|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, 2005
      Commission File Number 000-31989
      CONVERA CORPORATION
  (Exact name of registrant as specified in its charter)
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|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   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
The aggregate market value of the voting stock held by non-affiliates of the registrant as of July
31, 2004 (based on the closing sales price as reported on the NASDAQ National Market System) was
$34,673,939.
The number of shares outstanding of the registrants Class A common stock as of March 11, 2005
was 38,295,688.
DOCUMENTS INCORPORATED BY REFERENCE
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|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 36
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|         |  | CONVERA CORPORATION
      ANNUAL REPORT ON FORM 10-K
  FOR THE FISCAL YEAR ENDED JANUARY 31, 2005           |   
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|         |  |                                                                                                             |   
|Item 1.  |  | Business                                                                                                    | 1 
|         |  |                                                                                                             |   
|Item 2.  |  | Properties                                                                                                  | 16
|         |  |                                                                                                             |   
|Item 3.  |  | Legal Proceedings                                                                                           | 16
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|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                         | 16
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|         |  | PART II                                                                                                     |   
|         |  |                                                                                                             |   
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Mattersand Issuer Purchases of Equity Securities | 17
|         |  |                                                                                                             |   
|         |  |                                                                                                             |   
|Item 6.  |  | Selected Financial Data                                                                                     | 18
|         |  |                                                                                                            
|         |  |                                                                                                            
|Item 7.  |  | Managements Discussion and Analysis of Financial Conditionand Results of Operations                        | 19
|         |  |                                                                                                             |   
|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 Accountingand Financial Disclosure                         | 32
|         |  |                                                                                                             |   
|Item 9A. |  | Controls and Procedures                                                                                     | 32
|         |  |                                                                                                             |   
|Item 9B. |  | Other Information                                                                                           | 32
|         |  |                                                                                                             |   
|         |  | PART III                                                                                                    |   
|         |  |                                                                                                             |   
|Item 10. |  | Directors and Executive Officers of the Registrant                                                          | 33
|         |  |                                                                                                             |   
|Item 11. |  | Executive Compensation                                                                                      | 33
|         |  |                                                                                                            
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|         |  |                                                                                                            
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters               | 33
|         |  |                                                                                                             |   
|Item 13. |  | Certain Relationships and Related Transactions                                                              | 33
|         |  |                                                                                                             |   
|Item 14. |  | Principal Accounting Fees and Services                                                                      | 33
|         |  |                                                                                                             |   
|         |  | PART IV                                                                                                     |   
|         |  |                                                                                                             |   
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                  | 34

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|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
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|Convera designs, develops, markets, implements and supports enterprise search and categorization software
  solutions that enable a broad range of mission critical applications within government agencies and
  commercial enterprises. 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 flagship enterprise solution, RetrievalWare,
  offer customers the ability to manage vast stores of unstructured information by providing highly
  scalable, fast, accurate and secure search capabilities across more than 200 forms of text, video,
  image and audio information, in more than 45 languages. Convera also offers professional services
  for its software solutions to ensure Convera products integrate seamlessly into customer environments.
  Training, consulting and maintenance services are also provided to facilitate optimal use of its technologies.
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
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|Convera maintains a 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 latest software release, RetrievalWare 8, includes technical
advancements such as categorization, dynamic classification, profiling and distributed indexing capabilities.
In addition, as previously announced, the Company has embarked on an advanced Web indexing development
effort focused on applying portions of the Companys existing core technology to also locate
contextually relevant information on the World Wide Web (the Web). This next-generation
search technology achieved its initial development milestone in October 2004 by creating an Alpha
stage, search platform for open-source Web content. The Company has since advanced its efforts to
Beta stage as the technology presently contains more than 1 billion documents in the
index. The Company has also entered into a hosting facility agreement with AT&T for this service
offering in anticipation of a commercial launch during fiscal 2006.
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|Convera was established on December 21, 2000 through the combination of the former Excalibur Technologies
  Corporation (Excalibur) and Intel Corporations (Intel) Interactive
  Media Services (IMS) division. 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.
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|                                                                                                                                                                                                                                                                                                                                                                                                                      
|As of January 31, 2005 and 2004, 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. RetrievalWare and Screening Room are registered
trademarks of Convera Corporation or its subsidiaries in the United States and other countries.                   

|1
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|The Company can be contacted via email at invest@convera.com and visited at its web site, www.convera.com. On our web site, we post the following filings as soon as reasonably practicable after they are electronically
  filed with or furnished to the Securities and Exchange Commission: our annual report on Form 10-K,
  our quarterly reports on Form 10-Q, our current reports on Form 8-K, our proxy statement on Form
  14A related to our annual stockholders meeting and any amendments to those reports or statements
  filed or furnished pursuant to Section 13(a) of 15(d) of the Securities Exchange Act of 1934, as
  amended. All such filings on our web site are available free of charge. Information on the Convera
  web site is not part of this Form 10-K.
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|Business Strategy
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|The Company licenses its software products directly to government agencies and commercial enterprises
  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. Recently, Convera announced certain expense reductions aimed
  at positioning the core software products business (e.g., RetrievalWare) for profitability. In concert
  with this, the Company has elected to focus a substantial amount of resources on further penetration
  of the national security, defense, law enforcement and intelligence gathering community with the
  United States and its allies, while limiting its selling and marketing efforts to commercial customers
  for the RetrievalWare application. Further, the Company also expects to increase its efforts with
  regard to the previously announced Web indexing initiative. The Company will primarily target government
  agencies, as well as the media, entertainment and publishing sector for this Web indexing offering
  once commercial availability is determined. This strategy is expected to capitalize on customer requirements
  within these market segments seeking both Intranet and Web-based search and categorization technologies
  to manage the vast amounts of content within their environments. Convera continues to conduct international
  sales activities through Convera Technologies International, Limited (CTIL), its wholly
  owned subsidiary in the United Kingdom.
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|CONVERA PRODUCTS
PRODUCTS
|                         

|Convera develops, markets, licenses, services and supports its flagship software product RetrievalWare,
  which offers customers mission-critical search and categorization solutions powering a broad range
  of applications including enterprise portals, knowledge management, intelligence gathering, profiling,
  corporate policy compliance, regulatory compliance, and customer service. These applications are
  utilized within corporate intranets, Internet e-commerce, online publishing and OEM market segments.
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|Converas products are designed to address the search and categorization needs of a diverse customer
base within government agencies and commercial enterprises on a global basis. From supporting the
most demanding requirements of the intelligence and law enforcement communities within government
agencies, 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 software platform for mission-critical, search and categorization
applications. The RetrievalWare 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:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| |  | Searching a large collection of unstructured information assets distributed in information silos across
    the enterprise;                                           
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| |   |                                                                                                                                                                       
| |  | Dealing with large volumes of incoming unstructured data on a daily basis;                                                                                            
| |   |                                                                                                                                                                       
| |  | Searching disparate collections of documents and records regardless of their format, including scanned
    paper, text, audio, video, images and relational databases;
| |   |                                                                                                                                                                       
| |  | Tightly integrating the search solution as part of the corporate security infrastructure;                                                                             
| |   |                                                                                                                                                                       
| |  | Providing a robust, scalable and highly available information discovery platform; and                                                                                 
| |   |                                                                                                                                                                       
| |  | Searching information that exists in multiple languages.                                                                                                              

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|With the release of RetrievalWare 8, Convera enhanced its software product offering with new categorization
  and classification capabilities, as well as tools for developing and deploying taxonomies, and architectural
  enhancements that allow RetrievalWare to easily fit within J2EE and Web Services environments.                                                                                                                                                                                                         
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|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s satisfaction that will result from the search and categorization solution
  being deployed.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|RetrievalWare 8 was 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.                                                                                          

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|The RetrievalWare 8 product line includes:
RetrievalWare® Search (Base Product)
Optional Components:RetrievalWare® Categorization and Dynamic Classification;RetrievalWare® Profiling;RetrievalWare® Cartridge & Classification WorkbenchLanguage Cartridges;Domain Cartridges;Taxonomy Cartridges;RetrievalWare® Synchronizers;Internet Spider;RetrievalWare® FileRoom;Screening Room®;Screening Room® Capture;RetrievalWare® SDK;Screening Room® APIs; andVisual RetrievalWare®.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| | RetrievalWare® Search (Base Product)
| | ------------------------------------
| |                                     

|RetrievalWare provides a secure, scalable information retrieval and knowledge discovery infrastructure
  utilizing advanced indexing, search and categorization technology. The RetrievalWare distributed
  process architecture enables government agencies and commercial enterprises to integrate information
  assets into a single point of access, to navigate that information and to collaborate 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.
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|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                                                                                                                                                                                                                                                                                                                                                                                                             

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|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.
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|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|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.                                                                                                                                                                                                                                                                                                                                                                                               
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|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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|The RetrievalWare 8 product line includes the following optional components:
|                                                                            

| | Categorization and Dynamic Classification
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| |                                          

|The RetrievalWare 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.
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| | 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.
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| | 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.

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| | 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.
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|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.
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|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.
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|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.
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|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.
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|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                                                                                                                                                                                                                                                                                                                         

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|Edit Decision Lists (EDLs) for import into high-end offline editing systems. Screening
  Room Explorer allows user access to catalogs of video assets through any standard Web browser. The
  Video Asset Server indexes and stores captured video assets for instantaneous browsing, or search
  and retrieval via RetrievalWare.
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|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.
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|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.
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|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.
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| | Wed Indexing Technology
| | -----------------------

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|During fiscal year 2005, the Company initiated a research and development project aimed at applying
portions of the Companys existing technology to searching and indexing contextually relevant
information on the World Wide Web. This next-generation search technology achieved its initial development
milestone in October 2004 by creating an Alpha stage search platform for open-source
or Web-based content. The Company recently advanced its efforts to Beta stage, as the
technology presently contains more than 1 billion documents in the index. In connection with this
proposed, new service offering, the Company has entered into a hosting facility agreement with AT&T
in anticipation of a commercial launch during fiscal year 2006.
Converas web indexing technology is being developed to add structure to the Web through the use
of proprietary taxonomies and ontologies, semantic analysis and deep knowledge resources capable
of providing end-users with more relevant search results. The technology also supports complex queries,
offers built in video and image search, and provides geo-locational data. The offering, once commercially
available, may be used in concert with RetrievalWare, Converas flagship enterprise
(e.g., internal) search solution, or with an organizations existing

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|internal applications to create an integrated portal offering blended results from both
Intranet and Web-based searches.
TECHNICAL SUPPORT, PROFESSIONAL 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.
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|The Company also provides on-site consulting services to its customers through employees and independent
  consultants who have been trained and certified by the Company. 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, United Kingdom, as well
  as on-site training for its customers and distribution channel partners. Training customers typically
  pay on a per-course basis for regularly scheduled classes and on a per-day basis for on-site or dedicated
  courses.                                                                                                                                                                                                                                                         

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|--------------------------
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
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|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.
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|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
  agencies and media & publishing concerns. In addition, once commercially available, the Company
  expects to adopt a direct selling model with respect to its Web indexing initiative while also exploring
  the prospect of strategic partners or resellers who may provide increased distribution, access to
  incremental human resources and possible hosting facility alternatives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|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 web site, www.convera.com, is an integral part of its                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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|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 services and view online demonstrations. Existing customers can enroll in training courses and
  access password-protected areas for technical and other customer support.
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|PRODUCT DEVELOPMENT AND ADVANCED RESEARCH
|                                         

|The Companys research and development program focuses on enhancing and expanding the capabilities
  of its products and services to address emerging markets and customer requirements. Over time and
  as the technology evolves, RetrievalWare is expected to remain the basic building block of a modular
  suite of products as previously described. 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. It is expected at this
  time that the Web indexing initiative will be primarily utilized, once commercially available, for
  searching and indexing open source or Web-based content, however, it may also evolve to offer certain
  internal search and categorization features similar to that of RetrievalWare.
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|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 $13.8 million, $12.0 million and $11.6 million,
  respectively, in the fiscal years ended January 31, 2005, 2004, and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                    
|------------------------------------
|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.
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|COMPETITION
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|           

|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.                                                                                                                                                                                                                                         
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Convera considers its principal competitive advantages to be an environment that: (1) is scalable due
  to the distributed-processing architecture, (2) provides more accurate results due to the semantic
  network and APRP technologies, (3) provides more comprehensive results due to its ability to manage
  and retrieve information in multiple languages and in rich media file formats and (4) offers the
  ability to provide blended search results derived from an organizations internal
  data repositories. Once the Web indexing technology is made commercially available in fiscal year
  2006, the Companys blended search results will also include open source or Web-based
  content.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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|---------------------
|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.
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|SEGMENT INFORMATION
At the conclusion of fiscal 2005, the Company has determined that it has two reportable segments. Management
views the core software products business (e.g. RetrievalWare) separately from its Web indexing
initiative. All of the Companys revenues for fiscal 2005 are derived from third party customers
from within the core software products business. For fiscal year 2005, no revenues were earned from
the Web indexing initiative.
Revenues derived from contracts and orders issued by agencies of the U.S. Government were approximately
$11.6 million, $15.2 million and $6.4 million, respectively, in the fiscal years ended January 31,
2005, 2004 and 2003. These revenues, expressed as a percentage of total revenues for the aforementioned
fiscal years, were approximately 45%, 52% and 22%, respectively.
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 14 to the consolidated financial statements
contained herein.
EMPLOYEES
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|The Company had 148 employees at January 31, 2005, of whom 63 were in research and development; 33
  in sales and marketing; 28 in technical support, professional services and training and 24 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.
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|RISK FACTORS
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|            

|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 part or all of their investment in Converas common stock. The discussion
  below and elsewhere in this report also includes forward-looking statements, and the Companys
  actual results may differ substantially from those discussed in these forward-looking statements
  as a result of the risks discussed below.
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|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
and on its ability to commercially launch its Web indexing initiative. 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,
2005, 2004, and 2003, the Companys net losses were approximately $19.8 million, $18.1 million,
and $29.1 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, 2005, the Companys balances of cash, cash
equivalents and short-term investments were approximately $17.8 million. The Company believes its
current balance of cash, cash equivalents and short-term investments, combined with any funds generated
from its operations and available from credit facilities 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 including
those associated with the Web indexing initiative. As a result of any decrease in expenditures, the
Company may need to terminate employees, curtailresearch and developmentprograms 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.
The Company experiences quarterly fluctuations in its operating results, which may adversely affect
its stock price; for example, the Companys total revenues for the four quarters of fiscal year 2005 were $8.2
million, $5.1 million, $6.1 million and $6.3 million respectively, and the price per share of its
common stock during those quarters ranged from $2.16 to $5.40.
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:
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| |  | the downturn in capital spending by customers as a result of general economic conditions;
| | - | -----------------------------------------------------------------------------------------
| |  
| |  | reduced customer demand for the Companys products and services;                         
| |  

| |  | the delay or deferral of customer implementations;  
| | - | ----------------------------------------------------
| |   |                                                     
| |  | the budget cycles of the Companys customers;       
| |   |                                                     
| |  | seasonality of individual customer buying patterns; 
| |   |                                                     
| |  | an increase in competition in the software industry;
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| |  | the size and timing of individual transactions;     
| |   |                                                     

