networks and  taxonomies  that cover many languages and domain
specific  fields of interest,  RetrievalWare  recognizes  and  processes  words,
phrases  and  concepts  in the  context  in which  they  exist.  The result is a
comprehensive  search and retrieval  solution  enabling  basic  keyword  search,
advanced  natural  language  and  conceptual  search,  as  well  as  information
categorization  in many languages and fields of interest.  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 for
specific business solutions.

         Synchronizers

RetrievalWare  Synchronizers  provide  document-level secure access for users to
search multiple  native  repositories  from a single point of access.  Supported
repositories  include  Lotus  Notes,  Microsoft  Exchange,  Documentum,  FileNET
Panagon,  native file systems and major relational  database  management systems
including Microsoft SQL Server, Oracle, DB2, Sybase, Informix,  Teradata and any
ODBC-compliant database.

                                       4

<PAGE>

          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 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 an optional component that allows loading,  indexing,
viewing and managing scanned  documents,  images and text. Users access 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  FileRoom.   Graphs,  diagrams,
handwritten  notations and signatures in the retrieved  document are immediately
accessible.  Document-level  security lets organizations  control user access at
the FileRoom (library),  cabinet,  drawer, folder and document level.

          Screening Room(R)

Screening  Room is an optional  product to  RetrievalWare  Search that enables a
comprehensive solution for video asset management.  It provides 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.  It also  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.

          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  re-purposing 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.

                                       5
<PAGE>

          Screening Room and Screening Room Capture APIs

The  Screening  Room and  Screening  Room  Capture  APIs  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 that enables the development
of client/server  systems for indexing and retrieving 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,  scalable
and secure  architecture  designed for ease of  implementation,  integration  or
extension.


Technical Support, Implementation Services and Education

Convera  provides  technical  support and  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.


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 distribution
partners and OEMs. Members of the North American direct sales team are primarily
located  throughout  the United  States,  and the majority of the  international
direct sales team is located in the United Kingdom.  Distribution throughout the
Europe,  Middle  East,  Africa and Asia  Pacific  regions  is also  covered by a
network of reseller  partners.  The Company  typically  licenses its products to
end-users as either an enterprise-wide or work-group level solution.

The Company generally has three license types: OEM, reseller and end-user.  Each
of these license types generally includes the same standard terms regarding such
things as  confidentiality,  infringement  indemnification  and  limitations  of
liability.  OEM licenses generally  stipulate royalties due to the Company based
on  the  sale  of  the  OEM  customer's  product   incorporating  the  Company's
technology.  OEM  contracts  generally  require the  customer to pay some of the
royalties in advance of the sale of their integrated product.  Reseller licenses
generally  include a  predetermined  discount  or margin  that the  reseller  is
required to pay the Company  based on their sales of the  Company's  products to
their  customers.  Reseller  agreements are  occasionally  structured to include
minimum  amounts  due from the  resellers  in advance of their sales to end user
customers.  This is generally in consideration for some type of exclusivity in a
particular territory.  Generally,  arrangements with OEM customers and resellers
are  structured as term licenses  ranging from two to five years.  This provides
future revenue opportunities to the Company through term renewals.  The majority
of  the  Company's  business  is  conducted  with  end-users.  End-user  license
agreements  are  generally  structured  as  perpetual  software  licenses  for a
specific number of users and/or for use on a specific number of servers. Payment
terms  generally tend to be shorter on end user perpetual  licenses  compared to
those of OEM licenses.

                                       6

<PAGE>


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, publishing and technology.

Marketing efforts focus on building brand awareness and establishing  demand for
the Company's products and include public relations,  trade show  participation,
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,  broadened  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  $12.0  million,  $11.6 million and $22.5
million,  respectively,  in the fiscal years ended January 31, 2004,  2003,  and
2002.

                                       7
<PAGE>



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 holds one patent related to its current business strategy.  This patent,
which concerns multimedia  document  retrieval,  expires on August 24, 2018. The
Company  owns several  other  patents and patent  applications  unrelated to its
current business strategy. The Company has undertaken to protect all significant
marks  used to  identify  the  Company's  core  software  products  and  related
services. The Company owns U.S. trademark  registrations or pending applications
for its material  trademarks,  including  CONVERA , RETRIEVALWARE  and SCREENING
ROOM.  Renewals are due at various  dates  between July 2008 and August 2013. In
addition,  the Company owns numerous foreign  applications and registrations for
its material trademarks.


Competition

Competition in the information  technology industry in general, and the software
development  industry in particular,  is intense.  Convera competes primarily in
the search and  categorization  software  market which all Convera  products and
services  address.   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. While
there are dozens of companies  that compete  within this broad  market,  leading
industry analyst Gartner recognized 21 enterprise search software vendors in its
April 2003 Search Engine Magic Quadrant Report. In this report,  the most recent
available,  Convera  was ranked in the top three  vendors  for  completeness  of
product vision, and within the top four vendors for ability to execute. In terms
of market share, in the most recent reports issued by analyst firm IDC,  Convera
was  ranked  in  the  fourth  market  share  position  in  the  search  software
marketplace based on revenue for calendar year 2002.

Convera  considers its  principal  competitive  advantages to be an  environment
that: (1) is more scalable due to the distributed-processing  architecture,  (2)
provides   more  accurate   results  due  to  the  semantic   network  and  APRP
technologies,  and (3) provides more comprehensive results due to its ability to
manage and retrieve  information  in multiple  languages  and in rich media file
formats.

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.


GOVERNMENT REGULATION

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  $15.2  million,  $6.4 million and $4.9 million,
respectively,  in the fiscal years ended January 31, 2004, 2003 and 2002.  These
revenues,  expressed as a percentage of total revenues for the fiscal year, were
approximately 52%, 22% and 14%, respectively.  For the fiscal year ended January
31, 2004, one customer  accounted for  approximately  12% of the Company's total
revenues.

                                       8
<PAGE>


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 210  employees at January 31, 2004,  of whom 78 were in research
and  development;   66  in  sales  and  marketing;   37  in  technical  support,
professional  services and training  and 29 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.

     THE  COMPANY  HAS HAD A HISTORY OF  OPERATING  LOSSES AND MAY INCUR  FUTURE
LOSSES; IF THE COMPANY IS UNABLE TO ACHIEVE  PROFITABILITY,  THE COMPANY'S STOCK
PRICE WILL  LIKELY  SUFFER AND STEPS  WHICH THE  COMPANY  MAY TAKE TO REDUCE ITS
EXPENDITURES  OR PRESERVE ITS EXISTING  FUNDS COULD HARM ITS SALES AND FINANCIAL
RESULTS

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. The Company 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. For the fiscal years ended January 31, 2004, 2003, and 2002,
the Company's net losses were approximately  $18.1 million,  $29.1 million,  and
$910.5 million,  respectively.  These losses include the Company's  expenditures
associated  with  selling  software  products  and further  developing  software
products  during these years.  The Company  plans to continue to invest in these
programs and,  accordingly,  it cannot assure that its operating losses will not
continue in the future.  Continued  losses could reduce the Company's  liquidity
and  negatively  affect its stock price.  As of January 31, 2004,  the Company's
balances of cash, cash equivalents and short-term investments were approximately
$30.6  million.   The  Company  believes  its  current  balance  of  cash,  cash
equivalents and short-term  investments,  combined with any funds generated from
its  operations  will be sufficient to fund its operations for at least the next
twelve months based upon its estimates of funds required to operate its business
during such period.  However,  if, at any point,  due to continued  losses,  the
Company ceases to have  sufficient  funds to continue its  operations,  it would
need to decrease its  expenditures  (although  at this point the Company  cannot
accurately predict the amount of that decrease).  As a result of any decrease in
expenditures,  the Company may need to terminate employees, curtail research and
development  programs  and take  other  steps to reduce  the  amount of funds it
expends in its  operations.  This could have a negative  effect on the Company's
ability to develop product improvements or new products that will achieve market
acceptance.  This could in turn,  have a negative  impact on the Company's sales
and financial results.

                                       9
<PAGE>




     THE COMPANY  EXPERIENCES  QUARTERLY  FLUCTUATIONS IN ITS OPERATING RESULTS,
WHICH MAY ADVERSELY  AFFECT ITS STOCK PRICES;  FOR EXAMPLE,  THE COMPANY'S TOTAL
REVENUES  IN THE THIRD  QUARTER OF FISCAL YEAR 2004 WERE $8.7  MILLION,  BUT ITS
TOTAL REVENUES IN THE FOURTH QUARTER OF FISCAL YEAR 2004 WERE $6.0 MILLION,  AND
THE PRICE PER SHARE OF ITS COMMON STOCK  DURING  THOSE TWO QUARTERS  RANGED FROM
$3.16 TO $5.72

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

     o    the  downturn  in capital  spending  by  customers  as a result of the
          current economic slowdown;

     o    the delay or deferral of customer implementations;

     o   the budget cycles of the Company's customers;

     o   seasonality of individual customer buying patterns;

     o   an increase in competition in the software industry;

     o   the size and timing of individual transactions;

     o    the timing of new software  introductions and software enhancements by
          the Company and its competitors;

     o    changes in operating expenses and personnel;

     o    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;

     o    the overall trend towards industry consolidation; and

     o    changes in general economic and geo-political  conditions and specific
          economic conditions in the computer and software industries.

In   particular,   the  Company'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,  its 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  derives a significant  portion of its revenues from
sales to agencies of the U.S.  Government,  and, therefore,  the budget cycle of
the U.S.  Government impacts the Company's total revenues.  In certain financial
quarters,  the Company has derived a significant  portion of its revenues from a
single customer.  For example,  revenues derived from one customer accounted for
approximately  39% of the  Company's  total  revenues  for the third  quarter of
fiscal year 2004.  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 the Company's  revenue  patterns,  it
bases its operating  expenses upon anticipated  revenue levels,  and the Company
incur them 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.

In  addition,  steps  which the  Company  has taken or may take in the future to
control  operating  expenses  may hamper its  development,  sales and  marketing
efforts and,  ultimately,  its  operating  results.  For  instance,  the Company
aligned its resources  through a number of  reorganizations  during fiscal years
2002  through  2004  to  attempt  to   capitalize  on  markets  that  have  been
consistently   successful  for  it.  These   reorganizations  were  intended  to
streamline  the  Company's  professional  services,  customer  support and sales
organizations   by  reducing  the  number  of  its   employees  to  improve  the
productivity of each of those  organizations  as well as by reducing  management
personnel  and  other  overhead  costs  in  its   marketing,   development   and
administrative  organizations.  However,  the  loss  of key  personnel  in  such
restructurings and any severance and other costs incurred in such restructurings
could negatively affect the Company's  quarterly operating results and adversely
affect its stock price.

     THE COMPANY  DERIVES A  SIGNIFICANT  PORTION OF ITS REVENUES  FROM SALES TO
U.S.  GOVERNMENT  AGENCIES;  (FOR EXAMPLE,  FOR THE YEAR ENDED JANUARY 31, 2004,
TOTAL REVENUES DERIVED FROM SALES TO AGENCIES OF THE U.S. GOVERNMENT REPRESENTED
APPROXIMATELY 52% OF THE COMPANY'S TOTAL REVENUES); U.S. GOVERNMENT AGENCIES ARE
SUBJECT TO BUDGET CUTS AND,  CONSEQUENTLY,  THE COMPANY MAY LOSE  REVENUES  UPON
WHICH IT HAS  HISTORICALLY  RELIED,  AND A CHANGE IN THE SIZE AND  TIMING OF THE
COMPANY'S  U.S.  GOVERNMENT   CONTRACTS  MAY  MATERIALLY  AFFECT  THE  COMPANY'S
OPERATING RESULTS

                                       10
<PAGE>


For the year ended  January  31,  2004,  total  revenues  derived  from sales to
agencies of the U.S. Government were approximately  $15.2 million,  representing
52% of total  revenues.  For the year ended January 31, 2003,  revenues  derived
from sales to agencies of the U.S.  Government were  approximately $6.4 million,
or 27% of total  revenues.  While the U.S.  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.  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  Company's  future  operating  results  and
financial position. There can be no assurance that the Company will complete any
of these potential transactions.

     THE COMPANY  DEPENDS ON  INTERNATIONAL  SALES,  PARTICULARLY  IN THE UNITED
KINGDOM,  GERMANY AND FRANCE; (FOR EXAMPLE, FOR THE YEAR ENDED JANUARY 31, 2004,
TOTAL REVENUES DERIVED FROM INTERNATIONAL SALES REPRESENTED APPROXIMATELY 25% OF
THE COMPANY'S TOTAL REVENUES);  ANY ECONOMIC DOWNTURN,  CHANGES IN LAWS, CHANGES
IN CURRENCY  EXCHANGE RATES OR POLITICAL  UNREST IN THOSE COUNTRIES COULD HAVE A
MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS

For the year ended January 31, 2004, total revenues  derived from  international
sales were approximately $7.2 million,  representing  approximately 25% of total
revenues.   For  the  year  ended  January  31,  2003,   revenues  derived  from
international sales were approximately $8.3 million,  representing approximately
35% of total  revenues.  Most of the  Company's  international  sales are in the
United Kingdom,  Germany and France. The Company's international operations have
historically  exposed it to longer  accounts  receivable  and payment cycles and
fluctuations  in currency  exchange rates.  International  sales are made mostly
from the Company's  foreign  subsidiary and are denominated in British pounds or
EUROs. As of January 31, 2004,  approximately 11% and 20% of the Company's total
consolidated  accounts  receivable were  denominated in British pounds or EUROs,
respectively.  Additionally,  the  Company's  exposure to foreign  exchange rate
fluctuations arises in part from intercompany accounts in which royalties on the
Company's  foreign  subsidiary's  sales are  charged  to the  Company's  foreign
subsidiary  and  recorded  as  intercompany  receivables  on  the  books  of the
Company's U.S. parent company, Convera Corporation.  The Company is also exposed
to foreign exchange rate  fluctuations as the financial results of the Company's
foreign  subsidiary are translated  into U.S.  dollars in  consolidation.  Since
exchange rates vary,  those results when  translated may vary from  expectations
and adversely impact overall expected profitability.

The  Company's  international  operations  expose it to a variety of other risks
that could  seriously  impede its financial  condition  and growth.  These risks
include the following:

     o    potentially adverse tax consequences; o difficulties in complying with
          regulatory  requirements  and  standards;

     o    trade restrictions and changes in tariffs;

     o    import  and  export  license  requirements  and  restrictions;  and

     o    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.

     THE  COMPANY  IS IN AN  EXTREMELY  COMPETITIVE  MARKET,  AND IF IT FAILS TO
COMPETE  EFFECTIVELY  OR RESPOND TO RAPID  TECHNOLOGICAL  CHANGE,  THE COMPANY'S
REVENUES AND MARKET SHARE WILL BE ADVERSELY AFFECTED

The Company's business environment and the computer software industry in general
are characterized by intense competition,  rapid technological changes,  changes
in  customer  requirements  and  emerging  new market  segments.  The  Company's
competitors include many companies that are larger and more established and have
substantially  more  resources  than the Company  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

                                       11
<PAGE>


the needs of the markets which the Company  serves.  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 the Company's  strategy to succeed and to remain  competitive,  the
Company must  leverage  its core  technology  to develop new product  offerings,
update existing  features and add new components to its current products such as
support for new datatypes and taxonomies for specific  vertical  markets.  These
development  efforts  are  expensive,  and  the  Company  plans  to  fund  these
developments  with its existing capital  resources,  and other sources,  such as
equity  issuances  and  borrowings,  which  may be  available  to it.  If  these
developments do not generate  substantial  revenues,  the Company's business and
results of operations will be adversely affected. The Company cannot assure that
it will successfully  develop any new products,  complete them on a timely basis
or at all, achieve market acceptance or generate significant revenues with them.

     THE COMPANY  DESIGNS ITS PRODUCTS TO WORK WITH CERTAIN  SYSTEMS AND CHANGES
TO THESE SYSTEMS MAY RENDER ITS PRODUCTS  INCOMPATIBLE  WITH THESE SYSTEMS,  AND
THE COMPANY MAY BE UNABLE TO SELL ITS PRODUCTS

The Company'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 fail to adapt its products as quickly as its
competitors, the Company may be unable to sell its products.

