**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**





**x** **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**For
      the Fiscal Year Ended January 31, 2008**


**or**





** ̈** **TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**Commission
      File Number 000-31989**





**CONVERA
      CORPORATION**


(Exact
      name of registrant as specified in its charter)





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





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





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




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


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





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.    Yes  No ü




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


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




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




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




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




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




The
      aggregate market value of the voting stock held by non-affiliates of the
      registrant as of July 31, 2007 (based on the closing sales price as reported
      on
      the NASDAQ National Market System) was $101,792,183.




The
      number of shares outstanding of the registrant's Class A common stock as of
      March 12, 2008 was 53,291,194.





DOCUMENTS
      INCORPORATED BY REFERENCE


Portions
      of the Registrant’s Proxy Statement for the 2008 Annual Meeting of Shareholders
      are incorporated by reference into Part III.




The
      Index
      to Exhibits begins on Page 30





**CONVERA
      CORPORATION**





**ANNUAL
      REPORT ON FORM 10-K**


**FOR
      THE FISCAL YEAR ENDED JANUARY 31, 2008**





**TABLE
      OF CONTENTS**





Page**PART
                I**Item
                1.
            Business
            1Item
                1A.
            Risk
                Factors
            6Items
                1B.
            Unresolved
                Staff Comments
            12Item
                2.
            Properties
            12Item
                3.
            Legal
                Proceedings
            12Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            12**PART
                II**Item
                5.
            Market
                for Registrant's Common Equity, Related Stockholder
                Matters and Issuer Purchases of Equity Securities
            13Item
                6.
            Selected
                Financial Data
            15Item
                7.
            Management's
                Discussion and Analysis of Financial Conditionand
                Results of Operations
            16Item
                7A.
            Quantitative
                and Qualitative Disclosures about Market
                Risk
            25Item
                8.
            Financial
                Statements and Supplementary Data
            25Item
                9
            Changes
                in and Disagreements with Accountants on Accounting and
                Financial Disclosure
            25Item
                9A.
            Controls
                and Procedures
            25Item
                9B.
            Other
                Information
            28**PART
                III**Item
                10.
            Directors,
                Executive Officers and Corporate
                Governance
            28Item
                11.
            Executive
                Compensation
            28Item
                12
            Security
                Ownership of Certain Beneficial Owners and Management
                and Related Stockholder Matters
            28Item
                13.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            28Item
                14.
            Principal
                Accounting Fees and Services
            28**PART
                IV**Item
                15.
            Exhibits,
                Financial Statement Schedules
            29





Table
          of Contents


**ITEM
      1.****BUSINESS**





**FORWARD-LOOKING
      STATEMENTS**





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








**OVERVIEW**





Convera
      provides vertical search services to trade publishers. Our technology and
      services help publishers to build a loyal online community and increase their
      internet advertising revenues. With the use of our vertical search services,
      our
      customers can create search engines customized to meet the specialized
      information needs of their audience by combining publisher proprietary content
      with an authoritative subset of the World Wide Web (“the Web”.) The result is a
      more relevant and comprehensive search experience for the user designed to
      drive
      traffic to the publishers’ websites. We generate our revenues by receiving a
      percentage of publishers’ advertising revenues earned by the search sites and by
      charging minimum fees for our vertical search services. Many of our contracts
      with publishers contain minimum fees that we are entitled to receive until
      website advertising revenue generated by the publishers’ search sites exceeds
      these minimum amounts. We can also generate revenues from hosting publisher
      websites and from providing technical staff training. We offer professional
      services to customize publisher websites and optimize search engines, as well
      as
      website monetization consulting.





The
      first
      publisher search site using our vertical search services was launched in
      November 2006. With the sale of our RetrievalWare Enterprise Search business
      (“Enterprise Search”) completed, we are now focused exclusively on executing our
      vertical search services (previously entitled our Excalibur web hosting product)
      business strategy. Our sales and marketing efforts are targeting the top 50
      business-to-business (“B2B”) publishers in both the United States and United
      Kingdom, with the goal of building the largest collection of search-based
      professional user websites on the internet.





On
      March
      31, 2007, we agreed to sell the assets of our Enterprise Search business to
      Fast
      Search & Transfer (“FAST”) for $23.0 million. The transaction closed on
      August 9, 2007, with FAST assuming certain obligations of the business and
      retaining certain employees serving our Enterprise Search customers. More
      information about the transaction can be found in Note 2, “Discontinued
      Operations” of our Consolidated Financial Statements.





Convera
      was formed through the merger of the former Excalibur Technologies and the
      Intel
      Interactive Media Services Division on December 21, 2000. Convera is traded
      on
      the NASDAQ stock market (CNVR) and is headquartered at 1921 Gallows Road,
      Vienna, VA 22182. Our main corporate telephone number is (703)
      761-3700.





As
      of
      January 31, 2008 and 2007, Allen Holding, Inc., together with Allen &
Company Incorporated, Herbert A Allen and certain related parties (collectively
      “Allen & Company”) beneficially owned approximately 42% of the voting power
      of Convera and hold three seats on the Board of Directors, and would therefore
      be able to influence the outcome of matters requiring a stockholder
      vote.