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

| |  | continued success in technological advances and development including the Web indexing initiative;
| | - | --------------------------------------------------------------------------------------------------
| |   |                                                                                                   
| |  | changes in operating expenses and personnel;                                                      

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| |  | changes in accounting principles, such as a requirement that stock options be included in compensation,
which would increase the Companys expense and have a negative effect on earnings;
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| |   |                                                                                                                                                                                           
| |  | the overall trend towards industry consolidation; and                                                                                                                                     
| |   |                                                                                                                                                                                           
| |  | changes in general economic and geo-political conditions and specific economic conditions in the computer and software industries.                                                        

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|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 software 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 may derive 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
historically 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. 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 incurs these expenses 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 2005 to attempt to focus 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, improve the productivity of each
of those organizations and reduce 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, 2005, total revenues derived from sales to agencies of
the U.S. Government represented approximately 45% 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
For the year ended January 31, 2005, total revenues derived from sales to agencies of the U.S. Government
were approximately $11.6 million, representing 45% of total revenues. For the year ended January
31, 2004, revenues derived from sales to agencies of the U.S. Government were approximately $15.2
million, or 52% of total revenues. While the U.S. Government has recently increased spending on defense,
information systems and homeland security initiatives, some government agencies have realized budget
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 (for example, for the year ended January 31, 2005, total revenues derived from international sales represented
approximately 29% 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
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|For the year ended January 31, 2005, total revenues derived from international sales were approximately
$7.5
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|million, representing approximately 29% of total revenues. For the year ended January 31, 2004, revenues
derived from international sales were approximately $7.2 million, representing approximately 25%
of total revenues. Most of the Companys international sales are in the United Kingdom. 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 U.K. foreign subsidiary and are denominated in British pounds or EUROs. As
of January 31, 2005, approximately 10% and 17% 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.
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|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:
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| |  | potentially adverse tax consequences;                                                                              
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| |   |                                                                                                                    
| |  | difficulties in complying with regulatory requirements and standards;                                              
| |   |                                                                                                                    
| |  | trade restrictions and changes in tariffs;                                                                         
| |   |                                                                                                                    
| |  | import and export license requirements and restrictions; and                                                       
| |   |                                                                                                                    
| |  | uncertainty of the effective protection of 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.
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|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 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. Current and potential competitors have established
  or may establish cooperative relationships among themselves or with third parties to increase the
  ability of their products to address the needs of the markets which 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.
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|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.                                                                                                      

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|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 fails to adapt its products as quickly
  as its competitors, the Company may be unable to sell
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12
|--



|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:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| |  | pending patent applications may not be issued;                                                  
| | - | ------------------------------------------------------------------------------------------------
| |   |                                                                                                 
| |  | intellectual property laws may not protect the Companys intellectual property rights;          
| |   |                                                                                                 
| |  | third parties may challenge, invalidate, or circumvent any patent issued to the Company;        
| |   |                                                                                                 
| |  | rights granted under patents issued to the Company may not provide competitive advantages to it;

| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;
| |   |                                                                                                                                                                          
| |  | others may independently develop similar technology or design around any patents issued to the Company;
  and                                                            
| |   |                                                                                                                                                                          
| |  | 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. 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.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13
|--



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

|As of January 31, 2005, the Company had net operating loss carryforwards of approximately $165 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, 2005, the Companys balances of cash, cash equivalents and short-term investments
were approximately $17.8 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 capitalduring 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, 2005, the Companys balances of cash, cash equivalents and short-term investments
  were approximately $17.8 million. The Company believes its current balance ofcash, cash equivalentsand short-term investments, combined with any funds generated from its operations and available from credit facilities will be sufficient to meet its working capital and capital expenditure
  requirements for at least the next twelve monthsbased upon its estimates of funds required to operate its business during such period. However, during orafter that time, the Company may need to raise additional funds for the following purposes:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| |  | to fund the Companys operations, including sales, marketing and research and development programs
  including the Web initiative;
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                   
| |  | to fund any growth the Company experiences;                                                                                       

| | 
| | 

| |  | 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, including products capable of searching
  and/or indexing the Web, and the Company may expand its training and other professional services
  for its products;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                     
| |  | to increase the Companys promotional and marketing activities; or                                                                                                                                                                                                                                                                  

| | 
| | 

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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company 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.

|14
|--



|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 2005, the market price per share of the Companys common stock ranged
  from $3.70 to $5.05. This volatility may adversely affect 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:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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

|On occasion, the equity markets, and in particular the markets for software companies, have experienced
  significant price and volume fluctuations. These fluctuations have affected the market price for
  many companies securities and maybe 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.

|15
|--



|Item 2.            Properties
The Companys corporate headquarters facility is occupied under a lease agreement that expires
in December 2007 for a total of approximately 13,200 square feet of space in an office building located
at 1921 Gallows Road, Vienna, Virginia 22182.
The Companys principal development and customer support centers are located in Carlsbad, California
and Columbia, Maryland. The Company leases additional space in San Jose, California and Montreal,
Canada. The Company also leases space in Bracknell, United Kingdom in support of its international
sales operation. During fiscal 2005 the Company closed its offices in Paris, France and Munich, Germany
and is in the process of closing its Frankfurt, Germany office.
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 remains 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.
In addition, 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
adversely affected.
Item 4.            Submission of Matters to
a Vote of Security Holders
None.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|16
|--



|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, 2003 through January 31, 2005, as reported by the National Market System of NASDAQ.
The number of shareholders of record as of January 31, 2005 was 954. The Company has never declared
or paid dividends on its common stock and anticipates that, for the foreseeable future, it will not
pay dividends on its common stock.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                                  |  | High |      | Low |  
|------------------------------------------------- |  | ---- | ---- | --- | -
|
|
|Fiscal 2005 (February 1, 2004  January 31, 2005) |  |      |      |     |  
|                                                  |  |      |      |     |  
|First Quarter                                     |  | $    | 5.40 |     | $
|Second Quarter                                    |  |      | 3.40 |     |  
|Third Quarter                                     |  |      | 4.47 |     |  
|Fourth Quarter                                    |  |      | 5.05 |     |  
|                                                  | 
|Fiscal 2004 (February 1, 2003  January 31, 2004) |  |      |      |     |  
|                                                  |  |      |      |     |  
|First Quarter                                     |  | $    | 4.25 |     | $
|Second Quarter                                    |  |      | 5.25 |     |  
|Third Quarter                                     |  |      | 4.80 |     |  
|Fourth Quarter                                    |  |      | 5.72 |     |  

|                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------
|The following table sets forth, as of January 31, 2005, information with respect to the Companys
equity compensation plans:
|                                                                                                                            

|Plan Category                                                   |  | Number of 
      Securities to be Issued 
      Upon Exercise of 
      Outstanding Options,
      Warrants and Rights
      (a) |  | Weighted-Average 
      Exercise Price of 
      Outstanding 
      Options, Warrants
      and Rights (1)
      (b) |  | Number of Securities 
      Remaining Available for 
      Future Issuance Under 
      Equity Compensation Plans 
      (excluding securities 
      reflected in column (a)) 
      (c) | 
|--------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|
|Equity compensation plans approved
    by security holders:     |  |                                                                                                                                  |  |                                                                                                                      |  |                                                                                                                                                                                           | 
|1.  Convera Stock Option Plan                                   |  | 10,424,826                                                                                                                       |  | $4.55                                                                                                                |  | 2,380,747                                                                                                                                                                                 | 
|2.  Convera Employee Stock
            Purchase Plan            |  |                                                                                                                                 |  |                                                                                                                     |  | 726,408                                                                                                                                                                                   | 
|Equity compensation plans not
    approved by security holders: |  | None                                                                                                                             |  | Not Applicable                                                                                                       |  | Not Applicable                                                                                                                                                                            | 

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

|17
|--



|Item 6.            Selected Financial Data
The selected financial data presented below have been derived from the Companys consolidated
financial statements. The balance sheet data as of January 31, 2005 and 2004, and the statement of
operations data for the fiscal years ended January 31, 2005, 2004 and 2003 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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                                                           
|---------------------------------------------------------------------------
|
|
|
|Statement of Operations Data:                                              
|                                                                           
|Revenues                                                                   
|                                                                           
|Cost of revenues                                                           
|                                                                           
|                                                                           
|Gross margin                                                               
|                                                                           
|                                                                           
|Operating expenses:                                                        
|Sales and marketing                                                        
|Research and product development                                           
|General and administrative                                                 
|Amortization of goodwill (3)                                               
|Amortization of other intangible assets (3)                                
|Incentive bonus payments to employees                                      
|Restructuring charges                                                      
|Reduction in goodwill                                                      
|Reduction in other long-lived assets                                       
|Acquired in-process research and development                               
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Operating loss                                                             
|                                                                           
|Other income, net                                                          
|                                                                           
|                                                                           
|Net loss before income taxes                                               
|                                                                           
|Income tax benefit                                                         
|                                                                           
|Net loss                                                                   
|                                                                           
|Dividends on cumulative, convertible preferred stock                       
|                                                                           
|Net loss applicable to common stock                                        
|                                                                           
|Net loss per common share  basic and  diluted                             
|                                                                           
|Weighted-average number of common shares
   outstanding  basic and diluted
|                                                                           
|Balance Sheet Data (1) (at end of period)                                  
|Cash and cash equivalents                                                  
|Working capital                                                            
|Total assets                                                               
|Accumulated deficit                                                        
|Total shareholders equity (2)                                             
|                                                                           
|                                                                           

| | (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.

|18
|--



|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 government agencies and commercial
businesses throughout North America, Europe and other parts of the world. The Company licenses its
software to end users directly and also distributes its software products through license agreements
with value-added resellers, system integrators, original equipment manufacturers and other strategic
partners. Revenues are generated from software licenses with customers and from the related sale
of product maintenance, training and professional 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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|The Company believes RetrievalWare, its flagship product, has unique capabilities supporting
  the needs of customers within government agencies, as well as the media, entertainment and publishing
  sectors that will enable it to capitalize on current market opportunities and achieve its operational
  goals. Going forward, the Company expects to focus a substantial amount of resources on further penetration
  of the national security, defense, law enforcement and intelligence gathering community with the
  United States and its allies. An important objective in this market is to upgrade existing installations
  of older versions of RetrievalWare to the RetrievalWare 8 platform that includes technical advancements
  such as categorization, dynamic classification, profiling and distributed indexing software capabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Further, the Company expects to increase its efforts with regard to its Web indexing initiative launched
  by the Company during fiscal 2005. This research and development initiative is an advanced effort
  aimed at applying portions of the Companys existing technology to searching and indexing contextually
  relevant information on the Web. The Company has advanced the platform to a Beta stage as of January
  31, 2005 whereby the technology now contains more than 1 billion documents in the index. In concert
  with this initiative, Convera has entered into a hosting facility agreement with AT&T in anticipation
  of a commercial launch of this service offering sometime during fiscal year 2006. The Company will
  look to focus a majority of its selling and marketing efforts on the government and intelligence
  gathering community as well as the media, entertainment and publishing sector for the emerging Web
  indexing technology. This selling and marketing strategy is designed to capitalize on the alignment
  between customer requirements seeking both Intranet and Web-based search and categorization technologies.
  Operating costs for this advanced development effort totaled approximately $4.4 million for fiscal
  2005, while capital expenditures totaled approximately $4.1 million for the year ended January 31,
  2005. Going-forward, cash outlays will be limited to equipment, personnel and general operating costs.
  The Company expects to continue to increase its investment in this initiative and may also elect
  to seek funding sources for this development effort over the coming quarters. Opportunities outside
  of these areas will certainly be evaluated but will not be a primary focus of the Companys
  selling and marketing strategy going forward.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Managements primary 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 opportunities to determine the market sectors
in which the Company should concentrate its sales and marketing efforts. The Companys business
environment and the software industry in general are characterized by intense competition, rapid
technological changes, changes in customer requirements and emerging new market segments. The Company
competes intensely within the commercial sector where its market position has not been as strong
as it has been within the government sector. As such, the Company has elected to focus the majority
of it efforts within the commercial setting on the media, entertainment and publishing sectors. The
Company believes this segment may afford greater opportunities when compared to addressing a wide
array of commercial market segments. The Companys competitors include many companies that are
larger and more established and have substantially more resources. 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,

|19
|--



|the Company will continue to invest 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 our business. Through a number of reorganizations during
fiscal years 2002 through 2005, 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 vertical market
opportunities. The reorganizations, which are described in this section and elsewhere in this Form
10-K, were intended to streamline the professional services, customer support and sales organizations
by reducing the number of employees, improve the productivity of each of those organizations and
reduce management personnel and other overhead costs in the marketing, development and administrative
organizations within the Company.
On August 18, 2004, the Company announced that it further streamlined its expense structure. As part
of the restructuring, the Company reduced its personnel related costs, eliminated certain marketing
programs, renegotiated real estate obligations and decreased other general operating expenses. The
restructuring is expected to result in annualized savings of approximately $12 million that first
began to be realized during the fourth quarter of fiscal 2005. The Company recorded a restructuring
charge of $518,000 during the third quarter of fiscal 2005 related to this effort.
Further, on December 10, 2004 the Company announced an additional re-alignment of its operational infrastructure.
This action included a general workforce reduction (including the transfer of certain resources to
the Companys Web indexing initiative), facility consolidations, reduced marketing related expenses
and decreased other general operating costs. As part of this restructuring, the Company also announced
that it will increase its focus on accelerating its Web indexing development activities and will
seek to advance the Companys existing presence in the high-end search market, specifically
within the government and intelligence gathering community as well as the media, entertainment and
publishing sectors. These expense adjustments are in support of the Companys continuing efforts
to reach profitability and as such are expected to position the Companys software products
business (e.g. RetrievalWare) to reach net income profitability by the end of fiscal 2006. The Company
expects to increase the level of investment in its Web indexing initiative and may elect to seek
funding sources for this development effort over the coming quarters. The December 2004 restructuring
is expected to result in annualized savings of approximately $10 million that will begin to be realized
during the first quarter of fiscal 2006. The Company recorded a net restructuring charge of $426,000
during the fourth quarter of fiscal 2005 related to this effort. 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 for its core software products business. With
the expected reduction of approximately $22 million in annualized expenses during fiscal 2005, at
historical revenue run rates, the core software products business is expected to be net income neutral
for fiscal 2006. The Company will continue to invest in its Web indexing initiative, such that on
a consolidated basis, the Company is expected to remain in a net loss position until such time as
the Web indexing technology is offered to the commercial marketplace and certain levels of revenue
are attained. A detailed review of the numerous risks and challenges facing the Company is contained
in the Forward Looking Statements section beginning on page 10.
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
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|20
|--