     THE  COMPANY'S  SOFTWARE  PRODUCTS ARE COMPLEX AND MAY CONTAIN  ERRORS THAT
COULD DAMAGE ITS REPUTATION AND DECREASE SALES

The  Company's  complex  software  products  may contain  errors that people may
detect at any point in the  products'  life cycles.  The Company  cannot  assure
that,  despite its 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 DEPENDS ON PROPRIETARY  TECHNOLOGY LICENSED FROM THIRD PARTIES;
IF THE  COMPANY  LOSES THESE  LICENSES,  IT COULD  DELAY  SHIPMENTS  OF PRODUCTS
INCORPORATING THIS TECHNOLOGY AND COULD BE COSTLY

The Company's  products use some of the  technology  that it licenses 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 delay the Company's  ability to ship these products while
it 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 THE COMPANY'S BUSINESS, ITS INTELLECTUAL
PROPERTY IS EXTREMELY  IMPORTANT  TO ITS  BUSINESS,  AND ADVERSE  CHANGES TO THE
COMPANY'S INTELLECTUAL PROPERTY WOULD HARM ITS COMPETITIVE POSITION

The  Company  believes  that its  success  depends,  in part,  on its ability to
protect its  proprietary  rights and technology.  Historically,  the Company has
relied 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:

     o    pending patent applications may not be issued;

     o    intellectual property laws may not protect the Company's  intellectual
          property rights;

                                       12

<PAGE>


     o    third parties may  challenge,  invalidate,  or  circumvent  any patent
          issued to the Company;

     o    rights  granted  under  patents  issued to the Company may not provide
          competitive advantages to it;

     o    unauthorized  parties may attempt to obtain and use  information  that
          the Company  regards as proprietary  despite the Company's  efforts to
          protect its proprietary rights;

     o    others may independently  develop similar  technology or design around
          any patents issued to the Company; and

     o    effective protection of intellectual property rights may be limited or
          unavailable in some foreign countries in which the Company operates.

     THE COMPANY DEPENDS ON ITS KEY PERSONNEL,  THE LOSS OF WHOM WOULD ADVERSELY
AFFECT THE COMPANY'S  BUSINESS,  AND THE COMPANY MAY HAVE DIFFICULTY  ATTRACTING
AND RETAINING SKILLED EMPLOYEES

The  Company's  success  depends  to a  significant  degree  upon the  continued
contributions  of its  key  management,  marketing,  technical  and  operational
personnel,  especially  Patrick C.  Condo,  the  Company's  President  and Chief
Executive Officer. 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 that its future success will depend in large part upon its
ability to attract and retain additional highly skilled  management,  technical,
marketing,   product   development,   operational   personnel  and  consultants.
Competition for such personnel,  particularly software developers,  professional
service consultants and other technical 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, 2004,  the Company had net  operating  loss  carryforwards  of
approximately $154 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 the Company's ability to utilize these
carryforwards.  Additionally,  past or future changes in the Company'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.

As of January 31, 2004, the Company's  balances of cash,  cash  equivalents  and
short-term  investments  were  approximately  $30.6  million.  While the Company
believes it will have sufficient  funds for its operations for at least the next
twelve  months,  it is possible  that the Company will need  additional  capital
during or after  that  time.  The  Company  may need  additional  capital in the
future,  and it may not be available on acceptable  terms, or at all, and if the
Company does not receive any  necessary  additional  capital,  it could harm the
Company's financial condition and future prospects

     AS OF JANUARY 31, 2004, THE COMPANY'S  BALANCES OF CASH,  CASH  EQUIVALENTS
AND  SHORT-TERM  INVESTMENTS  WERE  APPROXIMATELY  $30.6  MILLION.  THE  COMPANY
BELIEVES  ITS  CURRENT  BALANCE  OF  CASH,   CASH   EQUIVALENTS  AND  SHORT-TERM
INVESTMENTS,  COMBINED  WITH ANY FUNDS  GENERATED  FROM ITS  OPERATIONS  WILL BE
SUFFICIENT TO MEET ITS WORKING CAPITAL AND CAPITAL EXPENDITURE  REQUIREMENTS FOR
AT LEAST THE NEXT TWELVE  MONTHS BASED UPON ITS  ESTIMATES OF FUNDS  REQUIRED TO
OPERATE ITS BUSINESS DURING SUCH PERIOD. HOWEVER, DURING OR AFTER THAT TIME, THE
COMPANY MAY NEED TO RAISE ADDITIONAL FUNDS FOR THE FOLLOWING PURPOSES:

     o    to fund the  Company's  operations;  including  sales,  marketing  and
          research and development programs;

     o    to fund any growth the Company experiences;

     o    to  enhance  and/or  expand the range of  products  and  services  the
          Company  offers;  for  example,  the Company may upgrade its  existing
          products  or develop  new  products,  and the  Company  may expand its
          training and other professional services for its products;

     o    to increase the Company's promotional and marketing activities; or

                                       13
<PAGE>


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

The Company cannot assure that if it needs any  additional  capital that it will
be available, and if so, on terms beneficial to the Company.  Historically,  the
Company has obtained external financing entirely from sales of its common stock.
To  the  extent  the  Company  raises  additional   capital  by  issuing  equity
securities, its shareholders may experience substantial dilution. If the Company
is unable to obtain  additional  capital,  it may then  attempt to preserve  its
available  resources  by various  methods  including  deferring  the creation or
satisfaction  of  commitments,   reducing   expenditures  on  its  research  and
development  programs or otherwise  scaling back its operations.  If the Company
were unable to raise such additional capital or defer certain costs as described
above,  that inability  would have an adverse effect on the Company's  financial
position, results of operations and prospects.

     THE  COMPANY'S  STOCK PRICE MAY  FLUCTUATE  WHICH MAY MAKE IT  DIFFICULT TO
RESELL SHARES OF THE COMPANY'S STOCK

The market price of the  Company's  common stock has been highly  volatile.  For
example,  in the fourth  quarter of fiscal year 2004, the market price per share
of the Company's  common stock ranged from $3.16 to $5.72.  This  volatility may
adversely  effect the price of the Company's  common stock, and its 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:

     o    future announcements concerning the Company or its competitors;

     o    quarterly variations in the Company's operating results;

     o    actual or anticipated  announcements  of technical  innovations or new
          product  developments  by the  Company or its  competitors;

     o    general conditions in the Company's industry;

     o    proprietary or other litigation; and

     o    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 THE COMPANY'S 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.

     ALLEN  HOLDING  INC. AND RELATED  PARTIES  EXERCISE  VOTING  CONTROL OF THE
COMPANY,  AND THE COMPANY'S OTHER SHAREHOLDERS WILL NOT HAVE AN EFFECTIVE SAY IN
ANY MATTERS UPON WHICH ITS SHAREHOLDERS VOTE

Allen Holding Inc., together with Allen & Company Incorporated, Herbert A. Allen
and certain related  parties,  beneficially  owns more than 50% of the Company's
voting  power,  and would  therefore  be able to control  the outcome of matters
requiring a stockholder  vote. These matters could include offers to acquire the
Company and elections of directors.  Allen Holding,  Inc., Mr. Allen and Allen &
Company  may have  interests  which  are  different  than the  interests  of the
Company's other stockholders.

                                       14

<PAGE>



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 plans to lease office space substantially similar to
what it currently occupies.

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.


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, and 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 million in actual  damages and $10
million in punitive  damages from the Company.  DSMCi  subsequently  amended its
complaint to add copyright  infringement-related  claims. NGTL intervened in the
litigation as a  co-defendant  with  Convera,  and filed  counterclaims  against
DSMCi. Convera moved to compel arbitration of DSMCi's claims; the District Court
denied the motion, and Convera filed an interlocutory  appeal. The D.C. Circuit,
in  November  2003,  ruled that it did not have  jurisdiction  to  consider  the
appeal.  The litigation is now in the discovery phase in the District Court. The
Company  continues to investigate 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.

                                       15
<PAGE>



                                     PART II

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

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."

The following  table sets forth the high and low sale prices for Convera  common
stock for the period from February 1, 2002 through January 31, 2004, as reported
by the National Market System of NASDAQ. The number of shareholders of record as
of January 31, 2004 was 962. The Company has never declared or paid dividends on
its common stock and anticipates  that, for the foreseeable  future, it will not
pay dividends on its common stock.

<TABLE>

<S>                                                                <C>                <C>
                                                                  High                Low

        Fiscal 2004 (February 1, 2003 - January 31, 2004)

        First Quarter....................................      $   4.25           $   3.08
        Second Quarter...................................          5.25               3.55
        Third Quarter....................................          4.80               3.74
        Fourth Quarter...................................          5.72               3.16

        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

</TABLE>


The following table sets forth, as of January 31, 2004, information with respect
to the Company's equity compensation plans:
<TABLE>

<S>                                             <C>                        <C>                       <C>
                                                Number of                                    Number of Securities
                                            Securities to be        Weighted-Average       Remaining Available for
                                          Issued Upon Exercise      Exercise Price of       Future Issuance Under
                                             of Outstanding       Outstanding Options,    Equity Compensation Plans
                                          Options, Warrants and    Warrants and Rights      (excluding securities
                                                 Rights                    (1)             reflected in column (a))
               Plan Category                       (a)                     (b)                       (c)
    Equity compensation plans approved
    by security holders:
    1.  Convera Stock Option Plan                8,639,067                 $5.18                      4,662,635
    2.  Convera Employee Stock
            Purchase Plan                                -                     -                        813,257
    Equity compensation plans not
    approved by security holders:                     None           Not Applicable              Not Applicable
<FN>

(1) For purposes of calculating the  weighted-average  exercise price,  deferred shares have been excluded  because
there is no exercise price.
</FN>
</TABLE>

                                       16
<PAGE>



Item 6.       Selected Financial Data
<TABLE>
<CAPTION>

   The selected financial data presented below have been derived from the Company's consolidated financial statements. The balance
   sheet data as of January 31, 2004 and 2003, and the statement of operations data for the fiscal years ended January 31, 2004,
   2003 and 2002 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.




---------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                  <C>           <C>               <C>           <C>
                                                                    Fiscal Years Ended January 31,
                                                  2004              2003             2002           2001            2000
Statement of Operations Data:                                   (in thousands, except per share data)

Revenues................................    $      29,251     $      23,614    $     34,228    $    51,522     $   37,934

Cost of revenues........................            8,570            10,697          22,307         18,080          6,867
                                            ---------------   ---------------  --------------  -------------   ------------

Gross margin............................           20,681            12,917          11,921         33,442         31,067
                                            ---------------   ---------------  --------------  -------------   ------------
                                            ---------------   ---------------  --------------  -------------   ------------

Operating expenses:
   Sales and marketing..................           18,124            20,018          33,747         22,591         16,210
   Research and product development.....           11,981            11,639          22,500         12,722          9,456
   General and administrative...........           10,564             8,642          10,214          6,279          5,402
   Amortization of goodwill (3).........                -                 -          86,291         13,594            118
   Amortization of other intangible
     assets (3).........................                -                 -           9,088          1,606              -
   Incentive bonus payments to employees                -              (138)          6,681              -              -
   Restructuring charges................              621             2,337           8,128              -              -
   Reduction in goodwill................                -                 -         675,896              -              -
   Reduction in other long-lived assets.                -                 -          78,528              -              -
   Acquired in-process research and
     development........................                -               126               -            800              -
                                            ---------------   ---------------  --------------  -------------   ------------
                                            ---------------   ---------------  --------------  -------------   ------------
                                                   41,290            42,624         931,073         57,592         31,186
                                            ---------------   ---------------  --------------  -------------   ------------
                                            ---------------   ---------------  --------------  -------------   ------------

Operating loss..........................          (20,609)         (29,707)        (919,152)       (24,150)          (119)

Other income, net.......................            2,550              636            4,191          1,368            250
Write-off of investment in affiliate....                -                -                -              -           (471)
                                            ---------------   ---------------  --------------  -------------   ------------
                                            ---------------   ---------------  --------------  -------------   ------------



Net loss before income taxes............          (18,059)         (29,071)        (914,961)       (22,782)          (340)



Income tax benefit......................                -                -            4,452              -              -
                                            ---------------   ---------------  --------------  -------------   ------------
                                            ---------------   ---------------  --------------  -------------   ------------
Net loss................................          (18,059)         (29,071)        (910,509)       (22,782)          (340)

Dividends on cumulative, convertible
preferred stock.........................                -                -                -             10             14
                                            ---------------   ---------------  --------------  -------------   ------------
                                            ---------------   ---------------  --------------  -------------   ------------
Net loss applicable to common stock.....    $     (18,059)    $    (29,071)    $   (910,509)   $   (22,792)    $     (354)
                                            ===============   ===============  ==============  =============   ============
                                            ===============   ===============  ==============  =============   ============
Net loss per common share - basic and       $         (0.57)  $       (1.01)   $      (20.08)  $      (1.22)   $     (0.02)
   diluted..............................
Weighted-average number of common shares
   outstanding - basic and diluted......           31,486            28,854          45,349         18,714         14,282



Balance Sheet Data (1) (at end of period):
Cash and cash equivalents...............    $      30,530     $      10,412    $     17,628    $    37,061     $   10,884
Working capital.........................           26,808            24,434          51,797        166,543         19,288
Total assets............................           45,695            49,139          78,106       1,026,445        30,687
Accumulated deficit.....................       (1,036,625)       (1,018,540)       (989,429)       (78,920)       (56,138)
Total shareholders' equity (2)..........           31,368            32,372          57,876       1,015,058        22,305

---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
<FN>

(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 the business  combination with Intel's IMS
         division.
</FN>
</TABLE>


                                       17
<PAGE>



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

Overview

The Company  principally  earns  revenues  from the  licensing  of its  software
products 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,  resellers
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.

Based on the most recent  forecasts  from  industry  analyst IDC, the  worldwide
market for enterprise  search  products is expected to grow at a compound annual
growth  rate of  approximately  17%  between  2003-2007.  The  Company  believes
RetrievalWare  8 has unique  capabilities  supporting  the needs of customers in
government, life sciences,  financial and publishing markets that will enable it
to  capitalize  on this market  growth and achieve its  operational  goals.  The
Company believes it can accomplish its goals with the current level of resources
and  staffing  and  continue to gain market  share in the  worldwide  government
market.  Going  forward,  the  Company  will focus a  substantial  amount of the
Company's  resources  on further  penetration  of national  security and defense
initiatives  with the United  States and its allies.  An important  objective in
this  market is to  substantially  upgrade the over 100  installations  of older
versions of RetrievalWare to RetrievalWare 8 and its  categorization and dynamic
classification  software. In the commercial sector, the Company will continue to
focus on the  financial and life sciences  verticals  and  anticipates  stronger
focus on the publishing  vertical  during the 2005 fiscal year, to capitalize on
the alignment  between  customer  requirements  in that sector and the Company's
categorization and classification software within RetrievalWare 8.

Management's  main objective is to achieve  profitability and positive cash flow
from operations without hampering development,  sales and marketing efforts. The
Company is committed to investing in the enhancement of its products to meet the
needs of its customers and prospects. To achieve its main objective, the Company
continually  evaluates  revenue to  determine  the  market  sectors in which the
Company should  concentrate  its sales and marketing  efforts while  maintaining
control over operating  expenses.  The Company's  business  environment  and the
computer software industry in general are characterized by intense  competition,
rapid technological  changes,  changes in customer requirements and emerging new
market  segments.   The  Company  competes  particularly  intensely  within  the
commercial sector where its market position is not as strong as it is within the
government  sector.  The Company's  competitors  include many companies that are
larger and more established and have  substantially more resources than it does.
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.  To address the competition,  the
Company will continue to invest  heavily in research and  development to advance
its leadership position in linguistic analysis,  scalability,  performance,  and
taxonomy  development  and  deployment.  The Company  will also make  additional
investments in specific  product features to better serve the needs of customers
looking for online customer service and support solutions.

In 2002 and 2003,  the  Company's  results of  operations  were  impacted by the
general  downturn in the  economy,  which  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  negatively  impacted  its  business.  Through a number of
reorganizations  during fiscal years 2002 through 2004, the Company  aligned its
resources in an effort to ensure it continued to capitalize on markets that have
been consistently  successful,  including the federal  government,  and to focus
more  resources  on  those  areas  of  the  commercial   business  that  present
opportunities,  such  as the  financial  services  and  life  sciences  vertical
markets. The reorganizations,  which are described in this section and elsewhere
in this Form 10-K, streamlined the professional  services,  customer support and
sales organizations  through reductions in headcount to improve the productivity
of each of those organizations as well as reduced management personnel and other
overhead costs in the marketing,  development

                                       18

<PAGE>

and  administrative  organizations  within the Company.  Management  continually
assesses historical results as well as future opportunities to determine whether
resources are aligned appropriately. Where necessary, additional changes will be
made to the  organization  to  ensure  that the  Company  continues  to focus on
achieving  profitable operating results. A detailed review of the numerous risks
and  challenges  facing the Company is  contained  in the Risk  Factors  section
beginning on page 9.

Convera was  established  on December  21, 2000 through the  combination  of the
former Excalibur  Technologies  Corporation and Intel Corporation's  Interactive
Media Services  division (the  "Combination").  Intel contributed to the Company
its IMS division,  intellectual  property and other assets used by that division
and $150  million in cash 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. 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 in exchange for 4,746,221 shares of Class A Convera common stock .

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, 2004.


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,


                                       19
<PAGE>

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  professional  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.  The  allowance for
doubtful accounts is determined based on an analysis of the Company's historical
collection  experience  and the  Company's  portfolio of  customers  taking into
consideration the general economic  environment as well as the industry in which
the Company operates. 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

                                       20
<PAGE>

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, 2004, the Company has recorded a
full valuation allowance against the net deferred tax asset.

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. Stock options  originally granted under the Company's stock option plans
have an exercise price equal to the market value of the underlying  common stock
on the date of grant, and accordingly no employee  compensation  cost related to
the initial grant of options is included in expenses. Stock option modifications
associated with a change in employee status to a nonemployee have been accounted
for as a new award and measured  using the intrinsic  value method under APB 25,
resulting  in the  inclusion  of  compensation  expense in the  January 31, 2004
consolidated statement of operations.  Nonvested shares of stock (referred to as
deferred  stock)  granted under the Company's  stock option plan are measured at
fair value on the date of grant  based on the number of shares  granted  and the
quoted  price  of the  Company's  common  stock.  Such  value is  recognized  as
compensation  expense  over the  corresponding  service  period.  If an employee
leaves the Company prior to the vesting of the deferred  stock,  the estimate of
compensation  expense  recorded  in previous  periods is adjusted by  decreasing
compensation expense in the period of forfeiture.


Results of Operations

For the fiscal year ended January 31, 2004,  total  revenues were $29.3 million,
an  increase of 24%  compared to revenues of $23.6  million in fiscal year 2003.
The net loss for fiscal year 2004 was $18.1 million,  or $0.57 per common share,
compared to $29.1 million, or $1.01 per common share, in the prior year. For the
fiscal year ended  January 31,  2003,  total  revenues  declined  31% from total
revenues of $34.2 million in fiscal year 2002. The net loss for fiscal year 2002
was $910.5 million, or $20.08 per common share.


                                       21
<PAGE>




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, 2004 (dollars in
thousands):

-----------------------------------------------------------------------------
<TABLE>
<S>                                <C>        <C>         <C>        <C>             <C>    <C>         <C>              <C>
                                                                                                         Increase      Increase
                                                                                                        (Decrease)    (Decrease)
                                                                                                        from          from
                                               Components of Revenue and Expenses                       2003 to       2002 to
                                                                                                          2004          2003
                                                 Fiscal years ended January 31,
                                      2004                    2003                     2002
Revenues:                          $          %            $          %             $         %            %             %
                               ----------- --------    ----------- --------     ---------- --------     ---------     ---------
    License                      $18,322       63%       $13,062       55%        $24,187      71%           40%          (46)%
    Professional services          4,338       15%         4,018       17%          2,553       7%            8%           57%
    Maintenance                    6,591       22%         6,534       28%          6,509      19%            1%            0%
                               ----------- --------    ----------- --------     ---------- --------     ---------     ---------
                                  29,251      100%        23,614      100%         33,249      97%           24%          (29)%
    Interactive services               -        -              -        -             979       3%            -          (100)%
                               ----------- --------    ----------- --------     ---------- --------     ---------     ---------
                               ----------- --------    ----------- --------     ---------- --------     ---------     ---------
      Total revenues             $29,251      100%       $23,614      100%        $34,228     100%           24%          (31)%
                               ----------- --------    ----------- --------     ---------- --------     ---------     ---------

Expenses:
   Cost of license revenue        $1,822        6%        $3,485       15%         $8,857      26%          (48)%         (61)%
    Cost of professional
     services revenue              4,715       16%         5,446       23%          7,511      22%          (13)%         (27)%
    Cost of maintenance
     revenue                       2,033        7%         1,766        7%          1,979       6%           15%          (11)%
    Cost of interactive
     services revenue                  -        -              -        -           3,960      12%            -          (100)%
    Sales & marketing             18,124       62%        20,018       85%         33,747      99%          (10)%         (41)%
   Research and product
      development                 11,981       41%        11,639       49%         22,500      66%            3%          (48)%
   General and administrative     10,564       36%         8,642       37%         10,214      30%           22%          (15)%
   Amortization of goodwill            -        -              -        -          86,291     252%           -          (100)%
   Amortization of other
      intangible assets                -        -              -        -           9,088      26%           -          (100)%
   Incentive bonus payments
      to employees                     -        -           (138)      (1)%         6,681      19%        (100)%        (102)%
   Restructuring charges             621        2%         2,337       10%          8,128      24%         (73)%         (71)%
   Reduction in goodwill               -        -              -        -         675,896    1975%           -          (100)%
   Reduction in other
      long-lived assets                -        -              -        -          78,528     229%           -          (100)%
   Acquired in-process
      research and
      development                      -        -            126        1%              -       -         (100)%         100%
                               ----------- --------    ----------- --------     ---------- --------     ---------     ---------
      Total expenses             $49,860      170%       $53,321      226%       $953,380    2785%          (6)%         (94)%
                               ----------- --------    ----------- --------     ---------- --------     ---------     ---------
Operating loss                  $(20,609)               $(29,707)               $(919,152)                  N/A           N/A

Other income, net                  2,550                     636                    4,191
                               -----------             -----------              ----------
Net loss before income taxes    $(18,059)               $(29,071)               $(914,961)
Income tax benefit                     -                       -                    4,452
                               -----------             -----------              ----------
                               -----------             -----------              ----------
Net loss                        $(18,059)               $(29,071)               $(910,509)
                               ===========             ===========              ==========
                               ===========             ===========              ==========

----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       22

<PAGE>



Revenues

License  revenues  for the year ended  January 31, 2004  increased  40% to $18.3
million from $13.1in fiscal year 2003 and decreased 46% in fiscal year 2003 from
$24.2 million in fiscal year 2002. The number of deals  completed in fiscal year
2004 declined 22% from fiscal year 2003,  but the average deal size increased to
approximately  $110 thousand from  approximately $65 thousand in the prior year.
The increase in license revenues in fiscal year 2004 was due to strong growth in
the federal market,  in which license revenues  increased by 170% over the prior
year. The decrease in license  revenues in fiscal years 2003 and 2002 was due to
the general downturn in the economy,  which 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  negatively  impacted the  business,  reducing the average
license revenue per contract 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 $4.3 million for the year ended  January 31,  2004,  an
increase of 8% over services revenues of $4.0 million for the year ended January
31, 2003.  Professional  services  revenues for fiscal 2003  increased  57% over
services  revenues of $2.6  million for the year ended  January  31,  2002.  The
growth in professional  services  revenues was due to increased  business in the
federal market.  Federal professional services revenues increased  approximately
167% in the current year. In fiscal year 2003,  services revenues  increased due
to an increased  focus on the provision of professional  services in Europe.  In
addition,  professional  services revenue derived from U.S.  government agencies
increased approximately 46% from fiscal year 2002 to fiscal year 2003.

Maintenance  revenues  were $6.6  million for the year ended  January 31,  2004,
compared  to $6.5  million for the years  ended  January 31, 2003 and 2002.  The
increase in maintenance revenues in the current fiscal year can be attributed to
the growth in license  revenues this fiscal year and the associated  increase in
new maintenance  revenues.  Maintenance revenues were essentially flat from 2002
to 2003 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. In the third quarter of fiscal year 2002, the Company announced that it
was  eliminating  operations  supporting  its  interactive  services  offerings.
Accordingly,  there were no revenues from interactive  services during the years
ended January 31, 2003 and January 31, 2004.

Revenues from international operations are generated from 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 approximately 13% to $7.2 million in fiscal year 2004 from $8.3 million
in fiscal year 2003. In fiscal year 2003,  international  revenues  declined 12%
from $9.1  million in fiscal year 2002.  Revenues  derived  from  contracts  and
orders issued by agencies of the U.S.  Government were  approximately  52%, 27%,
and 14% of total revenues for fiscal years 2004,  2003, and 2002,  respectively.
One customer  accounted for  approximately  12% of revenues in fiscal year 2004.
There were no  customers  in fiscal year 2003 and 2002 that  accounted  for more
than 10% of revenues.

Cost of revenues

Cost of license revenues  decreased 48% to $1.8 million in fiscal year 2004 from
$3.5 million in fiscal year 2003. Cost of revenues  decreased 61% in fiscal year
2003 from $8.9 million in fiscal year 2002. As a percentage of license revenues,
cost of license  revenues was 10% for the year ended  January 31, 2004,  27% for
the year ended  January 31, 2003,  and 37% for the year ended  January 31, 2002.
The  decrease in cost of license  revenues as a percentage  of license  revenues
over the last three fiscal years can be  attributed  to a decrease in the amount
of fixed amortization of prepaid royalties in those periods. Additionally, there
was $2.9  million  of  amortization  of  developed  technology  acquired  in the
Combination  included in cost of license  revenues  in fiscal  year 2002.  While
there was $0.3 and $0.2 million of amortization of developed  technology related
to the Semantix, Inc. acquisition included in cost of license revenues in fiscal
years  2004 and 2003,  respectively,  there was no  amortization  related to the
Combination contained in cost of license revenues for those fiscal years, as the
remaining  unamortized  balance  related  to the IMS  developed  technology  was
written off in fiscal year 2002.


                                       23

<PAGE>

Cost of  professional  services  revenues  decreased 13% to $4.7 million for the
year ended  January  31, 2004 from $5.4  million for the year ended  January 31,
2003.  Cost of  services  revenues  decreased  27% in fiscal year 2003 from $7.5
million in fiscal  year 2002.  The  decrease  in cost of  professional  services
revenues  for both fiscal year 2004 and 2003 is  attributable  to a reduction in
the overall number of employees  responsible  for the management and delivery of
professional services. In fiscal year 2004, the Company's  restructuring actions
reduced the number of employees in the  professional  services  organization  by
three.  In  restructuring  actions taken during the year ended January 31, 2003,
the  Company  reduced  the  number of  employees  in the  professional  services
organization  by 23 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  revenues  increased 15% in fiscal year 2004 to $2.0 million
from fiscal 2003 and decreased 11% to $1.8 million in fiscal year 2003 from $2.0
million in fiscal year 2002. As a percentage of  maintenance  revenues,  cost of
maintenance  revenues was 31%,  27%, and 30%, in fiscal  years 2004,  2003,  and
2002, respectively.  The increase in cost of maintenance revenues in fiscal year
2004  was  due to the  addition  of  five  employees  in  the  customer  support
organization.  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.  There were ten fewer
employees in the customer  support  organization at January 31, 2003 compared to
January 31, 2002.

Cost of interactive  services revenues represents the personnel and other direct
costs  incurred in  connection  with  performing  on the  Company's  interactive
services  related  contracts.  There were no such costs during fiscal years 2004
and 2003,  reflecting  the change in the Company's  business  strategy in fiscal
year 2002 away from  interactive  media  services  to focus  exclusively  on the
enterprise search products  business.  For the year ended January 31, 2002, cost
of interactive services revenues was approximately $4.0 million.

Operating expenses

Sales and marketing  expenses decreased 10% in fiscal year 2004 to $18.1 million
from $20.0 million in fiscal year 2003. In fiscal year 2003, sales and marketing
expenses  decreased  41% from $33.7 million in fiscal year 2002. As a percentage
of total revenues,  sales and marketing  expenses were 62%, 85% and 99% of total
revenues,  in fiscal years 2004,  2003 and 2002,  respectively.  The decrease in
sales  and  marketing  expenses  in  fiscal  years  2004 and  2003 is  partially
attributable to lower personnel  costs stemming from the  reorganization  of the
sales force that occurred  throughout fiscal years 2004 and 2003. In fiscal year
2004, the Company's restructuring actions reduced the number of employees in the
sales and marketing  organization by eleven.  In fiscal year 2003, the Company's
restructuring actions reduced the number of employees in the sales and marketing
organization  by 52.  The  fiscal  year 2004  decrease  in sales  and  marketing
expenses  compared to the prior year is also partially  attributable  to reduced
spending on marketing programs of $0.2 million, accounting for approximately 10%
of the decrease. In fiscal year 2003, a decrease in bad debt expense,  marketing
program expenses and commissions  accounted for 22%, 12% and 6%, respectively of
the  decline.  The  number  of sales and  marketing  personnel  decreased  to 66
employees at January 31, 2004 from 77 employees at January 31, 2003.  There were
134 sales and marketing employees at January 31, 2002.

Research and product development costs increased 3% in fiscal year 2004 to $12.0
million  from $11.6  million in fiscal  year 2003,  representing  41% and 49% of
total  revenues,  respectively.  In  fiscal  year  2003,  research  and  product
development  costs  decreased  48% from $22.5  million in fiscal  year 2002.  In
fiscal year 2002,  research and product  development  costs  represented  66% of
total  revenues.  The  increase  in  fiscal  year  2004  expenses  was due to an
increased use of consultants  for certain  aspects of product  development.  The
decrease in fiscal year 2003 was 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, there were
94 employees in research  and  development  compared to 108 at January 31, 2002.
The restructuring  actions taken in the second and third quarters of fiscal year
2002 reduced the number of engineers by 61 employees.

General and  administrative  expenses  increased  22% to $10.6 million in fiscal
year 2004 from $8.6  million in fiscal  year 2003,  representing  36% and 37% of
total revenues,  respectively.  In fiscal year 2003,  general and administrative


                                       24
<PAGE>

expenses  decreased  15% from $10.2  million in fiscal  year 2002.  General  and
administrative  expenses  represented 30% of total revenues in fiscal year 2002.
The increase in general and administrative  expenses in fiscal year 2004 was due
to an increase in accounting and legal fees, a non-recurring  charge  associated
with the  departure  of the  Company's  Chief  Operating  Officer  in the fourth
quarter,  and non-cash  compensation  expense  associated  with a deferred stock
grant under the  Company's  2000 Stock Option  Plan.  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.

Amortization of goodwill and other intangible assets

There was no amortization of intangible  assets recorded as a separate line item
in the  financial  statements  for the fiscal  years ended  January 31, 2004 and
2003.  Amortization of other intangible assets was approximately $9.1 million in
fiscal year 2002.  Amortization of goodwill was approximately  $86.3 million for
the year ended  January  31,  2002.  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  amount  also  includes
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.  Amortization of acquired developed  technology of
$0.3  million,  $0.2  million  and $2.9  million is  recorded in cost of license
revenues  for  the  fiscals  years  ended  January  31,  2004,  2003  and  2002,
respectively.