|financial statements and the reported amounts of revenues and expenses during the reporting period.
Management bases those estimates, including those related to bad debts, goodwill and other intangible
assets, restructuring costs, income taxes and litigation, on historical experience and other factors
that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets, liabilities and equity that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions
or conditions.
Convera believes the following accounting policies affect the more significant judgments and estimates
used in the preparation of the Companys financial condition and results of operations.
Revenue Recognition
Converas recognition of revenues requires judgment, particularly in the areas of collectibility
and whether the fee is fixed and determinable at the time the sales are made. The Company bases its
judgment on a variety of factors, including the payment and other terms of the individual customer
contracts, credit history of the customer, prior dealings with specific customers, and certain other
factors. If the Company determines that the price under the contract is fixed and determinable, and
that collectibility is assured, then the Company recognizes revenue related to the software license
at the time of sale. To the extent the Company determines that the price of a sales agreement is
not fixed, the Company delays revenue recognition until payments under the contract become due. Alternatively,
to the extent the Company determines that the collection of payments under the contract is not assured,
the Company delays revenue recognition until the payments under the contract are received. Thus,
the assessment as to whether the fee is fixed and determinable at the time of sale and that the fees
are collectible is critical in determining the extent of the revenue recognized in a given period.
The revenue associated with other elements of the contract, such as maintenance or training and 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
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|21
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|reporting units.  The impairment of goodwill is assessed on an annual basis or whenever changes
in circumstances indicate that the fair value of the Company is less than the carrying value. This
assessment is performed by comparing the market value of the Companys outstanding common stock
with the carrying amount of the Companys net assets. If the market value exceeds the carrying
amount of the Companys net assets, impairment of goodwill does not exist. If the market value
is less than the carrying amount of the Companys net assets, the Company will perform further
analysis and may be required to record an impairment.
The Company evaluates all of its long-lived assets, including intangible assets other than goodwill,
for impairment in accordance with the provisions of SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived assets and intangible
assets other than goodwill be evaluated for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable based on expected undiscounted
cash flows attributable to that asset. Should events indicate that any of the Companys assets
are impaired; the amount of such impairment will be measured as the difference between the carrying
value and the fair value of the impaired asset and recorded in earnings during the period of such impairment.
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, 2005, 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, 2005, total revenues were $25.7 million, a decrease of 12% compared
to revenues of $29.3 million in fiscal year 2004. The net loss for fiscal year 2005 was $19.8 million,
or $0.56 per common share, compared to $18.1 million, or $0.57 per common share, in the prior year.
For the fiscal year ended January 31, 2004, total revenues increased 24% from total revenues of $23.6
million in fiscal year 2003. The net loss for fiscal year 2003 was $29.1 million, or $1.01 per common
share.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|22
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|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, 2005 (dollars in thousands):
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                            

|                                                   |  | Components of Revenue and Expenses |         | Increase 
      (Decrease) 
      from 2004 to 
      2005 |     | Increase 
      (Decrease) 
      from 2003 to 
      2004 |  
|-------------------------------------------------- |  | ---------------------------------- | ------- | ---------------------------------------------------------- | --- | ---------------------------------------------------------- | -
|
|
|Revenues:                                          |  | $                                  |         | %                                                          |     | $                                                          |  
|                                                   |  |                                    |         |                                                            |     |                                                            |  
|License                                            |  | $                                  | 14,360  |                                                            | 56  | %                                                          | $
|Professional services                              |  |                                    | 3,746   |                                                            | 15  | %                                                          |  
|Maintenance                                        |  |                                    | 7,592   |                                                            | 29  | %                                                          |  
|                                                   |  |                                    |         |                                                            |     |                                                            |  
|Total revenues                                     |  | $                                  | 25,698  |                                                            | 100 | %                                                          | $
|                                                   |  |                                    |         |                                                            |     |                                                            |  
|                                                   |  |                                    |         |                                                            |     |                                                            |  
|Expenses:                                          |  |                                    |         |                                                            |     |                                                            |  
|                                                   |  |                                    |         |                                                            |     |                                                            |  
|Cost of license revenue                            |  | $                                  | 1,658   |                                                            | 6   | %                                                          | $
|Cost of professional services
    revenue          |  |                                    | 3,332   |                                                            | 13  | %                                                          |  
|                                                   |  |                                    |         |                                                            |     |                                                            |  
|Cost of maintenance revenue                        |  |                                    | 1,718   |                                                            | 7   | %                                                          |  
|                                                   |  |                                    |         |                                                            |     |                                                            |  
|Sales & marketing                                  |  |                                    | 14,476  |                                                            | 56  | %                                                          |  
|Research and product
     development              |  |                                    | 13,801  |                                                            | 54  | %                                                          |  
|                                                   |  |                                    |         |                                                            |     |                                                            |  
|General and administrative                         |  |                                    | 9,764   |                                                            | 38  | %                                                          |  
|Incentive bonus payments to
     employees         |  |                                    |        |                                                            | 0   | %                                                          |  
|                                                   |  |                                    |         |                                                            |     |                                                            |  
|Restructuring charges                              |  |                                    | 944     |                                                            | 4   | %                                                          |  
|Acquired in-process research 
     and development |  |                                    |        |                                                            | 0   | %                                                          |  
|                                                   |  |                                    |         |                                                            |     |                                                            |  
|Total expenses                                     |  | $                                  | 45,693  |                                                            | 178 | %                                                          | $
|                                                   |  |                                    |         |                                                            |     |                                                            |  
|Operating loss                                     |  | $                                  | (19,995 | )                                                          |     |                                                            | $
|                                                   |  |                                    |         |                                                            |     |                                                            |  
|Other income, net                                  |  |                                    | 175     |                                                            |     |                                                            |  
|                                                   |  |                                    |         |                                                            |     |                                                            |  
|Net loss before income taxes                       |  | $                                  | (19,820 | )                                                          |     |                                                            | $
|Income tax benefit                                 |  |                                    |        |                                                            |     |                                                            |  
|                                                   |  |                                    |         |                                                            |     |                                                            |  
|Net loss                                           |  | $                                  | (19,820 | )                                                          |     |                                                            | $
|                                                   |  |                                    |         |                                                            |     |                                                            |  

|23
|--



|Revenues
License revenues for the year ended January 31, 2005 decreased 22% to $14.4 million from $18.3 in fiscal
year 2004 and increased 40% in fiscal year 2004 from $13.1 million in fiscal year 2003. The average
deal size for fiscal year 2005 increased to approximately $130,000, up 18% from approximately $110,000
for the prior year. The total number of license deals for fiscal 2005 totaled approximately 109,
a 34% decrease compared to approximately 165 for fiscal year 2004. The decrease in total license
revenues in fiscal year 2005 compared to fiscal year 2004 is primarily attributable to a $3.4 million
federal enterprise license transaction recognized during the third quarter of fiscal 2004 and the
absence of a like-sized transaction in fiscal 2005 coupled with lengthier sales cycles (specifically
across the commercial marketplace).
Professional services revenues, which include training and professional services, were $3.7 million
for the year ended January 31, 2005, a 14% decrease over services revenues of $4.3 million for the
year ended January 31, 2004. Professional services revenues for fiscal 2004 increased 8% over services
revenues of $4.0 million for the year ended January 31, 2003. The decline in fiscal year 2005 professional
services revenues versus fiscal year 2004 was primarily due to the completion of two major contracts
from within the Companys international operation, which was partially offset by one U.S. commercial
engagement. Federal professional services revenues for fiscal year 2005 mirrored fiscal year 2004.
Maintenance revenues were $7.6 million for the year ended January 31, 2005, compared to $6.6 million
and $6.5 million for the years ended January 31, 2004 and 2003, respectively. The increase in maintenance
revenues in fiscal year 2005 can be attributed to the implementation of new maintenance renewal processes
and an increased focus on identifying lapsed renewals from within the existing customer base.
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. CTIL satellite offices in France and Germany were closed in fiscal year 2005.
International revenues from CTIL increased approximately 6% to $7.5 million in fiscal year 2005 from
$7.2 million in fiscal year 2004. In fiscal year 2004, international revenues declined 13% from $8.3
million in fiscal year 2003.
Revenues derived from contracts and orders issued by agencies of the U.S. Government were approximately
45%, 52%, and 27% of total revenues for fiscal years 2005, 2004, and 2003, respectively. One reseller
customer accounted for approximately 17% of revenues in fiscal year 2005. In fiscal year 2004 one
customer accounted for approximately 12% of revenues. There were no customers in fiscal year 2003
that accounted for more than 10% of revenues.
Cost of revenues
Cost of license revenues decreased 9% to $1.7 million in fiscal year 2005 from $1.8 million in fiscal
year 2004. Cost of license revenues decreased 48% in fiscal year 2004 from $3.5 million in fiscal
year 2003. As a percentage of license revenues, cost of license revenues was 12% for the year ended
January 31, 2005, 10% for the year ended January 31, 2004, and 27% for the year ended January 31,
2003. The decrease in cost of license revenues over the last three fiscal years can be attributed
to decreasing royalty expenses across those periods.
Cost of professional services revenues decreased 29% to $3.3 million for the year ended January 31,
2005 from $4.7 million for the year ended January 31, 2004. Cost of services revenues decreased 13%
in fiscal year 2004 from $5.4 million in fiscal year 2003. The decrease in cost of professional services
revenues for both fiscal year 2005 and 2004 is attributable to a reduction in the overall number
of employees responsible for the management and delivery of professional services. During fiscal
years 2005 and 2004, the Companys restructuring actions reduced the number of employees in
the professional services organization by seven and three, respectively. 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. The Company has elected to retain 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.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|24
|--



|Cost of maintenance revenues decreased 15% in fiscal year 2005 to $1.7 million from fiscal 2004 and
increased 15% to $2.0 million in fiscal year 2004 from $1.8 million in fiscal year 2003. As a percentage
of maintenance revenues, cost of maintenance revenues was 23%, 31%, and 27%, in fiscal years 2005,
2004, and 2003, respectively. The decrease in cost of maintenance revenues in fiscal year 2005 is
attributable to reduced personnel related costs. The increase in cost of maintenance revenues in
fiscal year 2004 compared to fiscal year 2003 was due to the addition of five employees in the customer
support organization.
Operating expenses
Sales and marketing expenses decreased 20% in fiscal year 2005 to $14.5 million from $18.1 million
in fiscal year 2004. In fiscal year 2004, sales and marketing expenses decreased 9% from $20.0 million
in fiscal year 2003. As a percentage of total revenues, sales and marketing expenses were 56%, 62%
and 85% of total revenues, in fiscal years 2005, 2004 and 2003, respectively. The decrease in sales
and marketing expenses for fiscal year 2005 is attributable to lower personnel costs stemming from
the two restructurings the Company implemented in fiscal year 2005 resulting in the elimination of
28 employees, a decreased emphasis on the commercial sector for its core software offering RetrievalWare,
reduced marketing program costs (e.g., trade shows, advertising, etc.) and a decrease in bad debt
expense. 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.
Research and product development costs increased 15% in fiscal year 2005 to $13.8 million from $12.0
million in fiscal year 2004, representing 54% and 41% of total revenues, respectively. In fiscal
year 2004, research and product development costs increased 3% from $11.6 million in fiscal year
2003. In fiscal year 2003, research and product development costs represented 49% of total revenues.
The increase in fiscal year 2005 research and development expenses was due to increased personnel
related costs associated with the Web indexing initiative which accounted for approximately $4.2
million of fiscal year 2005 costs. The increase in fiscal year 2004 research and development expenses
was due to an increased use of consultants for certain aspects of product development.
General and administrative expenses decreased 8% to $9.8 million in fiscal year 2005 from $10.6 million
in fiscal year 2004, representing 38% and 36% of total revenues, respectively. In fiscal year 2004,
general and administrative expenses increased 22% from $8.6 million in fiscal year 2003. General
and administrative expenses represented 37% of total revenues in fiscal year 2003. The decrease in
fiscal year 2005 general and administrative costs is due to reduced employee related costs resulting
from the restructurings as implemented across the year and lower other general operating costs. 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
Amortization of goodwill and other intangible assets
Amortization of acquired developed technology of $0.3 million, $0.3 million and $0.2 million is recorded
in cost of license revenues for the fiscals years ended January 31, 2005, 2004 and 2003, 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
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|25
|--



|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
Restructuring charges
During fiscal year 2005 the Company effected a re-alignment of its operational infrastructure aimed
at more closely aligning its expense structure with expected future revenue streams. Restructurings
in both the third and fourth quarters of fiscal 2005 totaling $0.9 million were implemented to reduce
operating expenses through general workforce reductions, facility consolidations, reduced marketing
related expenses and decreased other general operating costs. In connection with these restructurings,
the Company reduced its workforce by 77 employees worldwide, including 23 employees from within the
engineering group, 30 from the sales and marketing group, 19 from the professional services group,
and five from the general and administrative group. These restructurings are expected to result in
annualized savings of approximately $22 million beginning in fiscal 2006. Of the projected $22 million
in savings, approximately $11 million are expected to be realized from sales and marketing, $4.2
million from engineering, $5.1 million from general and administrative and $1.7 million from cost of revenues.
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 first began to be
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 first began to be realized in the third quarter of fiscal 2004.
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 first began to be 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,
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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|26
|--



|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 first began to be realized in the third quarter of fiscal 2005.
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 first began to be realized
in the first quarter of fiscal year 2004.
The Company paid approximately $1.6 million, $1.9 million and $3.0 million against the restructuring
reserve in the fiscal years ended January 31, 2005, 2004 and 2003, respectively. As of January 31,
2005, unpaid amounts of $0.1 million representing employee severance benefits and $0.7 million representing
facility-related charges, have been classified as a current restructuring reserve in the accompanying
consolidated balance sheet. The Company expects to pay the employee severance balances by the end
of the first quarter of fiscal year 2006. Amounts associated with facility closings will be settled
over the remaining term of the facility lease, which is through February 2006.
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 decreased to $0.2 million in fiscal year 2005 from $2.6 million in fiscal year 2004. In
fiscal year 2004 other income included a gain of $2.4 million resulting from a settlement agreement
reached between the Company and another party 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. Other income was $0.6 million in fiscal year 2003.
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).
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|27
|--



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

|Contractual Obligations       |  | Payments Due By Period (in thousands) |      
|----------------------------- |  | ------------------------------------- | -----
|
|
|                              |  |                                       |      
|Operating leases              |  | $                                     | 3,630
|Other contractual obligations |  |                                       | 2,457
|                              |  |                                       |      
|Total                         |  | $                                     | 6,087
|                              |  |                                       |      

| |  | Operating lease obligations  represents the minimum lease rental payments under non-cancelable
  leases, primarily for the Companys office space and operating equipment in various locations
  around the world.                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Other contractual obligations  represents the principal amounts due on outstanding contractual
  obligations relating to a separation agreement with a former executive, a hosting agreement between
  the Company and AT&T related to the Companys Web indexing initiative and a settlement agreement
  between the Company and Intel Corporation, current and long-term, as of January 31, 2005.

|                                                                                                                                                                                                           
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Liquidity and Capital Resources
The Companys combined balance of cash, cash equivalents and short-term investments at January
31, 2005 as compared to January 31, 2004 is summarized below (in thousands).
|                                                                                                                                                                                                           

|                          |  |   |        |  |   |        | 
|------------------------- |  | - | ------ |  | - | ------ | 
|
|
|Cash and cash equivalents |  | $ | 17,766 |  | $ | 30,530 | 
|Investments               |  |   | 71     |  |   | 71     | 
|                          |  |   |        |  |   |        | 
|Total                     |  | $ | 17,837 |  | $ | 30,601 | 
|                          |  |   |        |  |   |        | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|As of January 31, 2005, the Companys balances of cash, cash equivalents and short-term investments
were $17.8 million. The Company believes that its current balance of cash, cash equivalents, investments,
funds generated from operations, if any, and the recent bank loan discussed below 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 and the recent bank loan, 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 expense action and/or 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.
On March 23, 2005 the Company secured a $5 million equipment term loan from Silicon Valley Bank, the
primary subsidiary of Silicon Valley Bancshares (NASDAQ: SIVB). The four-year, term facility will
provide financing for capital purchases including those for its Web indexing initiative. The loan
is secured by a first lien on all corporate assets, excluding intellectual property.
The number of days sales outstanding (DSO) was 101 days at January 31, 2005, compared to
79 as reported for the period ended January 31, 2004. The DSO for fiscal year 2005 is calculated
using a methodology that focuses on the most recent sales in relation to the end of quarter receivables
balance. The DSO calculation for fiscal year 2004, in addition to applying the aforementioned methodology,
also incorporated the Companys yearend bad debt reserve balance that decreased the end of quarter
receivables balance. As such, if the DSO for fiscal year 2004 were calculated in an identical manner
to that of fiscal year 2005, the resulting DSO for fiscal 2004 would have been 103 days. Management
believes that the allowance for doubtful accounts of $0.5 million at January 31, 2005 is adequate.
The allowance for doubtful accounts at the end of fiscal year 2005 decreased from $1.8 million at
January 31, 2004. The allowance for doubtful accounts was $1.6 million at January 31, 2003. The provision
taken for doubtful accounts was $(0.4) million, $0.1 million and $0.8 million during fiscal years
2005, 2004, and 2003,

|28
|--



|respectively.  The fluctuation in the provision for bad debts in fiscal years 2003 through 2005
correlates generally with the economic environment and more specifically to a shift in the Companys
customer base. The provision taken for bad debts has steadily declined in fiscal years 2003 through
2005 as the general economy improved, and as 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 8%, 25% and 19% at January
31, 2005, January 31, 2004, and January 31, 2003, respectively. Collection efforts in fiscal year
2005 have reduced the percentage of receivables over 90 days past due. As a result, the allowance
as a percentage of gross receivables has also decreased at January 31, 2005. Conversely, the allowance
percentage increased at January 31, 2004 compared to the prior year-end. Although the overall gross
accounts receivables balance had declined, the Company reserved for a backlog of long outstanding
receivables being pursued at that time. There were no significant changes made to the Companys
collection policies or payment terms during the three-year time frame, however collection efforts
have became more aggressive in an effort to identify collection issues earlier and take actions to
increase the likelihood of collection.
Operating Activities
In fiscal year 2005, the Companys operating activities utilized $19.9 million of net cash and
cash equivalents, compared to $15.5 million in fiscal year 2004. Net cash used in operating activities
was $26.2 million in fiscal year 2003. The fiscal year 2005 net loss of $19.8 million was offset
by non-cash charges totaling $2.9 million, consisting primarily of depreciation of $1.6 million,
equity compensation expense of $1.4 million and amortization of developed technologies of $0.3 million.
A reversal to the provision for doubtful accounts reduced the non-cash charges by $0.4 million. Cash
was provided from a reduction in prepaid expenses and other of $0.9 million and an increase to deferred
revenues of $0.5 million. An increase to accounts receivable used cash of $0.6 million. Decreases
to accounts payable, accrued expenses, accrued bonuses and the restructuring reserve used net cash
of $2.1 million. A decrease to other long-term liabilities used $1.6 million. 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.
Investing Activities
In fiscal year 2005 cash flows from investing activities used $5.0 million for purchases of equipment
and leasehold improvements. Of this, $4.1 million was related to the Web indexing initiative. 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
Financing Activities
Financing activities provided cash of $12.2 million in fiscal year 2005. A private placement of 3,433,333
newly-issued shares of common stock to several investors, including affiliates of Allen & Company
Incorporated, a significant stockholder of the company, and certain directors resulted in proceeds
of $10.3 million. The shares were priced on September 7, 2004 at $3.00 per share, representing a
premium to the $2.80 closing market price on such date. Additionally, cash of approximately $0.2
million was provided by the issuance of stock under the employee
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|29
|--



|stock purchase plan and cash of $1.7 million was provided from the exercise of employee stock options.
Financing activities provided approximately $16.8 million of cash in fiscal year 2004, including
proceeds of $16.0 million from a private placement and proceeds of $0.8 million from the issuance
of stock under the employee stock purchase plan, the issuance of warrants and the exercise of stock
options. 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.
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
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123.
However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized
in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
Statement 123(R) must be adopted no later than August 1, 2005.
Statement 123(R) permits public companies to adopt its requirements using one of two methods:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| | 1. | A modified prospective method in which compensation cost is recognized beginning with the
    effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted
    after the effective date and (b) based on the requirements of Statement 123 for all awards granted
    to employees prior to the effective date of Statement 123(R) that remain unvested on the effective
    date.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 2. | A modified retrospective method which includes the requirements of the modified prospective
  method described above, but also permits entities to restate based on the amounts previously recognized
  under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented
  or (b) prior interim periods of the year of adoption.                                                           

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company is analyzing its options related to the adoption of Statement 123(R), which we will adopt
as of August 1, 2005.
As permitted by Statement 123, the company currently accounts for share-based payments to employees
using Opinion 25s intrinsic value method and, as such, generally recognizes no compensation
cost for employee stock options. Accordingly, the adoption of Statement 123(R)s fair value
method will have a significant impact on our result of operations, although it will have no impact
on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted
at this time because it will depend on levels of share-based payments granted in the future. However,
had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated
the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per
share in Note 2 to our consolidated financial statements. Statement 123(R) also requires the benefits
of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and

|30
|--



|increase net financing cash flows in periods after adoption. While the company cannot estimate what
those amounts will be in the future (because they depend on, among other things, when employees exercise
stock options), the amount of operating cash flows recognized in prior periods for such excess tax
deductions were $0 for the years ended January 31, 2005, 2004 and 2003.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which amends APB Opinion No. 29, Accounting for Nonmonetary Transactions (SFAS No. 153), which requires a nonmonetary exchange of assets be accounted for at fair value, recognizing any gain
or loss, if the exchange meets a commercial substance criterion and fair value is determinable. The
commercial substance criterion is assessed by comparing the entitys expected cash flows immediately
before and after the exchange. This eliminates the similar productive assets exception,
which accounts for the exchange of assets at book value with no recognition of gain or loss. Statement
153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. We do not believe the adoption of SFAS No. 153 will have a material impact on our
financial statements.
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
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 this Interpretation
has not had an effect on its consolidated financial statements.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|31
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|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 were approximately 29% of total
revenues in fiscal year 2005. 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, 2005, approximately 10% and 17% 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 2005, 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, 2005, approximately 2% and 3% of the Companys cash and cash equivalents were
denominated in British pounds and EUROs, respectively. Cash equivalents consist of funds deposited
in money market accounts with original maturities of three months or less. 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 $71,000, 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.
Item 9B.         Other Information
During August 2004, the Company entered into a Master Agreement and an Enterprise Hosting Agreement
with AT&T for hosting and bandwidth services related to the Web indexing initiative. The agreement
committed the Company to a financial obligation of approximately $1.4 million over a twenty-four
month period. Both agreements may be terminated with reasonable notice at which time the Company
would have a remaining financial obligation limited to 50% of its remaining contractual commitment.
During December 2004, the Company
entered into a second amendment for its office lease located
at 1921 Gallows Road, Vienna, Virginia. This second amendment allows for an extension of the lease
term through December 31, 2007, reduces the size of the premises by approximately 7,500 square feet
and decreases the monthly base rental rate per square foot.

|32
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|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 20, 2005 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 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 20, 2005 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 20, 2005 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 20, 2005 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 20, 2005 and
is incorporated in this report by reference.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|33
|--



|PART IV
Item 15.         Exhibits and Financial Statement Schedules
|-------------------------------------------------------------------
|                                                                   

|(a) | Documents filed as part of Form 10-K
|--- | ------------------------------------
|    |                                     
|    | 1.                                  
|    |                                     
|    |                                     
|    |                                     
|    |                                     
|    |                                     
|    |                                     
|    |                                     
|    |                                     
|    |                                     
|    |                                     
|    |                                     
|    | 2.                                  
|    |                                     
|    |                                     
|    |                                     
|    | 3.                                  
|    |                                     
|    |                                     

|34
|--



|Exhibit Index
|-------------
|             

|Exhibit No. |  | Exhibit Title                                                                                              |  | Incorporated by Reference from 
      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                                                
|            |  |                                                                                                            |  |                                                                          
|10.2        |  | 1995 Incentive Plan, dated November 1995                                                                   |  | Proxy Statement dated October 16, 1995 for Annual Meeting of Shareholders
|            |  |                                                                                                            |  |                                                                          
|10.4        |  | Amended and Restated Excalibur Technologies Corporation 1996 Employee Stock Purchase Plan                  |  | Form S-4 (Registration No. 333-50172), November 17, 2000                 
|            |  |                                                                                                            |  |                                                                          
|10.5        |  | Office Lease (1921 Gallows Road, Vienna, Virginia 22182), commencing May 1, 1999                           |  | Form 10-K, April 30, 1999                                                
|            |  |                                                                                                            |  |                                                                          
|10.6        |  | Employment agreement with James H. Buchanan, dated September 7, 1995                                       |  | Form 10-K, April 30, 1999                                                
|            |  |                                                                                                            |  |                                                                          
|10.7        |  | Office lease (11000 Broken Land Parkway, Columbia Maryland), commencing June 15, 2000                      |  | Form 10-K, April 28, 2000                                                
|            |  |                                                                                                            |  |                                                                          
|10.8        |  | Convera Stock Option Plan                                                                                  |  | Form 8-K, May 3, 2000                                                    
|            |  |                                                                                                            |  |                                                                          
|10.9        |  | Office Lease (23245 NW Evergreen Parkway, Hillsboro, Oregon) commencing March 1, 2001                      |  | Form 10-K, May 1, 2001                                                   
|            |  |                                                                                                            |  |                                                                          
|10.10       |  | Office Lease (1808 Aston Avenue, Carlsbad, California) commencing November 1, 2001                         |  | Form 10-K, April 30, 2002                                                
|            |  |                                                                                                            |  |                                                                          
|10.11       |  | Amended and Restated Convera Corporation 1996 Employee Stock Purchase Plan                                 |  | Definitive Form 14C, December 18, 2001                                   
|            |  |                                                                                                            |  |                                                                          
|10.12       |  | Office Lease (2055 Gateway Place , San Jose, California), commencing February 1, 2003                      |  | Form 10-K, April 30, 2003                                                
|            |  |                                                                                                            |  |                                                                          
|10.13       |  | Agreement and Release with James Buchanan, dated February 6, 2004 and First Amendment dated March 9, 2004  |  | Form 10-K, April 30, 2004                                                
|            |  |                                                                                                            |  |                                                                          
|10.14       |  | Agreement and Release with Christopher Mann, dated January 7, 2004 and First Amendment dated March 9, 2004 |  | Form 10-K, April 30, 2004                                                
|            |  |                                                                                                            |  |                                                                          
|10.15       |  | Settlement Agreement with Intel Corporation effective December 23, 2003                                    |  | Form 10-K, April 30, 2004                                                
|            |  |                                                                                                            |  |                                                                          
|10.16       |  | Employment Agreement with Steven M. Samowich, dated April 28, 2004                                         |  | Form 10-Q, June 14, 2004                                                 
|            |  |                                                                                                            |  |                                                                          
|10.17       |  | Employment Agreement with John R. Polchin, dated April 1, 2004                                             |  | Form 10-Q, June 14, 2004                                                 
|            |  |                                                                                                            |  |                                                                          
|10.18       |  | Office Lease Amendment (1921 Gallows Road, Vienna Virginia) commencing October 6, 2004                     |  | Form 10-Q, December 12, 2004                                             
|            |  |                                                                                                            |  |                                                                          
|10.19       |  | AT&T Master Agreement dated August 24, 2004                                                                |  | Filed Herewith                                                           

|35
|--



|21.01 |  | Subsidiaries of Convera                                                                                                                            |  | Form 10-K, April 30, 2004
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------
|      |  |                                                                                                                                                    |  |                          
|23.01 |  | Consent of Independent Registered Public Accounting Firm                                                                                           |  | Filed Herewith           
|      |  |                                                                                                                                                    |  |                          
|31.1  |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)                                                                      |  | Filed Herewith           
|      |  |                                                                                                                                                    |  |                          
|31.2  |  | Certification of Chief Financial 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. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  | Filed Herewith           
|      |  |                                                                                                                                                    |  |                          
|32.2  |  | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  | Filed Herewith           

|36
|--



|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:                
|                      | 
|                      |                  |                    
|                      |                  |                    
|Date:  March 30, 2005 |                  |                    
|                      |                  |                    