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
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 were fully
expensed  as of January 31,  2003.  The Company  made  payments of $0.4  million
related to these  incentive  bonuses in fiscal year 2003, and the remaining $0.9
million was 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 fiscal year 2004, the Company  adopted  restructuring  plans in the first
and second quarters as a result of continued  efforts to streamline  operations.
In connection  with the first quarter  reorganization,  the Company  reduced its
workforce by 11 employees worldwide, including four individuals from the general
and  administrative  group,  four from the marketing  group,  two from the sales
group and one from the engineering  group.  The Company recorded a restructuring
charge of $0.3 million related to severance costs for terminated employees.  The
Company  estimated that annualized  expense and cash savings  resulting from the
first fiscal  quarter  termination  of  employees  would be  approximately  $1.7
million,  which  included  approximately  $1.3  million in  estimated  sales and
marketing expense savings,  approximately  $0.3 million in estimated general and
administrative  expense  savings,  and  approximately  $0.1 million in estimated
research and development  expense  savings.  The savings were estimated to begin
being realized in the second fiscal quarter. In the second quarter,  the Company
further  reduced  its  workforce  by  17  employees  worldwide,  including  nine
individuals from the engineering  group,  three from the sales group, three from
the professional  services group and two from the marketing group. In connection
with this action,  the Company  recorded a restructuring  charge of $0.3 million
related to severance costs for terminated employees.  The Company estimated that
annualized  expense and cash savings  resulting  from the second fiscal  quarter
termination of employees  would be  approximately  $2.2 million,  which included
approximately  $1.0 million in estimated  sales and marketing  expense  savings,
approximately  $1.0  million  in  estimated  research  and  development  expense
savings,  and approximately  $0.2 million in estimated cost of revenues savings.
The savings were estimated to begin being realized in the third fiscal quarter.

                                       25

<PAGE>

During  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.  In the first quarter of fiscal 2003, in connection with
this  reorganization,   the  Company  reduced  its  workforce  by  61  employees
worldwide,  including 24 individuals  from the  engineering  group,  16 from the
sales group, 13 from the  professional  services  group,  six from the marketing
group and two from the  general  and  administrative  group.  As a  result,  the
Company recorded a restructuring charge of approximately $1.0 million related to
employee  severance costs. The Company reduced the restructuring  reserve in the
first fiscal quarter by  approximately  $0.2 million,  reflecting the payment of
lower  than  estimated  severance  amounts  related  to  previous  restructuring
actions.  The  Company  estimated  that  annualized  expense  and  cash  savings
resulting  from the first  fiscal  quarter  termination  of  employees  would be
approximately  $7.7  million,  which  included  approximately  $3.0  million  in
estimated sales and marketing  expense  savings,  approximately  $2.8 million in
estimated research and development  expense savings,  approximately $1.7 million
in  estimated  cost of  revenues  savings  and  approximately  $0.2  million  in
estimated general and administrative expense savings. The savings were estimated
to begin being realized in the second fiscal  quarter.  In the second quarter of
fiscal year 2003,  the Company  announced a reduction in force in the  continued
effort to streamline  operations.  As a result of this action,  Convera's  total
workforce was reduced by 42 employees,  including 15 from the sales group, seven
individuals from the engineering  group,  seven from the  professional  services
group,   seven  from  the   marketing   group  and  six  from  the  general  and
administrative  group. The Company recorded a restructuring charge in the second
quarter of fiscal year 2003 of  approximately  $1.0 million  related to employee
severance costs. The Company estimated that annualized  expense and cash savings
resulting  from the second  fiscal  quarter  termination  of employees  would be
approximately  $6.2  million,  which  included  approximately  $3.7  million  in
estimated sales and marketing  expense  savings,  approximately  $0.9 million in
estimated research and development  expense savings,  approximately $0.9 million
in  estimated  general and  administrative  expense  savings and $0.7 million in
estimated  cost of revenues  savings.  The savings were estimated to begin being
realized in the third fiscal  quarter.  During the fourth quarter of fiscal year
2003, the Company adopted a restructuring  plan in its continued effort to align
its operations  around key vertical markets and to streamline  operations.  As a
result of this restructuring  plan, the Company reduced its workforce by a total
of 12 employees,  including eight from the sales group, one from the engineering
group and three from the  professional  services  group.  The  Company  recorded
restructuring   charges  of  approximately  $0.5  million  related  to  employee
severance  costs for the quarter ended January 31, 2003.  The Company  estimated
that  annualized  expense  and cash  savings  resulting  from the fourth  fiscal
quarter  termination of employees  would be  approximately  $2.4 million,  which
included  approximately  $1.9 million in estimated  sales and marketing  expense
savings,  approximately  $0.4 million in estimated cost of revenues  savings and
approximately  $0.1  million  in  estimated  research  and  development  expense
savings.  The savings were estimated to begin being realized in the first fiscal
quarter of fiscal year 2004.

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 decision to exit the interactive  media services  business.
In the second  quarter of fiscal  year 2002,  the  restructuring  resulted  in a
reduction of Convera's total workforce by 22 employees, including 17 individuals
from the  Company's  engineering  group  and 5  individuals  from  the  business
development group. As part of this  restructuring,  the Company also reduced the
number of independent  contractors that were working on behalf of the Company by
approximately  40  contractors  and  reduced  the  amount of space to be used in
certain of the Company's leased facilities.  As a result, the Company recorded a
restructuring   charge  of  $2.9  million.  The  restructuring  charge  included
approximately $0.5 million in costs incurred under contractual  obligations with
no future  economic  benefit to the  Company,  accruals  of  approximately  $0.4
million for employee termination costs and approximately $2.1 million related to
future  facility  losses for the idle portion of a facility  resulting  from the
restructuring  activities.  A non-cash  charge  related to the write-down of the
non-idle  portion of facility  improvements  to their net  realizable  value was
recorded  during the second quarter of fiscal year 2002.  The Company  estimated
that  annualized  expense  and cash  savings  resulting  from the second  fiscal
quarter  termination  of  employees  would  be  $3.3  million,   which  included
approximately $1.9 million in estimated research and development expense savings
and approximately $1.4 million in estimated sales and marketing expense savings.
Estimated annualized research and development expense and cash savings resulting
from the reduction in the number of independent contractors working on behalf of
the Company was $6.0 million. Estimated total expense savings from the reduction
in the amount of space to be used in certain of the Company's leased  facilities
was $2.2  million,  which  included  approximately  $2.1  million  in  estimated
research  and  development  expense  savings and

                                       26
<PAGE>

approximately  $0.1 million in estimated  sales and marketing  expense  savings.
Estimated  cash savings from the  reduction in the amount of space to be used in
certain of the Company's  leased  facilities was $0.3 million.  Estimated  total
cost of revenues  savings from  contractual  obligations with no future economic
benefit to the Company was $0.5 million. The savings from all actions associated
with the second quarter  restructuring were estimated to begin being realized in
the third  fiscal  quarter of fiscal year 2003.  In the third  quarter of fiscal
year 2003,  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,   Convera
RetrievalWare(R)  and Convera Screening Room(R). The Company also announced that
it was  eliminating  operations  supporting  the digital  content  security  and
interactive services business units and closing offices in Hillsboro, Oregon and
Lafayette,  Colorado.  As a result of the  restructuring in the third quarter of
fiscal year 2003,  Convera's  total  workforce  was reduced by an  additional 66
employees,  including  44  employees  from the  engineering  group,  13 from the
professional   services  and  training  groups,   seven  from  the  general  and
administrative  group and two from the marketing  group.  In connection with the
restructuring  plan,  the Company  recorded  restructuring  charges in the third
quarter of fiscal year 2003 of $5.2 million. The restructuring  charges included
approximately $0.9 million in costs incurred under contractual  obligations with
no future  economic  benefit to the  Company,  accruals  of  approximately  $1.2
million for employee  termination costs and approximately $3.2 related to future
facility  losses for the  offices  closed in  Hillsboro,  Oregon and  Lafayette,
Colorado.  A non-cash  charge  representing  the  balance of the  write-down  of
facility  improvements  to their net  realizable  value was recorded  during the
third quarter of fiscal year 2002. The Company estimated that annualized expense
and cash  savings  resulting  from  the  third  fiscal  quarter  termination  of
employees would be approximately $7.6 million, which included approximately $5.1
million in estimated  research and development  expense  savings,  approximately
$1.5 million in estimated cost of revenues savings,  approximately  $0.7 million
in estimated general and  administrative  expense savings and approximately $0.3
million in  estimated  sales and  marketing  expense  savings.  Estimated  total
expense savings  related to the closing of certain of the Company's  offices was
approximately  $3.7  million,  which  included  approximately  $3.3  million  in
estimated research and development  expense savings,  approximately $0.2 million
in estimated sales and marketing expense savings and approximately  $0.2 million
in estimated general and administrative expense savings.  Estimated cash savings
from the closing of certain of the Company's leased facilities was $0.5 million.
Estimated total cost of revenues  savings from  contractual  obligations with no
future  economic  benefit to the Company was $0.9 million.  The savings from all
actions associated with the third quarter  restructuring were estimated to begin
being realized in the fourth fiscal quarter of fiscal year 2003.

The Company  paid  approximately  $1.9  million,  $3.0  million and $2.6 million
against the  restructuring  reserve in the fiscal years ended  January 31, 2004,
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,  2004,  unpaid  amounts  of  $0.6  million  and  $0.9  million,
representing  facility-related  charges,  have been  classified  as current  and
long-term  accrued  restructuring  costs,  respectively,   in  the  accompanying
consolidated  balance sheet.  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

In the third  quarter of fiscal  year  2002,  the  Company  recorded a charge of
$675.9  million  for  reduction  of goodwill  and a charge of $78.5  million for
reduction  of 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 was followed by
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


                                       27

<PAGE>

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 fiscal  year 2003.  The  acquired  IPRD was  immediately  expensed  since the
related technology had not reached  technological  feasibility as of the date of
the acquisition.

Other income

Other income in fiscal year 2004  increased to $2.6 million from $0.6 million in
fiscal  year 2003.  Other  income  was $4.2  million  in fiscal  year 2002.  The
increase in fiscal year 2004 was due to the  reversal of $2.4 million of accrued
expenses  resulting from a settlement  agreement reached between the Company and
another party in fiscal year 2004 related to disputed  invoices.  As a result of
the  settlement,  the Company's  liability was reduced from $5.6 million to $3.2
million,  and the previously  recorded accruals were reversed into other income.
The decrease in other income in fiscal year 2003 was a result of lower  interest
income  largely  due to a lower  level  of  invested  funds  as well as to lower
interest rates.

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 $72.7  million as of
January 31, 2004. Given the Company's  inability to predict  sufficient  taxable
income to realize the  benefits of its net  deferred tax asset as of January 31,
2004, the Company provided a full valuation  allowance against such deferred tax
asset.


Contractual Obligations

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

In 2003, the SEC released  Financial  Reporting  Release No. 67,  "Disclosure in
Management's  Discussion and Analysis about Off-Balance  Sheet  Arrangements and
Aggregate  Contractual  Obligations"  ("FRR 67").  FRR 67 requires  companies to
present an overview of certain known contractual  obligations in tabular format.
Specifically,  FRR 67  requires  companies  to  include  in a table  information
related to long-term  debt  obligations,  capital lease  obligations,  operating
lease  obligations,   purchase  obligations  and  other  long-term   liabilities
reflected on a registrant's  balance sheet under generally  accepted  accounting
principles in the United States ("GAAP").

                                       28
<PAGE>



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

    Contractual Obligations                             Payments Due By Period (in thousands)

<S>                                        <C>           <C>         <C>  <C>        <C>  <C>      <C>
                                          Total          2005        2006-2007       2008-2009     2010 and
                                                                                                  thereafter
    Operating leases                  $    5,659    $    3,119    $      2,477    $        63              -
    Purchase obligations                     627           624               3              -              -
    Other contractual obligations          3,813         2,166           1,647              -              -
                                        --------    ----------     ----------      ----------   ------------
          Total                       $   10,099    $    5,909    $      4,127    $        63              -
</TABLE>

o    Operating lease obligations -- represents the minimum lease rental payments
     under  noncancelable  leases,  primarily for the Company's office space and
     operating equipment in various locations around the world.

o    Purchase obligations-- represent an agreement to purchase goods or services
     that is enforceable  and legally  binding on the Company and that specifies
     all  significant  terms,  including:  fixed  or  minimum  quantities  to be
     purchased; fixed, minimum or variable price provisions; and the approximate
     timing of the  transaction.  The Company  expects to receive  consideration
     (i.e., products or services) for these purchase  obligations.  The purchase
     obligation amounts do not represent the entire anticipated purchases in the
     future,   but  represent   only  those  items  for  which  the  Company  is
     contractually obligated.  Additionally, the Company also purchases products
     and  services as needed,  with no firm  commitment.  For this  reason,  the
     amounts presented in the table will not provide a reliable indicator of the
     Company's expected future cash outflows on a stand-alone basis.

o    Other  contractual  obligations -- represents the principal  amounts due on
     outstanding contractual  obligations,  current and long-term, as of January
     31, 2004.


Liquidity and Capital Resources

The  Company's  combined  balance  of  cash,  cash  equivalents  and  short-term
investments  at January 31,  2004 as compared to January 31, 2003 is  summarized
below (in thousands).

<TABLE>
<S>                  <C>                   <C>                 <C>                 <C>
                                      January 31,         January 31,
                                         2004                 2003                Change
                                     --------------      ---------------      ----------------
              Cash and cash
               equivalents           $      30,530       $       10,412       $       20,118
              Investments                       71               20,054              (19,983)
                                     -- -----------      --- -----------      --- ------------
                  Total              $      30,601       $       30,466       $           135
                                     == ===========      === ===========      === ============
</TABLE>


As of January 31, 2004, the Company's  balances of cash,  cash  equivalents  and
short-term investments were $30.6 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 at least the next twelve  months.  Excluding the cash acquired as
part of the Combination  and other  acquisitions,  the Company has  historically
been  entirely  financed by sales of its common  stock.  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 number of days sales outstanding ("DSO") decreased to 79 days at January 31,
2004 from 100 days at January 31, 2003. The DSO was 97 days at January 31, 2002.
The DSO is calculated  using a methodology that focuses on the most recent sales
in relation to the end of quarter receivables balance.  Management believes that
the allowance


                                       29
<PAGE>

for  doubtful  accounts of $1.8  million at January 31,  2004 is  adequate.  The
allowance for doubtful  accounts at the end of fiscal year 2004  increased  from
$1.6 million at January 31, 2003.  The allowance for doubtful  accounts was $2.1
million at January 31, 2002. The provision taken for doubtful  accounts was $0.1
million, $0.8 million and $3.4 million during fiscal years 2004, 2003, and 2002,
respectively.  The  fluctuation  in the  provision for bad debts in fiscal years
2002 through 2004  correlates  generally with the economic  environment and more
specifically to a shift in the Company's customer base. In Convera's fiscal year
2002,  there was a general  downturn in the economy and the  Company's  customer
base  included  many high  technology  companies.  A number  of  high-technology
companies  went  bankrupt  or were unable to meet their  financial  commitments.
Convera counted a number of these  high-technology  companies as customers,  and
increased its provision for bad debts to account for  uncollectible  amounts due
from  several of them in fiscal  year 2002.  The  provision  taken for bad debts
declined in fiscal years 2003 and 2004 as the general economy improved,  many of
the high  technology  companies  were no longer in existence  and the  Company's
customer base tended to shift to companies with a stronger financial history and
to federal  government  agencies.  As a  percentage  of gross  receivables,  the
allowance for doubtful  accounts was  approximately  25%, 19% and 18% at January
31, 2004, January 31, 2003, and January 31, 2002, respectively. The allowance as
a percentage of gross receivables has increased due to the fact that the overall
gross accounts  receivables balance has declined as the Company is collecting on
its  current  receivables,  but the  allowance  continues  to  reserve  for long
outstanding  receivables  that the  Company  is still  pursuing.  There  were no
significant  changes made to the Company's  collection policies or payment terms
during the  three-year  time frame,  however  collection  efforts  progressively
became more aggressive in an effort to identify collection issues earlier and as
a result take actions to increase the likelihood of collection.