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

|Signature                |  | Title                                                                                             |  | Date          
|------------------------ |  | ------------------------------------------------------------------------------------------------- |  | --------------
|                         |  |                                                                                                   |  |               
|                         |  |                                                                                                   |  |               
|/s/Patrick C. Condo      |  | President, Chief Executive Officer,                                                               |  | March 30, 2005
|                         |  | and Director
    (Principal Executive Officer and Principal
    Financial and Accounting Officer) |  |               
|Patrick C. Condo         |  |                                                                                                   | 
|                         |  |                                                                                                   |  |               
|/s/Ronald J. Whittier    |  | Chairman of the Board                                                                             |  | March 30, 2005
|                         |  |                                                                                                   |  |               
|Ronald J. Whittier       |  |                                                                                                   |  |               
|                         |  |                                                                                                   |  |               
|/s/Herbert A. Allen      |  | Director                                                                                          |  | March 30, 2005
|                         |  |                                                                                                   |  |               
|Herbert A. Allen         |  |                                                                                                   |  |               
|                         |  |                                                                                                   |  |               
|/s/Herbert A. Allen, III |  | Director                                                                                          |  | March 30, 2005
|                         |  |                                                                                                   |  |               
|Herbert A. Allen, III    |  |                                                                                                   |  |               
|                         |  |                                                                                                   |  |               
|/s/Stephen D. Greenberg  |  | Director                                                                                          |  | March 30, 2005
|                         |  |                                                                                                   |  |               
|Stephen D. Greenberg     |  |                                                                                                   |  |               
|                         |  |                                                                                                   |  |               
|/s/Eli S. Jacobs         |  | Director                                                                                          |  | March 30, 2005
|                         |  |                                                                                                   |  |               
|Eli S. Jacobs            |  |                                                                                                   |  |               
|                         |  |                                                                                                   |  |               
|/s/Donald R. Keough      |  | Director                                                                                          |  | March 30, 2005
|                         |  |                                                                                                   |  |               
|Donald R. Keough         |  |                                                                                                   |  |               
|                         |  |                                                                                                   |  |               
|/s/William S. Reed       |  | Director                                                                                          |  | March 30, 2005
|                         |  |                                                                                                   |  |               
|William S. Reed          |  |                                                                                                   |  |               
|                         |  |                                                                                                   |  |               
|/s/ Carl J. Rickertson   |  | Director                                                                                          |  | March 30, 2005
|                         |  |                                                                                                   |  |               
|Carl J. Rickertson       |  |                                                                                                   |  |               
|                         |  |                                                                                                   |  |               
|/s/ Jeffrey White        |  | Director                                                                                          |  | March 30, 2005
|                         |  |                                                                                                   |  |               
|Jeffrey White            |  |                                                                                                   |  |               

|37
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|                                                                                                                       |  |      | 
|---------------------------------------------------------------------------------------------------------------------- |  | ---- | 
|Index to Consolidated Financial Statements                                                                             |  | Page | 
|                                                                                                                       |  |      | 
|Report of Independent Registered Public Accounting Firm                                                                |  | F-1  | 
|                                                                                                                       |  |      | 
|Consolidated Balance SheetsAs of January 31, 2005 and 2004                                                             |  | F-2  | 
|                                                                                                                       | 
|Consolidated Statements of Operations and Comprehensive LossFor the fiscal years ended January 31, 2005, 2004 and 2003 |  | F-3  | 
|                                                                                                                       | 
|Consolidated Statements of Shareholders EquityFor the fiscal years ended January 31, 2005, 2004 and 2003              |  | F-4  | 
|                                                                                                                       | 
|Consolidated Statements of Cash FlowsFor the fiscal years ended January 31, 2005, 2004 and 2003                        |  | F-5  | 
|                                                                                                                       | 
|Notes to Consolidated Financial Statements                                                                             |  | F-6  | 

|38
|--



|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Convera Corporation
We have audited the accompanying consolidated balance sheets of Convera Corporation as of January 31,
2005 and January 31, 2004, 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, 2005. 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 the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. We were not engaged
to perform an audit of the Companys internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Convera Corporation as of January 31, 2005 and January 31,
2004, and the consolidated results of its operations and its cash flows for each of the three years
in the period ended January 31, 2005, in conformity with U.S. generally accepted accounting principles.
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                                                             |                      
|February 18, 2005,Except for Note 17, as to which the date is March 23, 2005 |                      

|F-1
|---



|CONVERA CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except share data)
|------------------------------------------------------------------------------------------------
|                                                                                                

|                                                                                                                                                                                                                     | As of January 31, |           
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | ----------
|                                                                                                                                                                                                                     |                   |           
|ASSETS                                                                                                                                                                                                               | 2005              |           
|
|Current Assets:                                                                                                                                                                                                      |                   |           
|Cash and cash equivalents                                                                                                                                                                                            | $                 | 17,766    
|Short term investments                                                                                                                                                                                               |                   | 71        
|Accounts receivable, net of allowance for doubtful
          accounts of $537 and $1,793, respectively                                                                                                               |                   | 6,530     
|Prepaid expenses and other                                                                                                                                                                                           |                   | 2,390     
|                                                                                                                                                                                                                     |                   |           
|Total current assets                                                                                                                                                                                                 |                   | 26,757    
|                                                                                                                                                                                                                     |                   |           
|Equipment and leasehold improvements, net of accumulated
     depreciation of $13,940 and $12,692, respectively                                                                                                      |                   | 5,145     
|Other assets                                                                                                                                                                                                         |                   | 1,551     
|Goodwill                                                                                                                                                                                                             |                   | 2,275     
|Other intangible assets, net of accumulated amortization of $780 and
   $511, respectively                                                                                                                           |                   | 566       
|                                                                                                                                                                                                                     |                   |           
|Total assets                                                                                                                                                                                                         | $                 | 36,294    
|                                                                                                                                                                                                                     |                   |           
|                                                                                                                                                                                                                     |                   |           
|LIABILITIES AND SHAREHOLDERSEQUITY                                                                                                                                                                                  |                   |           
|                                                                                                                                                                                                                     |                   |           
|Current Liabilities:                                                                                                                                                                                                 |                   |           
|Accounts payable                                                                                                                                                                                                     |                   | 1,967     
|Accrued expenses                                                                                                                                                                                                     |                   | 3,529     
|Accrued bonuses                                                                                                                                                                                                      |                   | 526       
|Restructuring reserve                                                                                                                                                                                                |                   | 835       
|Deferred revenues                                                                                                                                                                                                    |                   | 4,288     
|                                                                                                                                                                                                                     |                   |           
|Total current liabilities                                                                                                                                                                                            |                   | 11,145    
|                                                                                                                                                                                                                     |                   |           
|Restructuring reserve, net of current portion                                                                                                                                                                        |                   |          
|Other long-term liabilities                                                                                                                                                                                          |                   |          
|                                                                                                                                                                                                                     |                   |           
|Total liabilities                                                                                                                                                                                                    |                   | 11,145    
|Commitments and Contingencies                                                                                                                                                                                        |                   |           
|Shareholders Equity:                                                                                                                                                                                                |                   |           
|Common stock Class A, $0.01 par value, 100,000,000 shares
         authorized; 38,740,215 and ; 34,655,344 shares issued,
         respectively; 38,013,807 and 33,842,087 shares
         outstanding, respectively |                   | 387       
|Treasury stock at cost, 726,408 and 813,257 shares,
         Respectively                                                                                                                                            |                   | (1,678    
|Additional paid-in capital                                                                                                                                                                                           |                   | 1,084,269 
|Accumulated deficit                                                                                                                                                                                                  |                   | (1,056,445
|Accumulated other comprehensive loss                                                                                                                                                                                 |                   | (1,384    
|                                                                                                                                                                                                                     |                   |           
|Total shareholders equity                                                                                                                                                                                           |                   | 25,149    
|                                                                                                                                                                                                                     |                   |           
|Total liabilities and shareholders equity                                                                                                                                                                           | $                 | 36,294    
|                                                                                                                                                                                                                     |                   |           

|                       
|-----------------------
|See accompanying notes.

|F-2
|---



|CONVERA CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(in thousands, except share and per share data)
|-----------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                               

|                                                                             | For the Fiscal Years Ended January 31, |           
|---------------------------------------------------------------------------- | -------------------------------------- | ----------
|
|
|
|Revenues:                                                                    |                                        |           
|License                                                                      | $                                      | 14,360    
|Professional services                                                        |                                        | 3,746     
|Maintenance                                                                  |                                        | 7,592     
|                                                                             |                                        |           
|                                                                             |                                        | 25,698    
|                                                                             |                                        |           
|Cost of revenues:                                                            |                                        |           
|License                                                                      |                                        | 1,658     
|Professional services                                                        |                                        | 3,332     
|Maintenance                                                                  |                                        | 1,718     
|                                                                             |                                        |           
|                                                                             |                                        | 6,708     
|                                                                             |                                        |           
|Gross margin                                                                 |                                        | 18,990    
|                                                                             |                                        |           
|Operating expenses:                                                          |                                        |           
|Sales and marketing                                                          |                                        | 14,476    
|Research and product development                                             |                                        | 13,801    
|General and administrative                                                   |                                        | 9,764     
|Incentive bonus payments to employees                                        |                                        |          
|Restructuring charges                                                        |                                        | 944       
|Acquired in-process research and development                                 |                                        |          
|                                                                             |                                        |           
|                                                                             |                                        | 38,985    
|                                                                             |                                        |           
|Operating loss                                                               |                                        | (19,995   
|                                                                             |                                        |           
|Other income, net                                                            |                                        | 175       
|                                                                             |                                        |           
|Net loss before income taxes                                                 |                                        | (19,820   
|                                                                             |                                        |           
|Income tax benefit                                                           |                                        |          
|                                                                             |                                        |           
|Net loss                                                                     |                                        | (19,820   
|                                                                             |                                        |           
|Net loss applicable to common shareholders                                   | $                                      | (19,820   
|                                                                             |                                        |           
|Basic and diluted net loss per common share                                  | $                                      | (0.56     
|Weighted-average number of common shares
    outstanding  basic and diluted |                                        | 35,432,754
|                                                                             |                                        |           
|Comprehensive loss:                                                          |                                        |           
|Net loss                                                                     |                                        | (19,820   
|Foreign currency translation adjustment                                      |                                        | (29       
|                                                                             |                                        |           
|Comprehensive loss                                                           | $                                      | (19,849   
|                                                                             |                                        |           

|                       
|-----------------------
|See accompanying notes.

|F-3
|---



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

|                                                                          |              |  |        |     |                |          |                                 |                    |        |   | Accumulated
      Other
      Compre-
      hensive
      Income(Loss) |   |       |          
|------------------------------------------------------------------------- | ------------ |  | ------ | --- | -------------- | -------- | ------------------------------- | ------------------ | ------ | - | ---------------------------------------------------------------------- | - | ----- | ---------
|                                                                          | Common Stock |  |        |     | Treasury Stock |          |                                 |                    |        |   |                                                                        |  
|                                                                          |              |  |        |     |                |          | Additional
      Paid-inCapital | AccumulatedDeficit |        |   |                                                                        |  
|                                                                          | Shares       |  | Amount |     | Warrants       |          | Shares                          |                    | Amount |   |                                                                        |   | Total |          
|                                                                          |              |  |        |     |                |          |                                 |                    |        |   |                                                                        |   |       |          
|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
|                                                                          |              |  |        |     |                |          |                                 |                    |        |   |                                                                        |   |       |          
|Private placement                                                         | 3,433,333    |  |        | 34  |                |         |                                 |                   |        |   |                                                                       |   |       | 10,266   
|Issuance of common 
      stock upon exercise of 
      options           | 465,469      |  |        | 5   |                |         |                                 |                   |        |   |                                                                       |   |       | 1,835    
|Issuance of treasury 
      stock for Employee
      Stock Purchase Plan  |             |  |        |    |                |         |                                 | 86,849             |        |   | 201                                                                    |   |       | (6       
|Exercise of warrants by 
      third party                                | 84,744       |  |        |    |                | (137,711 | )                               |                   |        |   |                                                                       |   |       |         
|                                                                          |              |  |        |     |                |          |                                 |                    |        |   |                                                                        |   |       |          
|Deferred compensation                                                     |             |  |        |    |                |         |                                 |                   |        |   |                                                                       |   |       | 1,416    
|                                                                          |              |  |        |     |                |          |                                 |                    |        |   |                                                                        |   |       |          
|Equity compensation                                                       | 101,325      |  |        | 1   |                |         |                                 |                   |        |   |                                                                       |   |       | (122     
|Foreign Currency 
      Translation adjustment                            |             |  |        |    |                |         |                                 |                   |        |   |                                                                       |   |       |         
|                                                                          |              |  |        |     |                |          |                                 |                    |        |   |                                                                        |   |       |          
|Net loss                                                                  |             |  |        |    |                |         |                                 |                   |        |   |                                                                       |   |       |         
|                                                                          |              |  |        |     |                |          |                                 |                    |        |   |                                                                        |   |       |          
|Balance, January 31, 2005                                                 | 38,740,215   |  | $      | 387 |                |         |                                 | (726,408           | )      | $ | (1,678                                                                 | ) | $     | 1,084,269
|                                                                          |              |  |        |     |                |          |                                 |                    |        |   |                                                                        |   |       |          

|                       
|-----------------------
|See accompanying notes.

|F-4
|---



|CONVERA CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)
|---------------------------------------------------------------------------------------
|                                                                                       

|                                                                                     | For the Fiscal Years Ended January 31, |        
|------------------------------------------------------------------------------------ | -------------------------------------- | -------
|                                                                                     |                                        |        
|                                                                                     | 2005                                   |        
|                                                                                     |                                        |        
|Cash Flows from Operating Activities:                                                |                                        |        
|Net loss                                                                             | $                                      | (19,820
|Adjustments to reconcile net loss to net cash used in 
   operating activities:      |                                        |        
|Depreciation                                                                         |                                        | 1,584  
|(Benefit) provision for doubtful accounts                                            |                                        | (402   
|Amortization of intangible assets                                                    |                                        | 269    
|Equity compensation expense on deferred stock                                        |                                        | 1,416  
|Non-cash restructuring charges                                                       |                                        |       
|Acquired in-process research and development                                         |                                        |       
|Changes in operating assets and liabilities, net of effects 
      from acquisition: |                                        |        
|Accounts receivable                                                                  |                                        | (559   
|Prepaid expenses and other                                                           |                                        | 860    
|Accounts payable, accrued expenses and accrued
     bonuses                          |                                        | (1,471 
|Restructuring reserve                                                                |                                        | (670   
|Deferred revenues                                                                    |                                        | 526    
|Other long-term liabilities                                                          |                                        | (1,647 
|                                                                                     |                                        |        
|Net cash used in operating activities                                                |                                        | (19,914
|                                                                                     |                                        |        
|Cash Flows from Investing Activities:                                                |                                        |        
|Purchase of investments                                                              |                                        |       
|Proceeds from maturities of investments                                              |                                        |       
|Purchases of equipment and leasehold improvements                                    |                                        | (4,959 
|Cash acquired in acquisition of business                                             |                                        |       
|Direct acquisition costs                                                             |                                        |       
|                                                                                     |                                        |        
|Net cash (used in) provided by investing activities                                  |                                        | (4,959 
|                                                                                     |                                        |        
|Cash Flows from Financing Activities:                                                |                                        |        
|Proceeds from the issuance of common stock, net                                      |                                        | 194    
|Proceeds from the private placement                                                  |                                        | 10,300 
|Proceeds from the issuance of warrants                                               |                                        |       
|Proceeds from the exercise of stock options                                          |                                        | 1,719  
|                                                                                     |                                        |        
|Net cash provided by financing activities                                            |                                        | 12,213 
|                                                                                     |                                        |        
|Effect of Exchange Rate Changes on Cash                                              |                                        | (104   
|                                                                                     |                                        |        
|Net (Decrease) Increase in Cash and Cash Equivalents                                 |                                        | (12,764
|                                                                                     |                                        |        
|Cash and Cash Equivalents, beginning of year                                         |                                        | 30,530 
|                                                                                     |                                        |        
|Cash and Cash Equivalents, end of year                                               | $                                      | 17,766 
|                                                                                     |                                        |        

|                       
|-----------------------
|See accompanying notes.

|F-5
|---



|CONVERA CORPORATION AND SUBSIDIARIESNOTES 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, 2005, 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.                        

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Convera principally earns revenues from the licensing of its software products and the provision of
services in deployment of the Companys technology to government agencies and commercial businesses
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. Further, during fiscal year 2005, the Company embarked on an
advanced Web indexing development effort focused on applying portions of the Companys existing
technology to also locate contextually relevant information on the World Wide Web (the Web).
This development initiative has advanced to a Beta stage as of January 31, 2005, at which
date the technology contained more than 1 billion documents in the index. Commercial availability
is expected during fiscal 2006 for this service offering.
The Companys operations are subject to certain risks and uncertainties including, but not limited
to, the effect of general business and economic trends; the ability to continue funding operating
losses; fluctuations in operating results including impacts from reduced corporate IT spending and
lengthier sales cycles; reduced customer demand for the Companys products and services; continued
success in technological advances and development including the Web indexing initiative; the
delay or deferral of customer software implementations; the potential for U.S. Government agencies
from which the Company has historically derived a significant 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; 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 could harm its competitive position; the
need to retain key personnel; the ability of the Company to use net operating loss carryforwards;
the availability of additional capital financing on terms acceptable to the Company, if at all; and
the present ownership structure of the Company which includes Allen Holdings Inc. and related parties
who exercise voting control of the Company such that other shareholders will not have an effective
say in any matters upon which its shareholders vote. Although management believes that its current cash
position is sufficient to sustain operations through January 31, 2006, should cash needs dictate, additional
cost saving measures could be enacted to conserve cash.
(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.

|F-6
|---



|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.
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.
To the extent that a discount exists in a multiple element or bundled arrangement that
includes a software license, the Company attributes that discount entirely to the delivered elements
utilizing the residual method as described in paragraph 12 of SOP 97-2 as amended by SOP 98-9. The
Company generally utilizes the residual methodology for recognizing revenue related to multi-element
software agreements. Under the residual methodology, the Company recognizes the arrangement fee as
follows: (a) the total fair value of the undelivered elements, as indicated by vendor-specific objective
evidence, is deferred and (b) the difference between the total arrangement fee and the amount deferred
for the undelivered elements is recognized as revenue related to the delivered elements. This assumes
that (a) all other applicable revenue recognition criteria in SOP 97-2 are met and (b) the fair value
of all of the undelivered elements is less than the arrangement fee.
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.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-7
|---



|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. For the Companys core software product the
period between achieving technological feasibility and the general availability of such software
has been short, and software development costs qualifying for capitalization have been insignificant.
Accordingly, the Company has not capitalized any software development costs related to its core software
products. The Companys web indexing software, currently in beta stage, is deemed to have reached
technological feasibility as of January 31, 2005. As a result, the Company will begin capitalizing
software development costs related to the web indexing initiative beginning February 1, 2005. The
Company expects to have a web services product available during fiscal year 2006, at which time capitalization
will cease and amortization of the capitalized costs will commence.
Advertising
Advertising costs are expensed as incurred and included with sales and marketing in the consolidated
statements of operations and comprehensive loss. The Company incurred approximately $197, $449 and
$52 in advertising costs for the years ended January 31, 2005, 2004 and 2003, 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.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-8
|---



|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 2005,
2004 and 2003 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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                       

|                                                                                             | 2005 |  | 2004 |         | 2003 |  
|-------------------------------------------------------------------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                                                                             |      |  |      |         |      |  
|Net loss, as reported                                                                        |      |  | $    | (19,820 | )    | $
|Stock-based compensation, as reported                                                        |      |  |      | 1,416   |      |  
|Total stock-based compensation determined under fair
      value based method for all awards |      |  |      | (6,274  | )    |  
|                                                                                             |      |  |      |         |      |  
|Pro forma net loss                                                                           |      |  | $    | (24,678 | )    | $
|                                                                                             |      |  |      |         |      |  
|                                                                                             |      | 
|Basic and diluted net loss per common share,
      as reported                               |      |  |      | ($ 0.56 | )    |  
|Basic and diluted net loss per common share,
      pro forma                                 |      |  |      | ($ 0.70 | )    |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                         |  | 2005         |  | 2004         |  | 2003         | 
|------------------------ |  | ------------ |  | ------------ |  | ------------ | 
|                         |  |              |  |              |  |              | 
|Expected volatility      |  | 90%          |  | 96%          |  | 95%          | 
|Risk free interest rates |  | 3.1% to 3.8% |  | 2.5% to 3.3% |  | 3.0% to 4.6% | 
|Dividend yield           |  | None         |  | None         |  | None         | 
|Expected lives           |  | 5 years      |  | 5 years      |  | 5 years      | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The weighted average fair value per share for stock option grants that were awarded in fiscal years
2005, 2004 and 2003 was $3.20, $3.01 and $2.69, 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 1,150,000 shares of deferred stock were outstanding as
of January 31, 2005. Pursuant to Mr. Condos May 2003 deferred stock agreement as amended in
May 2004, Mr. Condo was awarded 600,000 deferred shares of the Companys common stock. Under
the amended agreement, 150,000 shares of common stock vest on each consecutive one-year anniversary
of the date of grant as long as Mr. Condo remains continuously employed with the Company through
such vesting date. Notwithstanding such vesting schedule, all of the deferred shares will vest on
the earlier occurrence of Mr. Condos termination of employment without cause, death or disability
or a change of control of the Company. On May 20, 2004, in accordance with the terms of the amended
deferred stock agreement, 150,000 shares vested and the Company withheld 48,675 of the shares at
a cost of approximately $121,000 to fulfill Mr. Condos tax obligation with respect to the award.
The deferred stock covering the remaining 700,000 shares, which is held by several senior officers,
has a five-year cliff vesting provision, or vests immediately upon 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 for Mr. Condos stock award is expensed on a straight-line
basis over the four-year vesting period. Compensation cost for the remaining 700,000 shares 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 2005 was $1.4 million. Compensation
expense of $646, $773 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 and comprehensive loss.

|F-9
|---



|In the first quarter of the prior 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 of fiscal year 2004. In the first quarter of the current fiscal year, those warrants were
exchanged in a cashless exercise for 84,744 shares of Company common stock.
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 recorded in operating
expenses were $81, $741 and $585 for the years ended January 31, 2005, 2004 and 2003, 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 government agencies and to major corporations,
including distributors that serve a wide variety of U.S. and foreign markets. The Company extends
credit to its corporate customers based on an evaluation of the customers financial condition,
generally without requiring a deposit or collateral. Exposure to losses on receivables is principally
dependent on each customers financial condition. The Company monitors its exposure for credit
losses and maintains an allowance for anticipated losses. The allowance for doubtful accounts 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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-10
|----



|Valuation Accounts
|------------------
|                  

|                                |  | Balance at 
      Beginning of
      Period |       | Charged 
      (Credited) 
      to Costs and
      Expenses |   | Uncollectible 
      Accounts 
      Written Off, 
      Net of 
      Recoveries |   | Balance at 
      End of
      Period |     
|------------------------------- |  | ------------------------------------------- | ----- | ------------------------------------------------------------ | - | --------------------------------------------------------------------------------- | - | ------------------------------------- | ----
|                                |  |                                             |       |                                                              |   |                                                                                   |   |                                       |     
|Year Ended January 31, 2005:    |  |                                             |       |                                                              |   |                                                                                   |   |                                       |     
|Deducted from asset accounts:   |  |                                             |       |                                                              |   |                                                                                   |   |                                       |     
|Allowance for doubtful accounts |  | $                                           | 1,793 |                                                              | $ | (401                                                                              | ) | $                                     | (855
|                                |  |                                             |       |                                                              |   |                                                                                   |   |                                       |     
|Year Ended January 31, 2004:    |  |                                             |       |                                                              |   |                                                                                   |   |                                       |     
|Deducted from asset accounts:   |  |                                             |       |                                                              |   |                                                                                   |   |                                       |     
|Allowance for doubtful accounts |  | $                                           | 1,569 |                                                              | $ | 80                                                                                |   | $                                     | 144 
|                                |  |                                             |       |                                                              |   |                                                                                   |   |                                       |     
|Year Ended January 31, 2003:    |  |                                             |       |                                                              |   |                                                                                   |   |                                       |     
|Deducted from asset accounts:   |  |                                             |       |                                                              |   |                                                                                   |   |                                       |     
|Allowance for doubtful accounts |  | $                                           | 2,115 |                                                              | $ | 400                                                                               |   | $                                     | (946

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 this 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, 2005 and 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
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, 2005.
Equipment and Leasehold Improvements
Office furniture and computer equipment are recorded at cost. Depreciation of office furniture and
equipment is provided on a straight-line basis over the estimated useful lives of the assets, generally
three to five years. Amortization of leasehold improvements and leased assets are provided on a straight-line
basis over the shorter of the term of the applicable lease or the useful life of the asset.
Expenditures for normal repairs and maintenance are charged to operations as incurred. The cost of
property and equipment retired or otherwise disposed of and the related accumulated depreciation
or amortization are removed from the accounts and any resulting gain or loss is reflected in current
operations.

|F-11
|----



|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.
Reclassifications
Certain amounts presented in the prior years financial statements have been reclassified to conform
with the fiscal year 2005 presentation.
Other Income
Other income for the year ended January 31, 2005 consisted of $175 of net interest income. For the
year ended January 31, 2004 other income 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 year 2003 other income consisted entirely of net interest income of $636.
Recent Pronouncements
On December 16, 2004, the Financial Accounting Standards Board issued FASB Statement No. 123 (revised
2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123.
However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized
in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
Statement 123(R) must be adopted no later than August 1, 2005.
Statement 123(R) permits public companies to adopt its requirements using one of two methods:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| | 1. | A modified prospective method in which compensation cost is recognized beginning with the
  effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted
  after the effective date and (b) based on the requirements of Statement 123 for all awards granted
  to employees prior to the effective date of Statement 123(R) that remain unvested on the effective
  date.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-12
|----



| | 2. | A modified retrospective method which includes the requirements of the modified prospective
  method described above, but also permits entities to restate based on the amounts previously recognized
  under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented
  or (b) prior interim periods of the year of adoption.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company is analyzing its options related to the adoption of Statement 123(R), which we will adopt
as of August 1, 2005.
As permitted by Statement 123, the company currently accounts for share-based payments to employees
using Opinion 25s intrinsic value method and, as such, generally recognizes no compensation
cost for employee stock options. Accordingly, the adoption of Statement 123(R)s fair value
method will have a significant impact on our result of operations, although it will have no impact
on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted
at this time because it will depend on levels of share-based payments granted in the future. However,
had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated
the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per
share in Note 2 to our consolidated financial statements. Statement 123(R) also requires the benefits
of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods after adoption.
While the company cannot estimate what those amounts will be in the future (because they depend on,
among other things, when employees exercise stock options), the amount of operating cash flows recognized
in prior periods for such excess tax deductions were $0 for the years ended January 31, 2005, 2004 and 2003.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which amends APB Opinion No. 29, Accounting for Nonmonetary Transactions (SFAS No. 153), which requires a nonmonetary exchange of assets be accounted for at fair value, recognizing any gain
or loss, if the exchange meets a commercial substance criterion and fair value is determinable. The
commercial substance criterion is assessed by comparing the entitys expected cash flows immediately
before and after the exchange. This eliminates the similar productive assets exception,
which accounts for the exchange of assets at book value with no recognition of gain or loss. Statement
153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. We do not believe the adoption of SFAS No. 153 will have a material impact on our
financial statements.
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
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 this Interpretation
has not had 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® 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

|F-13
|----



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

|                                            | Year ended
      January 31, 2003 | 
|------------------------------------------- | --------------------------------- | 
|                                            |                                   | 
|Revenues                                    |                                   | 
|Net loss                                    |                                   | 
|Basic and diluted net loss per common share |                                   | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4)           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 and 2005 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. As a result, the Company recorded a restructuring charge of $2,933. As
of January 31, 2004, payments related to employee severance and contractual obligations have been
paid in full. The Company expects to settle the remaining accrual of $166 related to facility closings
over the term of the related facility lease, which is through February 2006.