Operating Activities

In fiscal year 2004, the Company's  operating  activities utilized $15.5 million
of net cash and cash equivalents, compared to $26.2 million in fiscal year 2003.
Net cash used in operating activities was $44.6 million in fiscal year 2002. The
fiscal  year  2004 net loss of $18.1  million  was  offset by  non-cash  charges
totaling $2.8 million,  consisting  primarily of  depreciation  of $1.7 million,
equity  compensation  expense of $0.8  million  and  amortization  of  developed
technologies  of $0.3  million.  Cash was provided  from a reduction in accounts
receivable  of $1.5 million and a decrease in prepaid  expense and other of $1.0
million. A decrease in accounts payable, accrued expense and accrued bonuses and
an increase in other  long-term  liabilities  used net cash of $2.3  million.  A
decrease in the  restructuring  reserve used $1.3 million,  while an increase in
deferred revenues contributed $0.9 million of net cash. 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
developed  technologies  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.

Investing Activities

Cash flows from investing  activities provided the Company $19.5 million of cash
in fiscal year 2004. 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 $0.5  million.  In fiscal year 2003,  cash flows from
investing  activities  provided  the  Company  $19.5  million of cash.  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 of net cash.  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.

                                       30

<PAGE>

Financing Activities

Financing activities provided approximately $16.8 million of cash in fiscal year
2004. Proceeds from a private placement provided $16.0 million of cash. Proceeds
from the issuance of stock under the employee  stock purchase plan, the issuance
of warrants and the exercise of stock  options  provided a total of $0.8 million
of cash.  Financing  activities  provided  approximately $0.3 million of cash 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 of cash. The  repurchase of the Company's  common stock from Intel
and the NBA used $53.0 million of cash. 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.


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.


Recent Pronouncements

The Financial  Accounting  Standards Board ("FASB") issued  Interpretation No.46
("FIN 46"),  "Consolidation of Variable Interest  Entities," in January 2003 and
amended the  Interpretation in December 2003. FIN 46 requires an investor with a
majority of the variable interests (primary  beneficiary) in a variable interest
entity  ("VIE")  to  consolidate  the  entity  and also  requires  majority  and
significant variable interest investors to provide certain disclosures. A VIE is
an  entity  in which  the  voting  equity  investors  do not have a  controlling
financial  interest or the equity  investment at risk is insufficient to finance
the entity's  activities  without receiving  additional  subordinated  financial
support from the other parties.  The main  provisions of FIN 46 are effective in
financial statements for periods ending after March 15, 2004 (except for certain
VIE structures that had an earlier  effective  date).  The Company does not have
any VIEs and consequently does not expect this  Interpretation to have an effect
on its consolidated financial statements.


                                       31
<PAGE>




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 25% of total revenues in fiscal year 2004.
International sales are made predominantly from the Company's foreign subsidiary
and are typically  denominated in British pounds,  EUROs or U.S. Dollars.  As of
January  31,  2004,  approximately  11% and 20% 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
2004, 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, 2004, less than 2% of the Company's cash and cash  equivalents
were denominated in British pounds and EUROs combined.  Cash equivalents consist
of funds  deposited in money market  accounts with original  maturities of three
months or less.  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 thousand,  which is pledged to  collateralize  a
letter of credit  required for a leased  facility.  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.


Item 9A. Controls and Procedures

As of the end of the period  covered  by this  Annual  Report on Form 10-K,  the
Company,  under the  supervision and with the  participation  of its management,
including the Chief Executive Officer, evaluated the effectiveness of the design
and operation of the Company's  "disclosure controls and procedures" (as defined
in Rule  13a-15(e)  under the  Securities  Exchange  Act of 1934 (the  "Exchange
Act")). Based on that evaluation, the Chief Executive 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.

                                       32

<PAGE>



                                    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 21, 2004 and is  incorporated in this report by
reference.

The Company has adopted a written code of conduct and ethics (the "Code")  which
is  applicable  to all of  the  Company's  officers,  directors  and  employees,
including the Company's  Chief  Executive  Officer and Chief  Financial  Officer
(collectively,  the  "Senior  Officers").  In  accordance  with  the  rules  and
regulations  of the  Securities  and  Exchange  Commission  and the rules of the
Nasdaq Stock Market, a copy of the Code has been posted on the Company's website
at  http://www.convera.com.  The Company intends to disclose any changes in or
waivers  from the Code  applicable  to any Senior  Officers on its website or by
filing a Form 8-K.


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 21, 2004 and is incorporated in this report by reference.


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

Information  regarding  security  ownership  of  certain  beneficial  owners and
management  and related  stockholder  matters will be included in the  Company's
definitive  Proxy Statement for the Annual Meeting of Shareholders to be held on
June 21, 2004 and is incorporated in this report by reference.


Item 13. Certain Relationships and Related Transactions

Information  concerning certain relationships and related transactions,  if any,
will be included in the  Company's  definitive  Proxy  Statement  for the Annual
Meeting of  Shareholders to be held on June 21, 2004 and is incorporated in this
report by reference.


Item 14. Principal Accounting Fees and Services

Information regarding principal accounting fees and services will be included in
the Company's  definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on June 21, 2004 and is incorporated in this report by reference.


                                       33
<PAGE>



                                     PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

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

         1.   Financial Statements:

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

              Index to Consolidated Financial Statements
              Report of Independent Auditors
              Consolidated Balance Sheets
              Consolidated Statements of Operations and Comprehensive Loss
              Consolidated Statements of Shareholders' Equity
              Consolidated Statements of Cash Flows
              Notes to Consolidated Financial Statements

         2.   Schedules Supporting Financial Statements:

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

3.       Exhibits:

              See Exhibit Index on the following page.

(b)      Reports on Form 8-K.

On December 15, 2003,  the Company  filed a Form 8-K for Item 5,  reporting  the
resignation of Christopher Mann as Chief Financial Officer and Treasurer.

On December 10, 2003,  the Company  filed a Form 8-K for Item 12,  attaching and
incorporating a press release of the Company dated December 10, 2003,  reporting
the Company's financial results for the fiscal quarter ended October 31, 2003.


                                       34

<PAGE>



                                  Exhibit Index
<TABLE>

<S>               <C>                                                                    <C>
                                                                                         Incorporated by Reference from
Exhibit No.                       Exhibit Title                                           the Following Documents

3.1               Amended and Restated Certificate of Incorporation of Convera           Form S-4 (Registration No.
                                                                                         333-50172), November 17, 2000

3.2               By-laws of Convera (Amended and Restated)                              Form 10-K, April 30, 2003

10.1              Incentive Stock Option Plan, dated April 1989                          Form 10-K, April 22, 1991

10.2              1995 Incentive Plan, dated November 1995                               Proxy Statement dated October 16,
                                                                                         1995 for Annual Meeting of
                                                                                         Shareholders

10.3              ConQuest Incentive Stock Option Plan, dated August 19, 1993            Form 10-K, April 30, 1996

10.4              Amended and Restated Excalibur Technologies Corporation 1996           Form S-4 (Registration No.
                  Employee Stock Purchase Plan                                           333-50172), November 17, 2000

10.5              Office Lease (1921 Gallows Road, Vienna, Virginia 22182),              Form 10-K, April 30, 1999
                  commencing May 1, 1999

10.6              Employment agreement with James H. Buchanan, dated September 7,        Form 10-K, April 30, 1999
                  1995

10.7              Office lease (11000 Broken Land Parkway, Columbia Maryland),           Form 10-K, April 28, 2000
                  commencing June 15, 2000

10.8              Convera Stock Option Plan                                              Form 8-K, May 3, 2000

10.9              Office Lease (23245 NW Evergreen Parkway, Hillsboro, Oregon)           Form 10-K, May 1, 2001
                  commencing March 1, 2001

10.10             Office Lease (1808 Aston Avenue, Carlsbad, California) commencing      Form 10-K, April 30, 2002
                  November 1, 2001

10.11             Amended and Restated Convera Corporation 1996 Employee Stock           Definitive Form 14C, December 18,
                  Purchase Plan                                                          2001

10.12             Office Lease (2055 Gateway Place, San Jose, California),               Form 10-K, April 30, 2003
                  commencing February 1, 2003

10.13             Agreement and Release with James Buchanan, dated February 6, 2004      Filed Herewith
                  and First Amendment dated March 9, 2004

10.14             Agreement and Release with Christopher Mann, dated January 7,          Filed Herewith
                  2004 and First Amendment dated March 9, 2004

10.15             Settlement Agreement with Intel Corporation effective December         Filed Herewith
                  23, 2003

21.01             Subsidiaries of Convera                                                Filed Herewith

23.01             Consent of Independent Auditors                                        Filed Herewith


                                       35

31.1              Certification of Chief Executive Officer,
                  pursuant to Rule 13a-14(a)/15d-14(a)                                   Filed Herewith

32.1              Certification of Chief Executive Officer, pursuant to 18 U.S.C.        Filed Herewith
                  Section 1350, as adopted pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002

</TABLE>


                                       36
<PAGE>



                                   SIGNATURES

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


                                              CONVERA CORPORATION


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

Date:  April 26, 2004


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.
<TABLE>
<S>                             <C>                                             <C>

     Signature                 Title                                            Date

/s/Patrick C. Condo            President, Chief Executive Officer               April 26, 2004
Patrick C. Condo               and Director
                               (Principal Executive Officer
                                and Principal Financial
                                and  Accounting Officer)

 /s/Ronald J. Whittier          Chairman of the Board                           April 23, 2004
   Ronald J. Whittier

 /s/Herbert A. Allen            Director                                        April 26, 2004
   Herbert A. Allen

 /s/Herbert A. Allen, III       Director                                        April 23, 2004
   Herbert A. Allen, III

 /s/Stephen D. Greenberg        Director                                        April 26, 2004
   Stephen D. Greenberg

 /s/Eli S. Jacobs               Director                                        April 23, 2004
   Eli S. Jacobs

/s/Donald R. Keough             Director                                        April 23, 2004
   Donald R. Keough

 /s/William S. Reed             Director                                        April 26, 2004
   William S. Reed

 /s/ Carl J. Rickertson         Director                                        April 25, 2004
   Carl J. Rickertson

 /s/ Jeffrey White              Director                                        April 28, 2004
   Jeffrey White

</TABLE>

                                       37

<PAGE>

<TABLE>

<S>                                                                                           <C>
     Index to Consolidated Financial Statements                                               Page

     Report of Independent Auditors                                                           F-1

     Consolidated Balance Sheets                                                              F-2
                   As of January 31, 2004 and 2003

     Consolidated Statements of Operations and Comprehensive Loss                             F-3
                   For the fiscal years ended January 31, 2004, 2003 and 2002

     Consolidated Statements of Shareholders' Equity                                          F-4
                  For the fiscal years ended January 31, 2004, 2003 and 2002

     Consolidated Statements of Cash Flows                                                    F-5
                  For the fiscal years ended January 31, 2004, 2003 and 2002

     Notes to Consolidated Financial Statements                                               F-6

</TABLE>

                                       38


<PAGE>




                         REPORT OF INDEPENDENT AUDITORS


Board of Directors and Shareholders
Convera Corporation

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Convera
Corporation  as of January  31,  2004 and  January  31,  2003,  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, 2004. 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 financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material   respects,   the  consolidated   financial  position  of  Convera
Corporation  as of January 31, 2004 and January 31, 2003,  and the  consolidated
results of its  operations and its cash flows for each of the three years in the
period  ended  January  31,  2004,  in  conformity  with  accounting  principles
generally accepted in the United States.

As discussed in the notes to the consolidated financial statements,  in the year
ended  January 31, 2003 the Company  adopted  Statement of Financial  Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."



                                           /s/ ERNST & YOUNG LLP


McLean, Virginia
March 12, 2004


                                      F-1


<PAGE>


                                       CONVERA CORPORATION AND SUBSIDIARIES
                                            CONSOLIDATED BALANCE SHEETS
                                         (in thousands, except share data)
<TABLE>
<S>                                                                                 <C>                     <C>

                                                                                         As of January 31,
                                                                               ---------------------------------------
                               ASSETS
                                                                                    2004                    2003
                                                                               ---------------         ---------------
Current Assets:
     Cash and cash equivalents..................................               $      30,530           $      10,412
     Short term investments.....................................                          71                  20,054
     Accounts receivable, net of allowance for doubtful
          accounts of $1,793 and $1,569, respectively...........                       5,464                   6,732
     Prepaid expenses and other ................................                       2,536                   2,509
                                                                               ---------------
                                                                               ---------------         ---------------
           Total current assets.................................                      38,601                  39,707

Equipment and leasehold improvements, net of accumulated
     depreciation of $12,692 and $10,843, respectively..........                       1,759                   2,906
Other assets....................................................                       2,225                   3,154
Goodwill........................................................                       2,275                   2,268
Other intangible assets, net of accumulated amortization of $511 and
$242, respectively..............................................                         835                   1,104
                                                                               ---------------         ---------------
           Total assets.........................................               $      45,695           $      49,139
                                                                               ===============         ===============

                LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
     Accounts payable...........................................                       2,615                   3,069
     Accrued expenses...........................................                       4,093                   7,220
     Accrued bonuses............................................                         745                     919
     Restructuring reserve......................................                         620                   1,326
     Deferred revenues..........................................                       3,720                   2,739
                                                                               ---------------         ---------------
                                                                               ---------------         ---------------
           Total current liabilities............................                      11,793                  15,273

Restructuring reserve, net of current portion...................                         887                   1,494
Other long-term liabilities.....................................                       1,647                       -
                                                                               ---------------         ---------------
                                                                               ---------------         ---------------
           Total liabilities....................................                      14,327                  16,767

Commitments and Contingencies
Shareholders' Equity:
     Common stock Class A, $0.01 par value, 100,000,000 shares
         authorized; 34,655,344 and 29,880,217 shares issued,
         respectively; 33,842,087 and 29,003,062 shares
         outstanding, respectively..............................                         347                     299
     Treasury stock at cost, 813,257 and 877,155 shares,
             Respectively.......................................                      (1,879)                 (2,026)
     Additional paid-in capital.................................                   1,070,880               1,053,455
     Accumulated deficit........................................                  (1,036,625)             (1,018,540)
     Accumulated other comprehensive loss.......................                      (1,355)                   (816)
                                                                               ---------------         ---------------
         Total shareholders' equity.............................                      31,368                  32,372
                                                                               ---------------         ---------------
         Total liabilities and shareholders' equity.............               $      45,695           $      49,139
                                                                               ===============         ===============
</TABLE>


                                              See accompanying notes.
                                      F-2
<PAGE>



                      CONVERA CORPORATION AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                 (in thousands, except share and per share data)
<TABLE>
<S>                                                          <C>                 <C>                 <C>
                                                               For the Fiscal Years Ended January 31,
                                                      ---------------------------------------------------------
                                                            2004                2003                2002
                                                      ------------------  -----------------   -----------------

Revenues:
    License........................................     $      18,322       $      13,062       $      24,187
    Professional services..........................             4,338               4,018               2,553
    Maintenance....................................             6,591               6,534               6,509
                                                      ------------------  -----------------   -----------------
                                                      ------------------  -----------------   -----------------
                                                               29,251              23,614              33,249
    Interactive services...........................                 -                   -                 979
                                                      ----
                                                         ---------------  -----------------   -----------------
                                                               29,251              23,614              34,228
                                                      ------------------  -----------------   -----------------

Cost of revenues:
    License .......................................             1,822               3,485               8,857
    Professional services..........................             4,715               5,446               7,511
    Maintenance ...................................             2,033               1,766               1,979
                                                      ------------------  -----------------   -----------------
                                                      ------------------  -----------------   -----------------
                                                                8,570              10,697              18,347
    Interactive services...........................                 -                   -               3,960
                                                      ------------------  -----------------   -----------------
                                                      ------------------  -----------------   -----------------
                                                                8,570              10,697              22,307
                                                      ------------------  -----------------   -----------------
                                                      ------------------  -----------------   -----------------

Gross margin                                                   20,681              12,917              11,921
                                                      ------------------  -----------------   -----------------
                                                      ------------------  -----------------   -----------------

Operating expenses:
    Sales and marketing............................            18,124              20,018              33,747
    Research and product development...............            11,981              11,639              22,500
    General and administrative.....................            10,564               8,642              10,214
    Amortization of goodwill.......................                 -                   -              86,291
    Amortization of intangible assets..............                 -                   -               9,088
    Incentive bonus payments to employees..........                 -                (138)              6,681
    Restructuring charges..........................               621               2,337               8,128
    Reduction in goodwill..........................                 -                   -             675,896
    Reduction in other long-lived intangible assets                 -                   -              78,528
    Acquired in-process research and development...                 -                 126                   -
                                                      ----
                                                         ---------------  -----------------   -----------------
                                                               41,290              42,624             931,073
                                                      ------------------  -----------------   -----------------

Operating loss.....................................           (20,609)            (29,707)           (919,152)

Other income, net..................................             2,550                 636               4,191
                                                      ------------------  -----------------   -----------------
                                                      ------------------  -----------------   -----------------

Net loss before income taxes.......................           (18,059)            (29,071)           (914,961)

Income tax benefit.................................                 -                   -               4,452
                                                      ------------------  -----------------   -----------------

Net loss...........................................           (18,059)            (29,071)           (910,509)

                                                      ------------------  -----------------   -----------------
Net loss applicable to common shareholders.........     $     (18,059)      $     (29,071)      $    (910,509)
                                                      ==================  =================   =================
                                                      ==================  =================   =================

Basic and diluted net loss per common share........     $       (0.57)      $       (1.01)      $      (20.08)
Weighted-average number of common shares outstanding
    - basic and diluted............................        31,486,032          28,854,291          45,348,739

Comprehensive loss:
    Net loss.......................................           (18,059)            (29,071)           (910,509)
    Foreign currency translation adjustment........              (539)                (98)                (29)
                                                      ------------------  -----------------   -----------------
Comprehensive loss.................................     $     (18,598)      $     (29,169)      $    (910,538)
                                                      ==================  =================   =================
</TABLE>

                                              See accompanying notes.