|F-14
|----



|The FY02 Q2 restructuring plan is outlined below including 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, 2005:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                       

|FY02 Q2 Restructuring    | Employee 
      termination costs |  | Estimated costs of 
      facilities closing |      | Contractual 
      obligations |   | Total |  
|------------------------ | --------------------------------- |  | -------------------------------------------- | ---- | ------------------------------ | - | ----- | -
|                         |                                  
|Restructuring charges    |                                   |  | $                                            | 409  |                                | $ | 2,066 |  
|FY02 payments            |                                   |  |                                              | (332 | )                              |   | (241  | )
|FY02 Non-cash adjustment |                                   |  |                                              |     |                                |   | (796  | )
|                         |                                   |  |                                              |      |                                |   |       |  
|Balance 1/31/02          |                                   |  |                                              | 77   |                                |   | 1,029 |  
|FY03 payments            |                                   |  |                                              |     |                                |   | (291  | )
|FY03 Non-cash adjustment |                                   |  |                                              | (77  | )                              |   |      |  
|                         |                                   |  |                                              |      |                                |   |       |  
|Balance 1/31/03          |                                   |  |                                              |     |                                |   | 738   |  
|FY04 payments            |                                   |  |                                              |     |                                |   | (267  | )
|                         |                                   |  |                                              |      |                                |   |       |  
|Balance 1/31/04          |                                   |  | $                                            |     |                                | $ | 471   |  
|FY05 payments            |                                   |  |                                              |     |                                |   | (305  | )
|                         |                                   |  |                                              |      |                                |   |       |  
|Balance 1/31/05          |                                   |  | $                                            |     |                                | $ | 166   |  
|                         |                                   |  |                                              |      |                                |   |       |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 and Convera Screening Room.As a result of the restructuring plan, the Company recorded restructuring charges in the third quarter
of fiscal year 2003 of $5,195. As of January 31, 2004 payments related to employee severance and
contractual obligations have been paid in full. In the fourth quarter of fiscal year 2005, a non-cash
adjustment of approximately $137 was made as projected payments related to this restructuring were
less than originally estimated. The Company expects to settle the remaining accrual of $525 related
to facility closings over the term of the related facility lease, which is through February 2006.
The FY02 Q3 restructuring plan is outlined below including 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, 2005:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|FY02 Q3 Restructuring    | Employee 
      termination costs |  | Estimated costs of 
      facilities closing |        | Contractual 
      obligations |   | Total |  
|------------------------ | --------------------------------- |  | -------------------------------------------- | ------ | ------------------------------ | - | ----- | -
|                         |                                  
|Restructuring charges    |                                   |  | $                                            | 1,169  |                                | $ | 3,146 |  
|FY02 payments            |                                   |  |                                              | (1,030 | )                              |   | (118  | )
|FY02 Non-cash adjustment |                                   |  |                                              |       |                                |   | (973  | )
|                         |                                   |  |                                              |        |                                |   |       |  
|Balance 1/31/02          |                                   |  |                                              | 139    |                                |   | 2,055 |  
|FY03 payments            |                                   |  |                                              | (36    | )                              |   | (435  | )
|FY03 Non-cash adjustment |                                   |  |                                              | (103   | )                              |   | (245  | )
|                         |                                   |  |                                              |        |                                |   |       |  
|Balance 1/31/03          |                                   |  |                                              |       |                                |   | 1,375 |  
|FY04 payments            |                                   |  |                                              |       |                                |   | (339  | )
|                         |                                   |  |                                              |        |                                |   |       |  
|Balance 1/31/04          |                                   |  | $                                            |       |                                | $ | 1,036 |  
|FY05 payments            |                                   |  |                                              |       |                                |   | (374  | )
|FY05 Non-cash adjustment |                                   |  |                                              |       |                                |   | (137  | )
|                         |                                   |  |                                              |        |                                |   |       |  
|Balance 1/31/05          |                                   |  | $                                            |       |                                | $ | 525   |  
|                         |                                   |  |                                              |        |                                |   |       |  

|F-15
|----



|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, 2003 the balance of employee related severance costs
has been paid in full. A summary of the FY03 Q1 restructuring charges and payments appears below.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|FY03 Q1 Restructuring | Employee 
      termination costs |        |  
|--------------------- | --------------------------------- | ------ | -
|                      |                                   |       
|Restructuring charges | $                                 | 1,027  |  
|FY03 payments         |                                   | (1,027 | )
|                      |                                   |        |  
|Balance 1/31/03       | $                                 |       |  
|                      |                                   |        |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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, 2003. The FY03 Q2 restructuring is summarized below.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|FY03 Q2 Restructuring | Employee 
      termination costs |        |  
|--------------------- | --------------------------------- | ------ | -
|                      |                                   |       
|Restructuring charges | $                                 | 1,043  |  
|FY03 payments         |                                   | (1,043 | )
|                      |                                   |        |  
|Balance 1/31/03       | $                                 |       |  
|                      |                                   |        |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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. A summary including annual payments related to the
FY03 Q4 restructuring appears below.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|FY03 Q4 Restructuring | Employee 
      termination costs |      |  
|--------------------- | --------------------------------- | ---- | -
|                      |                                   |     
|Restructuring charges | $                                 | 448  |  
|FY03 payments         |                                   | (61  | )
|                      |                                   |      |  
|Balance 1/31/03       |                                   | 387  |  
|FY04 payments         |                                   | (387 | )
|                      |                                   |      |  
|Balance 1/31/04       | $                                 |     |  
|                      |                                   |      |  

|F-16
|----



|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. The
FY04 Q1 restructuring plan is summarized below.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|FY04 Q1 Restructuring | Employee 
      termination costs |      |  
|--------------------- | --------------------------------- | ---- | -
|                      |                                   |     
|Restructuring charges | $                                 | 326  |  
|FY04 payments         |                                   | (326 | )
|                      |                                   |      |  
|Balance 1/31/04       | $                                 |     |  
|                      |                                   |      |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 FY04 Q2 restructuring plan is summarized below.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|FY04 Q2 Restructuring | Employee 
      termination costs |      |  
|--------------------- | --------------------------------- | ---- | -
|                      |                                   |     
|Restructuring charges | $                                 | 295  |  
|FY04 payments         |                                   | (295 | )
|                      |                                   |      |  
|Balance 1/31/04       | $                                 |     |  
|                      |                                   |      |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|FY05 Q3 Restructuring
On August 18, 2004, the Company announced that it was enacting further cost reduction measures to more
closely align its expense structure with expected future revenue streams. As part of the restructuring,
the Company reduced its personnel related costs, eliminated certain marketing programs, renegotiated
real estate obligations and decreased other general operating expenses. As a result of this action,
the Company reduced its workforce by 36 employees worldwide, including 13 individuals from the engineering
group, six from the sales group, nine from the professional services group, four from the marketing
group and four from the G&A group. In the third quarter of fiscal year 2005, the Company recorded
a restructuring charge of $518 related to severance costs for terminated employees. As of January
31, 2005 all severance costs related to the restructuring have been paid. The FY05 Q3 restructuring
plan is summarized below.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|FY05 Q3 Restructuring | Employee 
      termination costs |      |  
|--------------------- | --------------------------------- | ---- | -
|                      |                                   |     
|Restructuring charges | $                                 | 518  |  
|FY05 payments         |                                   | (518 | )
|                      |                                   |      |  
|Balance 1/31/05       | $                                 |     |  
|                      |                                   |      |  

|F-17
|----



|FY05 Q4 Restructuring
On December 10, 2004 the Company announced that it had effected a re-alignment of its operational infrastructure.
As part of this restructuring the Company reduced its personnel related costs through general workforce
reductions and facility consolidations. In total the Company reduced its workforce by 41 employees
worldwide, including 16 individuals from the sales group, ten from the engineering group, eight from
the professional services group, four from the marketing group and three from the G&A group.
The Company also further reduced marketing related expenses and decreased other general operating
costs. Additionally, as part of this restructuring, the Company transferred certain existing personnel
resources to the Companys previously announced web indexing initiative.
The Company recorded a restructuring charge of $563 related to severance costs for terminated employees
during the fourth quarter of fiscal year 2005. The Company expects to settle the remaining balance
of $144 during the first quarter of fiscal year 2006. The FY05 Q4 restructuring plan is summarized
below.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|FY05 Q4 Restructuring | Employee 
      termination costs |      |  
|--------------------- | --------------------------------- | ---- | -
|                      |                                   |     
|Restructuring charges | $                                 | 563  |  
|FY05 payments         |                                   | (419 | )
|                      |                                   |      |  
|Balance 1/31/05       | $                                 | 144  |  
|                      |                                   |      |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company paid an aggregate of approximately $1,616, $1,934 and $3,023 against the restructuring
reserve in the fiscal years ended January 31, 2005, 2004, and 2003, respectively. As of January 31,
2005, the unpaid balance of $835 has been classified as a current restructuring reserve in the accompanying
consolidated balance sheet.
(5)           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.
(6)           EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at January 31, 2005 and 2004 consisted of the following:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                              | 2005 |         | 2004 |  
|----------------------------- | ---- | ------- | ---- | -
|                              |      |         |      |  
|Computer equipment            | $    | 15,426  |      | $
|Office furniture              |      | 2,918   |      |  
|Leasehold improvements        |      | 741     |      |  
|                              |      |         |      |  
|                              |      | 19,085  |      |  
|Less accumulated depreciation |      | (13,940 | )    |  
|                              |      |         |      |  
|                              | $    | 5,145   |      | $
|                              |      |         |      |  

|                                                                                                                                                                                                                                                                                                                                                                 
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 2005, 2004
and 2003 was $1,584, $1,660 and $2,258, respectively.

|F-18
|----



|(7)           GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other acquisition-related intangibles at fiscal year ends were as follows:
|------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                          

|                              | 2005 |       | 2004 |  
|----------------------------- | ---- | ----- | ---- | -
|                              |      |       |      |  
|Goodwill                      | $    | 2,275 |      | $
|                              |      |       |      |  
|                              |      |       |      |  
|Developed technologies        | $    | 1,346 |      | $
|Less accumulated amortization |      | (780  | )    |  
|                              |      |       |      |  
|                              | $    | 566   |      | $
|                              |      |       |      |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Amortization expense for fiscal years 2005, 2004 and 2003 was $269, $269 and $242, 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: 2006 - $269; 2007 - $269; 2008 - $28; 2009
and 2010 - none.
(8)           ACCRUED EXPENSES
Accrued expenses at January 31, 2005 and 2004 consisted of the following:
|                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                       | 2005 |       | 2004 |  
|---------------------- | ---- | ----- | ---- | -
|                       |      |       |      |  
|Accrued payroll        | $    | 1,026 |      | $
|Accrued facility costs |      | 1,625 |      |  
|Other                  |      | 878   |      |  
|                       |      |       |      |  
|                       | $    | 3,529 |      | $
|                       |      |       |      |  

|F-19
|----



|(9)           INCOME TAXES
  The Components of the benefit from income taxes are as follows:
|--------------------------------------------------------------------------------------------
|                                                                                            

|                     | For the Fiscal Years Ended January 31, |  
|-------------------- | -------------------------------------- | -
|                     |                                        |  
|                     | 2005                                   |  
|                     |                                        |  
|Current tax benefit  |                                        |  
|Federal              | $                                      | 
|State                |                                        | 
|                     |                                        |  
|                     | $                                      | 
|                     |                                        |  
|                     |                                        |  
|Deferred tax benefit |                                        |  
|Federal              | $                                      | 
|State                |                                        | 
|                     |                                        |  
|                     | $                                      | 
|                     |                                        |  

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

|                                            | For the Fiscal Years Ended January 31, |       
|------------------------------------------- | -------------------------------------- | ------
|                                            |                                        |       
|                                            | 2005                                   |       
|                                            |                                        |       
|Federal benefit at statutory rate           | $                                      | (6,937
|Effect of:                                 
|                                            |                                        |       
|State benefits, net of federal
    benefits |                                        | (595  
|Expiration of NOL carryforward              |                                        | 621   
|Other                                       |                                        | 645   
|Valuation allowance                         |                                        | 6,266 
|                                            |                                        |       
|Net deferred tax assets                     | $                                      |      
|                                            |                                        |       

|                                                                                                                                                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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, 2005 and 2004 were as follows:
|                                                                                                                                                                                                                                                                                                   

|                                                      | 2005 |         | 2004 |  
|----------------------------------------------------- | ---- | ------- | ---- | -
|                                                      |      |         |      |  
|Deferred tax assets:                                  |      |         |      |  
|Net operating loss carryforwards,
   not yet utilized | $    | 61,627  |      | $
|Restructuring reserve                                 |      | 325     |      |  
|Other                                                 |      | 16,981  |      |  
|                                                      |      |         |      |  
|Total deferred tax assets                             |      | 78,933  |      |  
|Valuation allowance                                   |      | (78,933 | )    |  
|                                                      |      |         |      |  
|Net deferred tax assets                               | $    |        |      | $
|                                                      |      |         |      |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|At January 31, 2005, the Company had net operating loss carryforwards (NOLs) of approximately
$161,843 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 $15,100
of the NOLs relate to stock option exercises, and $15,065 and $109 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, 2005, 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.