                                      F-3
<PAGE>



                      CONVERA CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                        (in thousands, except share data)

<TABLE>
<S>                      <C>             <C>    <C>           <C>       <C>              <C>
                          Common Stock        Warrants       Treasury Stock         Additional
                                                                                     Paid-in
                      Shares         Amount   Warrants     Shares       Amount       Capital
Balance, January
31, 2001.........   47,534,627    $     475          -           -   $        -  $   1,094,192
Issuance of
common stock upon
exercise of
options..........       28,150            -          -           -            -            232
Issuance of
common stock for
Employee Stock
Purchase Plan....      152,778            2          -           -            -            700
Capital
contribution from
Intel............            -            -          -           -            -          5,422
Purchase and
retirement of
common stock.....   (19,746,221)       (197)         -   (1,000,000)     (2,310)       (50,493)
Foreign Currency
Translation
adjustment.......            -            -          -           -            -              -

Net loss.........            -            -          -           -            -              -
                    ------------ ----------- ----------- ----------    --------  --------------
                    ------------ ----------- ----------- ----------    --------  --------------

Balance, January
31, 2002.........   27,969,334    $     280        -      (1,000,000) $   (2,310) $   1,050,053

Stock adjustment
for previously
retired treasury
stock............    1,000,000           10          -           -            -            (10)
Issuance of
common stock upon
exercise of
options..........       10,810            -          -           -            -             14
Issuance of
common stock for
Employee Stock
Purchase Plan....           73            -          -           -            -              -
Issuance of
treasury stock
for Employee
Stock Purchase
Plan.............            -            -          -     122,845          284              -
Issuance of
common stock
related to
Semantix  merger.      900,000            9          -           -            -          3,398
Foreign Currency
Translation
adjustment.......            -            -                      -            -              -

Net loss.........            -            -                                   -              -
                    ===========  =========== ==========  ========== ===========  ==============
Balance, January
31, 2003.........    29,880,217    $     299          -    (877,155)  $   (2,026) $   1,053,455

Private placement    4,714,111           47          -           -            -         15,978
Issuance of
common stock upon
exercise of
options..........       61,016            1          -           -            -            250
Issuance of
treasury stock
for Employee
Stock Purchase
Plan.............            -            -          -      63,898          147             26
Issuance of
warrants to third
party............            -            -    137,711           -            -            383
Deferred
compensation.....            -            -          -           -            -            788
Foreign Currency
Translation
adjustment.......            -            -          -           -            -              -

Net loss.........            -            -          -           -            -              -
                    ------------ ----------- ----------- ---------- -----------  --------------
Balance, January
31, 2004.........   34,655,344    $     347   137,711     (813,257)  $   (1,879) $   1,070,880
                    ============ =========== =========== ========== ===========  ==============


                             See accompanying notes.
                                      F-4

</TABLE>

<PAGE>

                      CONVERA CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                        (in thousands, except share data)
<TABLE>
<S>                      <C>            <C>            <C>

                     Accumulated   Accumulated
                     Deficit        Other
                                    Compre-
                                    hensive
                                     Income
                                     (Loss)          Total
Balance, January
31, 2001.........  $   (78,920)  $      (689)  $   1,015,058
Issuance of
common stock upon
exercise of
options..........            -             -             232
Issuance of
common stock for
Employee Stock
Purchase Plan....            -             -             702
Capital
contribution from
Intel............            -             -           5,422
Purchase and
retirement of
common stock.....            -             -         (53,000)
Foreign Currency
Translation
adjustment.......            -           (29)            (29)

Net loss.........     (910,509)            -        (910,509)
                   ------------- ------------- ---------------

Balance, January
31, 2002.........   $  (989,429)  $      (718)  $      57,876

Stock adjustment
for previously
retired treasury
stock............            -             -               -
Issuance of
common stock upon
exercise of
options..........            -             -              14
Issuance of
common stock for
Employee Stock
Purchase Plan....            -             -               -
Issuance of
treasury stock
for Employee
Stock Purchase
Plan.............          (40)            -             244
Issuance of
common stock
related to
Semantix  merger.            -             -           3,407
Foreign Currency
Translation
adjustment.......            -           (98)            (98)

Net loss.........      (29,071)            -         (29,071)
                   ------------- ------------- ---------------
                   ------------- ------------- ---------------

Balance, January
31, 2003.........$    (1,018,540) $      (816)  $      32,372

Private placement            -             -          16,025
Issuance of
common stock upon
exercise of
options..........            -             -             251
Issuance of
treasury stock
for Employee
Stock Purchase
Plan.............          (26)            -             147
Issuance of
warrants to third
party............            -             -             383
Deferred
compensation.....            -             -             788
Foreign Currency
Translation
adjustment.......            -          (539)           (539)

Net loss.........      (18,059)            -         (18,059)

                   ------------- ------------- ---------------
Balance, January
31, 2004.........  $ (1,036,625) $    (1,355)  $      31,368
                   ============= ============= ===============
</TABLE>


                             See accompanying notes.

                                      F-4
<PAGE>



                      CONVERA CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<S>                                                                     <C>             <C>                   <C>
                                                                =======================================================
                                                                         For the Fiscal Years Ended January 31,
                                                                ========================================================
                                                                       2004               2003               2002
                                                                   ------------       -------------       ------------
Cash Flows from Operating Activities:
Net loss                                                        $    (18,059)      $    (29,071)       $    (910,509)
Adjustments to reconcile net loss to net cash used in
   operating activities:
     Depreciation............................................          1,660              2,258                2,294
     Provision for doubtful accounts.........................             69                400                3,420
     Amortization of goodwill................................              -                  -               86,291
     Amortization of developed technologies..................            269                242                2,925
     Amortization of other intangible assets.................              -                  -                9,088
     Equity compensation expense on deferred stock...........            788                  -                    -
     Non-cash restructuring charges..........................              -                425                1,769
     Acquired in-process research and development............              -                126                    -
     Write off of investments................................              -                  -                  481
     Deferred tax benefit....................................              -                  -               (4,452)
     Reduction of goodwill...................................              -                  -              675,896
     Reduction of other long-lived assets....................              -                  -               78,528
Changes in operating assets and liabilities, net of effects
from acquisition:
     Accounts receivable.....................................          1,481              1,812                4,256
     Prepaid expenses and other..............................            984              2,330                 (695)
     Accounts payable, accrued expenses and accrued bonuses..
                                                                      (3,904)            (2,508)               3,206
     Restructuring reserve...................................         (1,313)            (1,112)               3,750
     Deferred revenues.......................................            903             (1,103)                (896)
     Other long-term liabilities.............................          1,647                  -                    -
                                                                -- ------------    -- -------------    -- ------------
     Net cash used in operating activities...................        (15,475)           (26,201)             (44,648)
                                                                -- ------------    -- -------------    -- ------------

Cash Flows from Investing Activities:
     Purchase of investments.................................        (14,960)           (70,002)            (201,208)
     Proceeds from maturities of investments.................         34,942             90,036              279,923
     Purchases of equipment and leasehold improvements.......           (470)              (710)              (5,647)
     Cash acquired in acquisition of business................              -                399                    -
     Direct acquisition costs................................              -               (246)              (1,416)
                                                                -- ------------    -- -------------    -- ------------
                                                                -- ------------    -- -------------    -- ------------
     Net cash provided by investing activities...............         19,512             19,477               71,652
                                                                -- ------------    -- -------------    -- ------------

Cash Flows from Financing Activities:
     Proceeds from the issuance of common stock, net.........            147                244                  702
     Proceeds from the private placement.....................         16,025                  -                    -
     Proceeds from the issuance of warrants..................            383                  -                    -
     Proceeds from the exercise of stock options.............            251                 14                  232
     Repurchase of common stock..............................              -                  -              (53,000)
     Capital contribution from Intel.........................              -                  -                5,422
                                                                -- ------------    -- -------------    -- ------------
     Net cash provided by (used in) financing activities.....         16,806                258              (46,644)
                                                                -- ------------    -- -------------    -- ------------

Effect of Exchange Rate Changes on Cash......................           (725)              (750)                 207
                                                                -- ------------    -- -------------    -- ------------

Net Increase (Decrease) in Cash and Cash Equivalents.........         20,118             (7,216)             (19,433)

Cash and Cash Equivalents, beginning of year.................         10,412             17,628               37,061
                                                                -- ------------    -- -------------    -- ------------

Cash and Cash Equivalents, end of year.......................   $     30,530       $     10,412        $      17,628
                                                                == ============    == =============    == ============
</TABLE>

                             See accompanying notes.

                                      F-5

<PAGE>



                      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").

As of January 31, 2004, 2003 and 2002, Allen Holding,  Inc., together with Allen
& Company  Incorporated  and  Herbert  A.  Allen  and  certain  related  parties
(collectively "Allen & Company")  beneficially owned 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,  resellers and other
strategic partners. Revenues are generated from software licenses with customers
and from the related  sale of product  maintenance,  training  and  professional
services.

The  Company's  operations  are  subject  to  certain  risks  and  uncertainties
including,  but not limited  to, the effect of general  economic  conditions  on
demand for the Company's  products and services,  including reduced corporate IT
spending  and  lengthier  sales  cycles;  the  delay  or  deferral  of  customer
implementations;  the  potential  for U.S.  Government  agencies  from which the
Company has historically  derived a signification  portion of its revenues to be
subject  to budget  cuts;  a  dependence  on  international  sales;  actual  and
potential  competition by entities with greater financial resources,  experience
and market presence than the Company;  rapid technological  changes;  changes in
software  and  hardware   products  that  may  render  the  Company's   products
incompatible  with these  systems;  the  potential  for  errors in its  software
products that may result in loss of or delay in market acceptance and sales; the
dependence  on  proprietary  technology  licensed from third  parties;  possible
adverse  changes to the  Company's  intellectual  property  which would harm its
competitive  position;  the need to retain  key  personnel;  the  ability of the
Company  to use  net  operating  loss  carryforwards;  and the  availability  of
additional capital financing on terms acceptable to the Company, if at all.


(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,  as  amended  by  Statement  of  Position  98-9,  Software  Revenue
Recognition, with respect to certain transactions.


                                      F-6

<PAGE>

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 professional  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 professional 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.

Certain of the Company's customers are Original Equipment  Manufacturers  (OEMs)
and  resellers.  OEM  contracts  generally  stipulate  prepaid  royalties due at
varying  dates  as well  as  royalties  due to the  Company  on the  sale of the
customer's  integrated product over a specified contract term, generally ranging
from two to five years. With prepaid  royalties,  the Company recognizes revenue
upon shipment of the software and/or software  developer's  kit, as appropriate,
provided the payment terms are  considered  normal and customary for these types
of  arrangements,  the fee is considered fixed and  determinable,  and all other
criteria  within SOP 97-2 have been met.  To the extent  the OEM  product  sales
exceed the level provided for by the guaranteed  prepaid  royalty and additional
royalties are due, the Company generally  recognizes the additional royalties as
the sales occur and are reported to the Company.  Reseller  contracts  generally
stipulate  royalties due to the Company on the resale of the Company's  products
and call for a guaranteed  minimum  royalty payment in exchange for the right to
sell the Company's products within a specified territory over a specified period
of time. The Company  recognizes the prepaid  royalties as revenue upon delivery
of the initial copy of the software,  provided the payment terms are  considered
normal and  customary  for these types of  arrangements,  the fee is  considered
fixed and determinable, and all other criteria within SOP 97-2 have been met. To
the extent the  reseller's  product  sales exceed the level  provided for by the
guaranteed  minimum  royalty  and  additional  royalties  are due,  the  Company
generally  recognizes the  additional  royalties as the reseller sales occur and
are reported to the Company.

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.

Deferred  revenue  consists  of  deferred  training  and  professional  services
revenues, deferred maintenance revenues and deferred license revenues.

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


                                      F-7
<PAGE>


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
$449,  $52 and $307 in  advertising  costs for the years ended January 31, 2004,
2003 and 2002, 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. Stock options  originally granted under the Company's stock option plans
have an exercise price equal to the market value of the underlying  common stock
on the date of grant, and accordingly no employee  compensation  cost related to
the initial grant of options is included in expenses. Stock option modifications
associated with a change in employee status to a nonemployee have been accounted
for as a new award and measured  using the intrinsic  value method under APB 25,
resulting  in the  inclusion  of  compensation  expense in the  January 31, 2004
consolidated statement of operations.  Nonvested shares of stock (referred to as
deferred  stock)  granted under the Company's  stock option plan are measured at
fair value on the date of grant  based on the number of shares  granted  and the
quoted  price  of the  Company's  common  stock.  Such  value is  recognized  as
compensation  expense  over the  corresponding  service  period.  If an employee
leaves the Company prior to the vesting of the deferred  stock,  the estimate of
compensation  expense  recorded  in previous  periods is adjusted by  decreasing
compensation expense in the period of forfeiture.

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 in fiscal years 2004, 2003 and 2002 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.


<TABLE>
<S>                                                                <C>            <C>               <C>

                                                                    2004            2003            2002
          Net loss, as reported                                 $  (18,059)     $  (29,071)     $ (910,509)
          Stock-based compensation, as reported                        788               -               -
          Total stock-based compensation determined under fair
          value based method for all awards                         (6,773)         (8,246)        (10,327)
                                                                 -----------    ------------    -----------
          Pro forma net loss                                    $  (24,044)     $  (37,317)     $ (920,836)
                                                                ============    ===========     ===========
          Basic and diluted net loss per common share,
          as reported                                               ($0.57)         ($1.01)        ($20.08)
          Basic and diluted net loss per common share,
          pro forma                                                 ($0.76)         ($1.29)        ($20.31)

</TABLE>

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.

<TABLE>
<S>                                                        <C>                  <C>                  <C>
                                                           2004                 2003                 2002
                                                     -----------------    -----------------     ----------------
         Expected volatility                               96%                  95%                   90%
         Risk free interest rates                      2.5% to 3.3%         3.0% to 4.6%         4.2% to 4.8%
         Dividend yield                                    None                 None                 None
         Expected lives                                  5 years              5 years               5 years
</TABLE>

                                      F-8

<PAGE>


The  weighted  average  fair value per share for stock  option  grants that were
awarded  in  fiscal  years  2004,  2003 and 2002 was  $3.01,  $2.69  and  $3.38,
respectively.  See Note 13 for additional  information  related to the Company's
stock compensation plans.

During  fiscal year 2004,  pursuant to the  Company's  2000 Stock  Option  Plan,
several  senior  officers of the Company  were awarded an aggregate of 1,700,000
shares of deferred stock with a five-year cliff vesting  provision,  of which an
aggregate of 1,300,000  shares of deferred stock were  outstanding as of January
31, 2004. The deferred stock covering  700,000 shares vests  immediately  upon a
change in control.  The deferred stock covering 600,000 shares vests immediately
if the holder is terminated without cause, becomes disabled, dies or if there is
a change in control.  The  weighted-average  fair value of the awards granted in
fiscal year 2004 was $4.84 based on the market price of the  Company's  stock on
the date of award.  Compensation cost is expensed on a straight-line  basis over
the  five-year  vesting  period.  Compensation  expense,  net of  reversals  for
terminated  employees,  recorded  by the  Company in fiscal  year 2004 was $388.
Compensation   expense  of  $365,   $20  and  $3  is  included  in  general  and
administrative  costs,  research and  development  costs and sales and marketing
costs, respectively, in the accompanying consolidated statements of operations.

In the first quarter of the current  fiscal year,  the Company  issued  two-year
warrants to purchase  137,711  shares of Convera  common  stock to a third party
customer 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 of 108%; risk free interest rate
of 2.12%;  no dividend  yield;  and expected  life of 2 years.  The value of the
warrants  reduced  the  amount of  revenue  recognized  and was  recorded  as an
increase to additional paid-in-capital during the first quarter.

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 stock  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)  recorded in operating  expenses were $741,  $585 and ($226) for the
years ended January 31, 2004, 2003 and 2002, respectively.

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 their fair value.

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


                                      F-9

<PAGE>

on each customer's  financial  condition.  The Company monitors its exposure for
credit losses and maintains an allowance for anticipated  losses.  The allowance
for  doubtful  accounts is  determined  based on an  analysis  of the  Company's
historical collection experience and the Company's portfolio of customers taking
into  consideration the general economic  environment as well as the industry in
which the Company operates.






Valuation Accounts

<TABLE>
<S>                                              <C>            <C>             <C>              <C>
                                                                             Uncollectible
                                                                               Accounts
                                               Balance at     Charged to     Written Off,
                                              Beginning of     Costs and        Net of        Balance at
                                                 Period        Expenses       Recoveries     End of Period
Year Ended January 31, 2004:
   Deducted from asset accounts:
     Allowance for doubtful accounts          $      1,569   $         80   $       144      $       1,793

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

</TABLE>

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 as of
January 31, 2004 consist of a certificate  of deposit for $71,  which is pledged
to  collateralize  a letter of credit  required for a leased  facility.  For the
years ended January 31, 2003 and 2002 short-term  investments also included U.S.
Government treasury bills that were carried at amortized cost.

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, 2004.

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.

                                      F-10

<PAGE>


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.  Acquired  developed  technology 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  or asset
write-downs in fiscal years 2003 or 2004.

Reclassifications

Certain  amounts  presented in the prior year's  financial  statements have been
reclassified to conform with the fiscal year 2004 presentation.

Other Income

Other  income for the year  ended  January  31,  2004  consisted  of $187 in net
interest  income and a reversal of $2,363 of accrued  expenses  resulting from a
settlement  agreement  reached  between the Company and another  party in fiscal
year 2004. As a result of the  settlement,  the Company's  liability was reduced
from $5.6 million to $3.2 million,  and the  previously  recorded  accruals were
reversed  into  other  income.  In  fiscal  years  2003 and 2002,  other  income
consisted entirely of net interest income of $636 and $4,191, respectively.

Recent Pronouncements

The Financial Accounting Standards Board issued Interpretation No.46 ("FIN 46"),
"Consolidation of Variable  Interest  Entities," in January 2003 and amended the
Interpretation  in December 2003. FIN 46 requires an investor with a majority of
the variable  interests  (primary  beneficiary)  in a variable  interest  entity
("VIE") to  consolidate  the entity and also requires  majority and  significant
variable interest investors to provide certain  disclosures.  A VIE is an entity
in  which  the  voting  equity  investors  do not have a  controlling  financial
interest or the equity investment

                                      F-11

<PAGE>


at risk is insufficient  to finance the entity's  activities  without  receiving
additional  subordinated  financial  support  from the other  parties.  The main
provisions of FIN 46 are effective in financial  statements  for periods  ending
after March 15, 2004  (except  for  certain VIE  structures  that had an earlier
effective date).  The Company does not have any VIEs and  consequently  does not
expect  this  Interpretation  to have an  effect on its  consolidated  financial
statements.


(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(R)  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.

The  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 years ended January 31, 2003 or
January 31, 2004.

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.


                                      F-12

<PAGE>




Pro forma information (unaudited):
<TABLE>

<S>                                                              <C>                <C>
                                                                Year ended January 31,
                                                                2003               2002

Revenues                                                $      23,625       $      34,247
Net loss                                                      (30,104)           (913,295)
Basic and diluted net loss per common share                    (1.04)             (19.75)

</TABLE>

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

During fiscal year 2002, the Company recorded a charge of $675,896 for reduction
of goodwill and a charge of $78,528 for reduction of 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

In  fiscal  year  2002,  as a  result  of the  Company's  decision  to exit  the
interactive  media  services  market  and in  response  to the  downturn  in the
economy, the Company adopted several  restructuring plans. The Company continued
to reduce  its  workforce  in fiscal  years 2003 and 2004 in an effort to reduce
operating costs and increase efficiencies.

FY02 Q2 Restructuring

On May 10,  2001,  the  Company  announced  it was  restructuring  its  business
operations  in response to the downturn in the economy and in  conjunction  with
the integration of the IMS division's operations following the Combination.  The
restructuring  resulted  in a  reduction  of  Convera's  total  workforce  by 22
employees,  including 17 individuals  from the Company's  engineering  group and
five  individuals  from  the  business   development  group.  As  part  of  this
restructuring,  the Company also reduced the number of  independent  contractors
that were working on behalf of the Company by  approximately  40 contractors and
reduced the amount of space to be used in certain of the Company's


                                      F-13


<PAGE>

leased facilities.  As a result, the Company recorded a restructuring  charge of
$2,933. The restructuring  charge included  approximately $458 in costs incurred
under  contractual  obligations  with no future economic benefit to the Company,
accruals of approximately $409 for employee  termination costs and approximately
$2,066  related to future  facility  losses  for the idle  portion of a facility
resulting from the restructuring  activities.  A non-cash accrual adjustment was
made in fiscal  year 2003 as costs  related to employee  terminations  were less
than originally estimated.  As of January 31, 2004, payments related to employee
severance and contractual  obligations have been paid in full. A non-cash charge
related to the write-down of the non-idle  portion of facility  improvements  to
their net realizable value was recorded during the second quarter of fiscal year
2002.  The Company  expects to settle the  remaining  accrual of $471 related to
facility closings over the term of the related facility lease,  which is through
February 2006.

FY02 Q3 Restructuring

On October 3, 2001, the Company  announced an additional  restructuring  plan to
consolidate all operations around the development,  marketing, sales and support
of its enterprise class information  infrastructure  software products,  Convera
RetrievalWare(R)  and Convera Screening Room(R). The Company also announced that
it was  eliminating  operations  supporting  the digital  content  security  and
interactive services business units and closing offices in Hillsboro, Oregon and
Lafayette,  Colorado.  As a result of the  restructuring in the third quarter of
fiscal year 2003,  Convera's  total  workforce  was reduced by an  additional 66
employees,  including  44  employees  from the  engineering  group,  13 from the
professional   services  and  training  groups,   seven  from  the  general  and
administrative group and two from the marketing group.

As a result  of the  restructuring  plan,  the  Company  recorded  restructuring
charges in the third  quarter of fiscal year 2003 of $5,195.  The  restructuring
charges  include   approximately   $880  in  costs  incurred  under  contractual
obligations  with  no  future  economic  benefit  to the  Company,  accruals  of
approximately  $1,169 for employee  termination costs and  approximately  $3,146
related to future  facility  losses for the offices closed in Hillsboro,  Oregon
and Lafayette,  Colorado.  A non-cash accrual adjustment was made in fiscal year
2003 as costs  related  to  employee  terminations  were  less  than  originally
estimated.  As of January 31, 2004  payments  related to employee  severance and
contractual  obligations have been paid in full. A non-cash charge  representing
the balance of the write-down of facility  improvements  to their net realizable
value was  recorded  during the third  quarter of fiscal  year 2002.  A non-cash
charge of approximately  $200 relating to the write-down to their net realizable
value of  capitalized  assets no longer in use was  recorded  during  the second
quarter of fiscal  year 2003,  related  to the  fiscal  year 2002 third  quarter
restructuring.  The Company  expects to settle the  remaining  accrual of $1,036
related to facility closings over the term of the related facility lease,  which
is through February 2006.

FY03 Q1 Restructuring

On February 22, 2002, the Company  announced that it was aligning its operations
around key vertical markets. In connection with this reorganization, the Company
reduced its workforce by 61 employees  worldwide,  including 24 individuals from
the  engineering  group,  16 from the  sales  group,  13 from  the  professional
services  group,  six from the  marketing  group  and two from the  general  and
administrative  group. As a result, the Company recorded a restructuring  charge
of approximately  $1,027 related to employee  severance costs. As of January 31,
2004 the balance of employee related severance costs has been paid in full.

FY03 Q2 Restructuring

On May 22, 2002,  the Company  announced a reduction  in force in the  continued
effort to streamline  operations.  As a result of this action,  Convera's  total
workforce was reduced by 42 employees,  including 15 from the sales group, seven
individuals from the engineering  group,  seven from the  professional  services
group,   seven  from  the   marketing   group  and  six  from  the  general  and
administrative  group. The Company recorded a restructuring charge in the second
quarter of fiscal year 2003 of $1,043 related to employee  severance  costs. The
balance of these employee  related  severance  costs has been paid in full as of
January 31, 2004.

                                      F-14
<PAGE>




FY03 Q4 Restructuring

During  the  fourth  quarter  of  fiscal  year  2003,  the  Company   adopted  a
restructuring  plan in its continued  effort to align its operations  around key
vertical markets and to streamline operations. As a result of this restructuring
plan,  the Company  reduced its workforce by a total of 12 employees,  including
eight from the sales group,  one from the  engineering  group and three from the
professional  services  group.  The Company  recorded  restructuring  charges of
approximately  $448 related to employee  severance  costs for the quarter  ended
January 31, 2003.  Severance costs related to this  restructuring plan have been
paid in full as of January 31, 2004.

FY04 Q1 Restructuring

During  the first  quarter  of the  fiscal  year  2004,  the  Company  adopted a
restructuring plan in its continued effort to make operations more efficient. In
connection  with this  reorganization,  the Company  reduced its workforce by 11
employees   worldwide,   including  four   individuals   from  the  general  and
administrative  group,  four from the marketing  group, two from the sales group
and one from the engineering group. The Company recorded a restructuring  charge
of $325 related to terminated employee severance costs.  Severance costs related
to this restructuring have been paid in full as of January 31, 2004.

FY04 Q2 Restructuring

In the second quarter of fiscal year 2004,  the Company  announced an additional
reduction  in  force.  As a result  of this  action,  the  Company  reduced  its
workforce  by 17  employees  worldwide,  including  nine  individuals  from  the
engineering  group,  three from the sales  group,  three  from the  professional
services  group  and two  from the  marketing  group.  The  Company  recorded  a
restructuring   charge  of  $295  related  to  severance  costs  for  terminated
employees.  As of January 31, 2004 the  balance of  employee  related  severance
costs has been paid in full.

The  following  table  sets forth a summary  of all of the  restructuring  plans
implemented  by the Company since May 2001.  Each plan includes a summary of the
restructuring  charges,  the  payments  made  against  those  charges,  non-cash
adjustments  made and the  remaining  restructuring  liability as of January 31,
2004:

                                      F-15

<PAGE>




<TABLE>

---------------------------------------------------------------------------------------------------------------------
<S>                                     <C>              <C>                     <C>                     <C>
                                        Employee        Estimated costs of      Contractual
Restructuring Plan                 termination costs    facilities closing      obligations             Total
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
   FY02 Q2 Accruals                    $     409          $     2,066          $       458          $     2,933
   FY02 payments                            (332)                (241)                (458)              (1,031)
   FY02 Non-cash adjustment(a)               -                   (796)                   -                 (796)
                                        ---------          ------------        -------------         -------------
   Balance 1/31/02                            77                1,029                    -                1,106
   FY03 payments                                                 (291)                   -                 (291)
   FY03 Non-cash adjustment(a)               (77)                   -                    -                  (77)
                                        ---------          ------------        -------------         -------------
   Balance 1/31/03                                                738                    -                  738
   FY04 payments                                 -               (267)                   -                 (267)
                                         ---------          ------------        -------------         -------------
   Balance 1/31/04                     $         -          $     471          $         -           $       471
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
   FY02 Q3 Accruals                    $     1,169          $     3,146          $       880          $     5,195
   FY02 payments                            (1,030)                (118)                (430)              (1,578)
   FY02 Non-cash adjustment(a)                 -                   (973)                  -                  (973)
                                        ---------          ------------        -------------         -------------
   Balance 1/31/02                             139                2,055                  450                2,644
   FY03 payments                               (36)                (435)                (130)                (601)
   FY03 Non-cash adjustment(a)                (103)                (245)                  -                  (348)
                                        ---------          ------------        -------------         -------------
   Balance 1/31/03                             -                  1,375                  320                1,695
   FY04 payments                               -                   (339)                (320)                (659)
                                        ---------          ------------        -------------         -------------
   Balance 1/31/04                     $       -            $     1,036          $         -          $     1,036
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
   FY03 Q1 Accruals                    $     1,027          $       -          $         -          $       1,027
   FY03 payments                            (1,027)                 -                    -                 (1,027)
                                        ---------          ------------        -------------         -------------
   Balance 1/31/03                     $       -          $         -          $         -          $           -
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
   FY03 Q2 Accruals                    $     1,043          $         -          $         -          $     1,043
   FY03 payments                            (1,043)                   -                    -               (1,043)
                                        ---------          ------------        -------------         -------------
   Balance 1/31/03                     $         -          $         -          $         -          $         -
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
   FY03 Q4 Accruals                    $       448          $         -          $         -          $       448
   FY03 payments                               (61)                   -                    -                  (61)
                                        ---------          ------------        -------------         -------------
   Balance 1/31/03                             387                   -                    -                   387
   FY04 payments                              (387)                  -                    -                  (387)
                                        ---------          ------------        -------------         -------------
   Balance 1/31/04                     $        -          $         -          $         -          $        -
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
   FY04 Q1 Accruals                    $       326          $        -          $        -          $         326
   FY04 payments                              (326)                  -                   -                   (326)
                                         ----------         -----------          -----------          --------------
   Balance 1/31/04                     $         -          $        -          $        -          $          -
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
   FY04 Q2 Accruals                    $       295          $       -          $       -          $           295
   FY04 payments                              (295)                 -                  -                     (295)
                                        ---------          ------------        -------------         -------------
   Balance 1/31/04                     $         -          $         -          $         -          $        -
---------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      F-16
<PAGE>

(a) Non-cash charges represent the write-down of facility  improvements included
in  the  estimated   costs  of  facilities   closings  and  adjustments  to  the
restructuring  accrual, as costs related to employee terminations were less than
originally estimated.

The Company paid an aggregate of approximately $1,934, $3,023 and $2,609 against
the restructuring  reserve in the fiscal years ended January 31, 2004, 2003, and
2002, respectively. As of January 31, 2004, unpaid amounts of $620 and $887 have
been  classified  as  current  and  long-term   accrued   restructuring   costs,
respectively, in the accompanying consolidated balance sheet.