|F-20
|----



|(10)         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 third quarter of fiscal year 2005, the Company completed a private placement of 3,433,333 newly-issued
shares of Class A common stock to several investors, including affiliates of Allen & Company
Incorporated, a significant stockholder of the Company, and certain directors. The shares were priced
on September 7, 2004 at $3.00 per share, representing a premium to the $2.80 closing market price
on such date. Proceeds to the Company of approximately $10.3 million will be used to finance ongoing
operations and for general corporate purposes, including potential acquisitions.
In the second quarter of fiscal year 2004, the Company completed a private placement of 4,714,111 shares
of its Class A 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 has
used and will continue to use the net proceeds to finance ongoing operations and for general corporate
purposes, including potential acquisitions. Allen & Company LLC, a company 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.
No shares of the Companys Class B common stock are issued or outstanding at January 31, 2005.
(11)         NET LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net loss per common share:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                                                               | For the Fiscal Years Ended January 31, |           
|------------------------------------------------------------------------------ | -------------------------------------- | ----------
|                                                                               |                                        |           
|                                                                               | 2005                                   |           
|                                                                               |                                        |           
|Numerator:                                                                     |                                        |           
|Net loss                                                                       | $                                      | (19,820   
|                                                                               |                                        |           
|                                                                               |                                        |           
|Denominator:                                                                   |                                        |           
|Weighted average number of common shares
      outstanding  basic and diluted |                                        | 35,432,754
|                                                                               |                                        |           
|Basic and diluted net loss per common share                                    | $                                      | (0.56     

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

|               | For the Fiscal Years Ended January 31, |        
|-------------- | -------------------------------------- | -------
|               |                                        |        
|               | 2005                                   |        
|               |                                        |        
|Stock options  |                                        | 712,682
|Deferred stock |                                        | 182,597
|Stock warrants |                                        |       
|               |                                        |        

|F-21
|----



|(12)         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 9,274,826 shares and 1,150,000 deferred
shares were outstanding as of January 31, 2005. The Company had a total of 2,380,747 shares of Class
A common stock reserved for the issuance of warrants, deferred shares and options under the plans
as of January 31, 2005.
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.
The following table summarizes the Companys activity for all of its stock option awards:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                          | Number of Options |  | Range of Exercise Prices |   | Weighted-Average
      Exercise Price |     
|------------------------- | ----------------- |  | ------------------------ | - | ------------------------------------- | ----
|                          |                   |  |                          |   |                                       |     
|Balance, January 31, 2002 |                   |  | 9,484,309                |   | $                                     | 1.04
|                          |                   |  |                          |   |                                       |     
|Granted                   |                   |  | 1,413,400                |   |                                       | 1.41
|Exercised                 |                   |  | (10,810                  | ) |                                       | 1.04
|Canceled                  |                   |  | (2,073,245               | ) |                                       | 1.41
|                          |                   |  |                          |   |                                       |     
|Balance, January 31, 2003 |                   |  | 8,813,654                |   | $                                     | 1.45
|                          |                   |  |                          |   |                                       |     
|                          |                   |  |                          |   |                                       |     
|Granted                   |                   |  | 480,310                  |   |                                       | 3.40
|Exercised                 |                   |  | (61,016                  | ) |                                       | 1.70
|Canceled                  |                   |  | (2,031,592               | ) |                                       | 2.43
|                          |                   |  |                          |   |                                       |     
|Balance, January 31, 2004 |                   |  | 7,201,356                |   | $                                     | 1.45
|                          |                   |  |                          |   |                                       |     
|                          |                   |  |                          |   |                                       |     
|Granted                   |                   |  | 3,937,150                |   |                                       | 2.24
|Exercised                 |                   |  | (465,469                 | ) |                                       | 1.45
|Canceled                  |                   |  | (1,398,211               | ) |                                       | 1.45
|                          |                   |  |                          |   |                                       |     
|Balance, January 31, 2005 |                   |  | 9,274,826                |   | $                                     | 1.60
|                          |                   |  |                          |   |                                       |     
|                          |                   |  |                          |  

|                                                                                                                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Options to purchase 5,324,042, 4,830,097 and 4,734,479 shares of the Companys common stock
were vested and exercisable at January 31, 2005, 2004 and 2003, respectively, at weighted-average
exercise prices of $5.44, $5.64 and $5.76 per share, respectively.

|F-22
|----



|The following table summarizes additional information about stock options outstanding at January 31,
2005:
|----------------------------------------------------------------------------------------------------------
|                                                                                                          

|                         |      | Options Outstanding     |   | Options Exercisable                                                    | 
|------------------------ | ---- | ----------------------- | - | ---------------------------------------------------------------------- | 
|                         |      |                         |   |                                                                        | 
|Range of Exercise Prices |      | Number of
      Options |   | Weighted-
      Average
      Remaining 
      Contractual 
      Life | 
|                         |      |                         |   |                                                                        | 
|$                        | 1.60 | to                      | $ | 2.75                                                                   | 
|$                        | 2.82 | to                      | $ | 4.20                                                                   | 
|$                        | 4.22 | to                      | $ | 4.38                                                                   | 
|$                        | 4.39 | to                      | $ | 8.19                                                                   | 
|$                        | 8.25 | to                      | $ | 46.06                                                                  | 
|                         |      |                         |   |                                                                        | 
|                         |      |                         |   |                                                                        | 
|                         |      |                         |   |                                                                        | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 2005, 2004
and 2003, 86,849, 63,898 and 122,845 shares were purchased by the employees, respectively, leaving
726,408 shares in treasury as of January 31, 2005.
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, 2005, 2004 and 2003, the Company contributed approximately $483,
$477 and $560, respectively, to the employee savings plan.

|F-23
|----



|(13)         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, 2005 are as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year Ending
    January 31, |                 |   |       | 
| | --------------------------- | --------------- | - | ----- | 
| |                             |                 |   |       | 
| |                             | 2006            | $ | 2,121 | 
| |                             | 2007            |   | 1,149 | 
| |                             | 2008            |   | 360   | 
| |                             | 2009 and beyond |   |      | 
| |                             |                 |   |       | 
| |                             |                 | $ | 3,630 | 
| |                             |                 |   |       | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Total rental expense under operating leases was approximately $2,743, $2,982 and $3,174 for fiscal
years 2005, 2004 and 2003, 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 remains 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.
In addition, 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-24
|----



|(14)         SEGMENT REPORTING
The Company is principally engaged in the design, development, marketing and support of enterprise
search, retrieval and categorization solutions. All of the Companys revenues result from the
sale of the Companys software products and related services for all fiscal years presented.
During fiscal year 2005, the Company embarked on an advanced development effort focused on applying
portions of its existing core technology to also locate contextually relevant information on the
World Wide Web (e.g., the Web indexing initiative). Accordingly, the Company considers itself to have
two reportable segments, specifically the license, implementation and support of its core software
products business and the Web indexing initiative. The Companys chief operating decision-making
group reviews financial information presented on a consolidated basis, accompanied by disaggregated
information about revenues, expenses and relevant balance sheet items for both product segments and
by geographic region for purposes of making operating decisions and assessing financial performance.
The following table reconciles the Companys segment activity to its consolidated results of operations
for the years ended January 31, 2005, 2004 and 2003.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                           |  | Fiscal Years Ended January 31, |        
|------------------------------------------ |  | ------------------------------ | -------
|
|
|                                           |  |                                |        
|                                           |  |                                |        
|Revenues and expenses                      |  |                                |        
|Core Software Products                     | 
|Revenues                                   |  | $                              | 25,698 
|Expenses, excluding depreciation           |  |                                | (40,032
|Depreciation                               |  |                                | (1,267 
|                                           |  |                                |        
|Net operating loss                         |  | $                              | (15,601
|                                           |  |                                |        
|                                           |  |                                |        
|Web Indexing                               |  |                                |        
|Revenues                                   |  | $                              |       
|Expenses, excluding depreciation           |  |                                | (4,063 
|Depreciation                               |  |                                | (331   
|                                           |  |                                |        
|Net operating loss                         |  | $                              | (4,394 
|                                           |  |                                |        
|                                           | 
|Reconciliation to consolidated net loss    | 
|Net operating loss-both reporting segments |  | $                              | (19,995
|Other income, net (unallocated)            |  |                                | 175    
|Net loss before income taxes               |  |                                | (19,820
|Income tax benefit                         |  |                                |       
|                                           |  |                                |        
|Net loss                                   |  | $                              | (19,820
|                                           |  |                                |        

|F-25
|----



|The following table reconciles each segments total assets to the Companys consolidated total
assets for the years ended January 31, 2005 and 2004.
|---------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                   

|                                                                            |  | Fiscal Years Ended January 31, |       
|--------------------------------------------------------------------------- |  | ------------------------------ | ------
|
|                                                                            |  | 2005                           |       
|                                                                            |  |                                |       
|Core Software Products                                                      |  |                                |       
|Equipment and leasehold improvements, net of
      accumulated depreciation |  | $                              | 1,353 
|All other assets                                                            |  |                                | 31,149
|                                                                            |  |                                |       
|Total assets for segment                                                    |  | $                              | 32,502
|                                                                            |  |                                |       
|                                                                            |  |                                |       
|Web Indexing                                                                |  |                                |       
|Equipment and leasehold improvements, net of
      accumulated depreciation |  | $                              | 3,792 
|All other assets                                                            |  |                                |      
|                                                                            |  |                                |       
|Total assets for segment                                                    |  | $                              | 3,792 
|                                                                            |  |                                |       
|                                                                            |  |                                |       
|Consolidated total assets                                                   |  | $                              | 36,294
|                                                                            |  |                                |       

|                                                                                                                           
|---------------------------------------------------------------------------------------------------------------------------
|Operations by Geographic Area
The following table presents information about the Companys operations by geographical area:
|                                                                                                                           

|                    |  | Fiscal Years Ended January 31, |       
|------------------- |  | ------------------------------ | ------
|
|
|                    |  |                                |       
|Sales to customers: |  |                                |       
|United States       |  | $                              | 18,171
|United Kingdom      |  |                                | 6,608 
|All Other           |  |                                | 919   
|                    |  |                                |       
|                    |  | $                              | 25,698
|                    |  |                                |       
|Long-lived assets:  |  |                                |       
|United States       |  | $                              | 9,350 
|All Other           |  |                                | 187   
|                    |  |                                |       
|                    |  | $                              | 9,537 
|                    |  |                                |       

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Major Customers
Revenues derived from contracts and orders issued by agencies of the U.S. Government were approximately
$11,600 $15,200 and $6,400, respectively, in the fiscal years ended January 31, 2005, 2004 and 2003.
These revenues, expressed as a percentage of total revenues for each such fiscal year, were approximately
45%, 52% and 27%, respectively. For the fiscal year ended January 31, 2005 one reseller customer
accounted for approximately 17% of the Companys total revenues. One customer accounted for
approximately 12% of the Companys total revenues for the fiscal year ended January 31, 2004
and no individual customer accounted for more than 10% of the Companys total revenues for the
fiscal year ended January 31, 2003.

|F-26
|----



|(15)         SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|-------------------------------------------------------------
|                                                             

|                                                                               |  | For the Fiscal Years Ended January 31, |    
|------------------------------------------------------------------------------ |  | -------------------------------------- | ---
|                                                                               |  |                                        |    
|                                                                               |  | 2005                                   |    
|                                                                               |  |                                        |    
|Supplemental Disclosures of Non-cash Investing and
      Financing Activities: |  |                                        |    
|Issuance of common stock for acquisition of
   Semantix assets                 |  | $                                      |   
|Stock options exercised under deferred compensation
     arrangements          |  | $                                      | 121

|                                                       
|-------------------------------------------------------
|(16)         SELECTED QUARTERLY INFORMATION (UNAUDITED)
|                                                       

|                                              |  |  | 1st Quarter |        | 2nd Quarter |   | 3rd Quarter |   | 4th Quarter |       
|--------------------------------------------- |  |  | ----------- | ------ | ----------- | - | ----------- | - | ----------- | ------
|                                              |  |  |             |        |             |   |             |   |             |       
|2005:                                         |  |  |             |        |             |   |             |   |             |       
|Revenues                                      |  |  | $           | 8,170  |             | $ | 5,067       |   | $           | 6,130 
|Gross margin                                  |  |  |             | 6,273  |             |   | 3,361       |   |             | 4,112 
|Operating loss                                |  |  |             | (4,796 | )           |   | (7,079      | ) |             | (4,563
|Restructuring charges                         |  |  |             |       |             |   |            |   |             | 518   
|Other income                                  |  |  |             |       |             |   |            |   |             |      
|Net loss                                      |  |  |             | (4,759 | )           |   | (7,049      | ) |             | (4,518
|                                              |  | 
|Basic and diluted loss per commonshare        |  |  | $           | (0.14  | )           | $ | (0.21       | ) | $           | (0.13 
|                                              |  | 
|2004:                                         |  |  |             |        |             |   |             |   |             |       
|Revenues                                      |  |  | $           | 6,960  |             | $ | 7,613       |   | $           | 8,697 
|Gross margin                                  |  |  |             | 4,650  |             |   | 5,213       |   |             | 6,832 
|Operating loss                                |  |  |             | (5,948 | )           |   | (5,167      | ) |             | (3,345
|Restructuring charges                         |  |  |             | 326    |             |   | 295         |   |             |      
|Other income                                  |  |  |             |       |             |   |            |   |             |      
|Net loss                                      |  |  |             | (5,897 | )           |   | (5,117      | ) |             | (3,301
|                                              |  | 
|Basic and diluted loss per common
      share |  |  | $           | (0.20  | )           | $ | (0.18       | ) | $           | (0.10 

|                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The gross margins reported on Form 10-Q for the first three quarters of fiscal years 2004 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.
|                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                      |  |  | 1st Quarter |       | 2nd Quarter |   | 3rd Quarter |  
|------------------------------------- |  |  | ----------- | ----- | ----------- | - | ----------- | -
|                                      |  |  |             |       |             |  
|2004:                                 |  |  |             |       |             |   |             |  
|Gross margin as reported on Form 10-Q |  |  | $           | 4,717 |             | $ | 5,281       |  
|Amortization of developed technology  |  |  |             | (67   | )           |   | (68         | )
|                                      |  |  |             |       |             |  
|Gross margin as reclassified          |  |  | $           | 4,650 |             | $ | 5,213       |  

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

|F-27
|----



|(17)         SUBSEQUENT EVENTS
On March 23, 2005 the Company secured a $5 million equipment term loan from Silicon Valley Bank, the
primary subsidiary of Silicon Valley Bancshares (NASDAQ: SIVB). The four-year, term facility will
provide financing for capital purchases including those for its Web indexing initiative. The loan
is secured by a first lien on all corporate assets, excluding intellectual property.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-28
|----