(6)      INCENTIVE BONUS PAYMENTS

Specified  former Intel  employees  who became  Convera  employees  and remained
employed through September 30, 2002 received 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 were 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 was paid out in fiscal year 2004. In fiscal year
2002,  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.


(7)      EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold  improvements  at January 31, 2004 and 2003 consisted of
the following:

                                                     2004           2003

 Computer equipment                                $  10,713      $  10,174
 Office furniture                                      3,059          2,904
 Leasehold improvements                                  679            671
                                                   ----------     ----------
                                                      14,451         13,749
 Less accumulated depreciation                       (12,692)       (10,843)
                                                   ----------     ----------
                                                  $    1,759     $    2,906
                                                  ==========     ===========
Equipment  and  leasehold  improvements  are  added  at  cost.  Depreciation  is
calculated on the straight-line  method over three years for computer equipment,
five  years for  office  furniture  and over the life of the  related  lease for
leasehold  improvements.  Depreciation  expense for fiscal years 2004,  2003 and
2002 was $1,660, $2,258 and $2,294, respectively.


(8)      GOODWILL AND OTHER INTANGIBLE ASSETS

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

                                                        2004           2003

    Goodwill                                      $   2,275       $   2,268

    Developed technologies                        $   1,346       $   1,346
    Less accumulated amortization                      (511)           (242)
                                                   ----------     ----------
                                                  $     835       $   1,104
                                                   ==========     ==========
                                      F-17

<PAGE>


Amortization  expense for fiscal  years 2004,  2003 and 2002 was $269,  $242 and
$98,  respectively.  Based on the current amount of intangible assets subject to
amortization,  the estimated  amortization  expense for each of the succeeding 5
years is as follows:  2005 - $269; 2006 - $269; 2007 - $269; and 2008 - $28; and
2009 - none.

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 per
                                                         basic and diluted
                                        Net loss            common share
 As reported                        $     (910,509)          $     (20.08)
 Add goodwill amortization                     118                  (0.00)
                                       -------------         -------------
 Adjusted                           $     (910,391)          $     (20.08)
                                     ===============         =============

Goodwill amortization is nondeductible for tax purposes.


(9)      ACCRUED EXPENSES

Accrued expenses at January 31, 2004 and 2003 consisted of the following:

                                                     2004           2003
  Accrued payroll                               $   1,420       $   1,006
  Accrued facility costs                            1,625           4,007
  Accrued consulting fees                               -             917
  Other                                             1,048           1,290
                                                ---------        ---------
                                               $    4,093      $    7,220
                                               ==========      ===========

(10)     INCOME TAXES

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

                                    For the Fiscal Years Ended January 31,
                          ----------------------------------------------------
                                2004               2003             2002
                          ----------------  ----------------  ----------------

  Current tax benefit
     Federal                   $   -            $   -         $       -
     State                         -                -                 -
                             -----------        -----------     --------------
                               $   -            $   -         $       -
  Deferred tax benefit
                            -----------        -----------     --------------
     Federal                   $   -            $   -          $   4,006
     State                         -                -                446
                            -----------        -----------     --------------
                               $   -            $   -         $    4,452
                            -----------        -----------     --------------

                                      F-18

<PAGE>




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

                                                    For the Fiscal Years Ended January 31,
                                     ---------------------------------------------------------------------
<S>                                          <C>                     <C>                     <C>
                                             2004                    2003                    2002
                                     ----------------------  ----------------------  ---------------------

  Federal benefit at statutory rate   $     (6,321)   (35)%   $    (10,048)   (35)%   $  (320,236)   (35)%
  Effect of:
  State benefits, net of federal              (542)    (3)%         (1,039)    (3)%        (6,022)    (1)%
  benefits
  Goodwill                                       -      0 %              -      0 %       266,193     21 %
  Other                                        163      1 %            733      2 %             -      0 %
  Valuation allowance                        6,700     37 %         10,354     36 %        55,613     15 %
                                        ----------              ------------            -----------
  Net deferred tax assets             $        -        0 %   $        -        0 %   $    (4,452)     0 %
                                        =========               ============            ===========
</TABLE>

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,  2004 and 2003 were as
follows:

<TABLE>
<S>                                                               <C>               <C>
                                                                  2004              2003
                                                              --------------    -------------
                                                              --------------    -------------
        Deferred tax assets:
        Net operating loss carryforwards,
           not yet utilized                                    $  58,663         $  54,309
        Restructuring reserve                                        586             1,097
        Other                                                     13,418            10,561
                                                             ------------        ----------
        Total deferred tax assets                                 72,667            65,967
        Valuation allowance                                      (72,667)          (65,967)
                                                             ------------        ----------
        Net deferred tax assets                                $    -         $         -
                                                             ============       ===========
</TABLE>

At January 31, 2004, the Company had net operating loss  carryforwards  ("NOLs")
of approximately $153,565 that expire at various dates through fiscal year 2024.
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 $10,996 and $381 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.

As of January 31, 2004,  the Company had deferred tax assets which are primarily
related to NOL  carryforwards  generated by the Company.  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  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.

In the second  quarter of fiscal  year 2004,  the  Company  completed  a private
placement of 4,714,111  shares (the  "Shares") of its common stock to a group of
unaffiliated  institutional investors. The Company sold the Shares at a purchase
price of $3.60 per share,  resulting in proceeds to the Company of approximately
$16,971.  In connection  with this private  placement,  the Company has incurred
expenses of approximately  $946, which have been recorded in equity as an offset
against the  proceeds.  The  Company  will  continue to use the net  proceeds to
finance  ongoing  operations  and  for  general  corporate  purposes,  including
potential  acquisitions.  Allen & Company  LLC,  a company

                                      F-19

<PAGE>

affiliated  with the  majority  shareholder,  acted as  placement  agent for the
private  placement  and was paid a  commission  of 5%,  which is included in the
offering expenses above.

During  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
$42,000,  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.  and certain  related  parties  owned more than 50% of the
outstanding shares of Convera Class A common stock as of January 31, 2004.


(12)     NET LOSS PER COMMON SHARE

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

                                                             For the Fiscal Years Ended January 31,
                                                   -----------------------------------------------------------
<S>                                                      <C>                 <C>                  <C>
                                                         2004                2003                 2002
                                                   -----------------   ------------------   ------------------
Numerator:
Net loss.......................................     $     (18,059)       $     (29,071)      $    (910,509)
                                                   =================   ==================   ==================

Denominator:
Weighted average number of common shares
outstanding - basic and diluted................        31,486,032            28,854,291         45,348,739

Basic and diluted net loss per common share....     $       (0.57)       $       (1.01)      $      (20.08)

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

                                                             For the Fiscal Years Ended January 31,
                                                   -----------------------------------------------------------
<S>                                                      <C>                 <C>                  <C>
                                                         2004                2003                 2002
                                                   -----------------   ------------------   ------------------

Stock options..................................           199,901               22,654           1,399,512
Deferred stock.................................            40,694                    -                   -
Stock warrants.................................            71,551                    -                   -

</TABLE>

                                      F-20


<PAGE>




(13)     EMPLOYEE BENEFIT PLANS

Stock Options

The Convera 2000 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 and
other  stock based  compensation  pursuant to the plans and the terms and option
exercise prices of the stock options.  Of the total number of shares  authorized
for stock based  compensation,  options or warrants to purchase 7,339,067 shares
and  1,300,000  deferred  shares were  outstanding  as of January 31, 2004.  The
Company had a total of 4,662,635 shares of Class A common stock reserved for the
issuance of warrants,  deferred shares and options under the plans as of January
31, 2004.

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 the Company's 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-21

<PAGE>




The  following  table  summarizes  the  Company's  activity for all of its stock
option awards:
<TABLE>

<S>                                             <C>                      <C>                     <C>
                                                                                          Weighted-Average
                                           Number of Options   Range of Exercise Prices    Exercise Price
         Balance, January 31, 2001                9,674,420         $ 1.04 -67.19              $ 19.09
         Granted                                  8,711,497           2.34 -18.81                 4.71
         Exercised                                  (28,150)          4.75 -15.00                 8.24
         Canceled                                (8,873,458)          3.80 -67.19                19.24
                                                ------------          ---  -----              --------
         Balance, January 31, 2002                9,484,309         $ 1.04 -59.75              $  5.77
                                                ===========           ===  =====              ========
         Granted                                  1,413,400           1.41 - 4.20                 3.64
         Exercised                                  (10,810)          1.04 - 2.07                 1.26
         Canceled                                (2,073,245)          1.41 -59.75                 6.43
                                                ------------          ---  -----              --------
         Balance, January 31, 2003                8,813,654         $ 1.45 -52.75              $  5.25
                                                ===========           ===  =====              ========
         Granted                                    480,310           3.40 - 4.95                 4.09
         Exercised                                  (61,016)          1.70 - 4.75                 4.11
         Canceled                                (2,031,592)          2.43 -39.63                 5.02
                                                ------------          ---  -----              --------
         Balance, January 31, 2004                7,201,356         $ 1.45 -52.75              $  5.24
                                                ===========           ===  =====              ========
</TABLE>

Options to purchase  4,830,097,  4,734,479 and 3,622,523 shares of the Company's
common stock were vested and  exercisable  at January 31,  2004,  2003 and 2002,
respectively,  at weighted-average exercise prices of $5.64, $5.76 and $6.36 per
share, respectively.

The  following  table  summarizes  additional  information  about stock  options
outstanding at January 31, 2004:
<TABLE>

                                              Options Outstanding                      Options Exercisable
                                   -------------------------------------------     ----------------------------
<S>                                     <C>            <C>             <C>            <C>               <C>
                                                  Weighted-Average
                                                    Remaining
                                                   Contractual   Weighted-Average                Weighted-Average
                                     Number of        Life        Exercise            Number       Exercise
       Range of Exercise Prices       Options                       Price          Exercisable       Price
       $   1.45 to  $ 4.20           1,905,504       8.39 years    $   3.73            655,492     $   3.77
       $   4.23 to  $ 4.38           3,929,887       6.88              4.38          2,962,916         4.38
       $   4.42 to  $ 6.75             701,329       3.31              4.93            614,801         4.95
       $   7.00 to  $15.50             356,886       4.36              9.00            335,790         8.98
       $  20.52 to  $52.75             307,750       5.33             21.84            261,098        21.92
                                     ---------       -----            -----         ----------     ---------
                                     7,201,356       6.74 years    $   5.24          4,830,097     $   5.64
                                     ========        =====            =====         ==========     =========

</TABLE>

Employee Stock Purchase Plan

The Company's  employee stock purchase plan ("ESPP") 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 and 152,778  shares were  purchased by employees in fiscal years
2003 and 2002, 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
years 2004 and 2003,  63,898 and 122,845 shares were purchased by the employees,
respectively, leaving 813,257 shares in treasury as of January 31, 2004.


                                      F-22

<PAGE>

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,  2004,  2003 and 2002,  the  Company
contributed  approximately  $477, $560 and $760,  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, 2004 are as follows:


                             Year Ending
                             January 31,
                                 2005                        $     3,119
                                 2006                              1,662
                                 2007                                815
                                 2008                                 63
                                                       -        ---------
                                                             $     5,659
                                                                =========

Total rental expense under operating leases was approximately $2,982, $3,174 and
$3,604 in fiscal years 2004, 2003 and 2002, 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, and 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 million in actual  damages and $10
million in punitive  damages from the Company.  DSMCi  subsequently  amended its
complaint to add copyright  infringement-related  claims. NGTL intervened in the
litigation as a  co-defendant  with  Convera,  and filed  counterclaims  against
DSMCi. Convera moved to compel arbitration of DSMCi's claims; the District Court
denied the motion, and Convera filed an interlocutory  appeal. The D.C. Circuit,
in  November  2003,  ruled that it did not have  jurisdiction  to  consider  the
appeal.  The litigation is now in the discovery phase in the District Court. The
Company  continues to investigate 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-23

<PAGE>


(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
<TABLE>
The following table presents information about the Company's operations by geographical area:


                                            Fiscal Years Ended January 31,
                                  ----------------------------------------------------
<S>                                     <C>               <C>              <C>
                                        2004              2003             2002
  Sales to customers:
     United States                  $    21,896       $    15,343      $    24,894
     United Kingdom                       2,815             3,958            5,738
     All Other                            4,540             4,313            3,596
                                      ---------         ---------          -------
                                    $    29,251       $    23,614      $    34,228
                                      =========         =========          =======
  Long-lived assets:
     United States                  $     6,671       $     8,706      $     7,501
     All Other                              423               726              707
                                      ---------         ---------          -------
                                    $     7,094       $     9,432      $     8,208
                                      =========         =========          =======
</TABLE>

Major Customers

Revenues  derived  from  contracts  and orders  issued by  agencies  of the U.S.
Government were approximately  $15,200 $6,400 and $4,900,  respectively,  in the
fiscal years ended January 31, 2004, 2003 and 2002. These revenues, expressed as
a percentage of total revenues for the fiscal year, were  approximately 52%, 27%
and 14%,  respectively.  For the fiscal year ended January 31, 2004 one customer
accounted for approximately 12% of the Company's total revenues.  For the fiscal
years ended January 31, 2003 and 2002, no individual customer accounted for more
than 10% of the Company's total revenues.


(16)     SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>

                                                               For the Fiscal Years Ended January 31,
                                                         ----------------------------------------------------
<S>                                                            <C>               <C>               <C>
                                                               2004              2003              2002
Supplemental Disclosures of Non-cash Investing and
Financing Activities:
   Retirement of common stock                                  $  -              $ -             (50,690)
   Issuance of common stock for acquisition of
   Semantix assets                                                -               3,407
   Stock options exercised under deferred compensation
     arrangements                                                25                -                 -

</TABLE>
                                      F-24


<PAGE>



(17)     SELECTED QUARTERLY INFORMATION (UNAUDITED)
<TABLE>

<S>                                        <C>                <C>               <C>               <C>
                                           1st Quarter        2nd Quarter       3rd Quarter       4th Quarter
   2004:
   Revenues...........................     $   6,960     $       7,613    $       8,697       $      5,981
   Gross margin.......................         4,650             5,213            6,832              3,986
   Operating loss....................         (5,948)           (5,167)          (3,345)            (6,149)
   Restructuring charges.............            326               295               -                  -
   Other income......................            -                 -                 -                2,363
   Net loss..........................         (5,897)           (5,117)          (3,301)            (3,744)

   Basic and diluted loss per common
     share..........................       $   (0.20)    $       (0.18)     $       (0.10)    $      (0.11)
   2003:
   Revenues.........................       $    6,293    $       5,036      $      6,250      $       6,035
   Gross margin.....................            3,180            2,435             3,558              3,744
   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
     share..........................       $    (0.34)    $      (0.31)     $       (0.21)    $      (0.15)
</TABLE>

The gross margins  reported on Form 10-Q for the first three  quarters of fiscal
years 2004 and 2003 differ from the amounts reported in the table above. This is
due to a  reclassification  of  amortization of acquired  developed  technology,
previously reported in operating expenses, to cost of revenues.  The table below
compares the amounts  reported  previously  on Forms 10-Q with the  reclassified
amounts reported herein.

----------------------------------------------------------
<TABLE>
<S>                                                           <C>               <C>               <C>
                                                              1st Quarter       2nd Quarter       3rd Quarter
2004:
   Gross margin as reported on Form 10-Q......              $    4,717         $  5,281          $   6,899
   Amortization of developed technology.......                     (67)             (68)               (67)
                                                             ----------         ---------        -----------
   Gross margin as reclassified...............              $    4,650         $  5,213          $   6,832

2003:
   Gross margin as reported on Form 10-Q......              $   3,220          $  2,502          $  3,625
   Amortization of developed technology.......                    (40)              (67)              (67)
                                                             ----------         ---------        -----------
   Gross margin as reclassified...............              $   3,180          $  2,435          $  3,558
</TABLE>

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-25