1
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          of Contents


**BUSINESS
      STRATEGY**




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




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




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




Our
      revenue strategy is to execute vertical search services agreements wherein
      we
      receive a percentage of customer search-related advertising revenue (typically
      between 20% and 50% of net advertising revenues). Our new and renewal publisher
      contracts will typically contain a monthly minimum fee for each vertical market
      served that we will be entitled to receive until our share of the website’s
      advertising revenues surpasses the minimum fee. We can also generate
      professional services fees from delivering consulting and training to our
      customers, and from website hosting services.







**PRODUCTS** **AND SERVICES**





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





We
      offer
      the following services:





2
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          of Contents


**Vertical
      Search Service**





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





Convera
      Web Search Platform





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





Publisher
      Control Panel (PCP)





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





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





Convera
      Ad Service (CAS)





Our
      Convera Ad Service allows publishers to directly manage and pursue search-based
      advertising revenues for their vertical search websites. CAS connects the
      publisher websites directly with the providers of advertising inventory,
      enhancing publishers’ abilities to increase their web advertising revenues,
      supporting the insertion, tracking and billing of a variety of ad pricing models
      including banner ads, tenancy ads, search term ads and click-through
      advertisements.








**Professional
      Services**





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


3
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          of Contents


**MARKETING
      AND DISTRIBUTION**





Our
      vertical search offering is sold as a hosted service through a direct sales
      force located in the United States and United Kingdom. We are also exploring
      the
      prospect of strategic partners such as large advertising agencies or resellers
      who may provide increased distribution capabilities, access to incremental
      human
      resources and possible hosting facility alternatives. As previously disclosed
      above, our sales efforts are focused principally on the top 50 B2B publishers
      in
      the United States and United Kingdom. The top 50 publishers have an estimated
      2,000-plus relevant magazine titles that could be converted to search-based
      sites and subscribers totaling more than two million professionals.





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








**RESEARCH
      AND DEVELOPMENT**





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





Our
      research and development expenses were $4.7 million, $11.0 million, and $3.2
      million for the years ended January 31, 2008, 2007, and 2006,
      respectively.








**INTELLECTUAL
      PROPERTY AND PROPRIETARY TECHNOLOGY**





We
      regard
      our software as proprietary and rely primarily on a combination of patents,
      copyright, trademark and trade secret laws of general applicability, employee
      confidentiality and invention assignment agreements, and other intellectual
      property protection methods to safeguard our technology. We hold one patent
      related to our current business strategy. This patent, which concerns multimedia
      document retrieval, expires on August 24, 2018.  We are actively engaged in
      seeking additional patents specifically related to our vertical search offering.
      We have undertaken to protect all significant marks used to identify our core
      services. We own U.S. trademark registrations or pending applications for our
      material trademarks, including CONVERA and THE VERTICAL SEARCH
      COMPANY.  Renewals are due at various
      dates between July 2008 and August 2013. In addition, we own
      numerous foreign applications and registrations for our material
      trademarks.








**COMPETITION**





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





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          of Contents


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








**SEGMENT
      AND GEOGRAPHIC AREA FINANCIAL INFORMATION**





We
      have
      one reportable segment. Prior to our agreement on March 31, 2007 to sell the
      assets of the Enterprise Search business to FAST, we operated under two
      reportable segments: the Enterprise Search segment and the vertical search
      segment (previously entitled our Excalibur web hosting product). Financial
      information is located in the financial statements beginning on page F-2. The
      assets and liabilities of the Enterprise Search business have been reported
      as
“assets held for sale” and “liabilities held for sale” on the Consolidated
      Balance Sheets. Revenue, expenses and cash flows related to the Enterprise
      Search business have been reflected as discontinued operations in the
      Consolidated Statements of Operations and of Cash Flows.





All
      of
      our revenues are from third-party customers. In the fiscal year ended January
      31, 2008, one customer, CMP Information Ltd., accounted for 82% of our revenues.
      In the fiscal year ended January 31, 2007, three customers accounted for 53%,
      29%, and 17% of total revenues, respectively. A single customer accounted for
      100% of revenues in fiscal year 2006.




To
      date,
      our revenues have been earned principally from customers located in the United
      Kingdom. For geographic area revenues and long-lived assets information, see
      Note 12, “Segment Reporting” in the Notes to Consolidated Financial Statements.








**EMPLOYEES**





We
      had 76
      employees at January 31, 2008. See Item 1A. “Risk Factors” for a discussion
      of some of the risks we face related to our employees.








**AVAILABLE
      INFORMATION**




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





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          of Contents


**Item
      1A.****Risk
      Factors**





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





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





As
      of
      January 31, 2008, we had an accumulated deficit of approximately $1.1 billion.
      We have operated at a loss for each of the past three fiscal years. For the
      fiscal years ended January 31, 2008, 2007 and 2006, our net losses were
      approximately $9.1 million, $44.8 million, and $14.3 million, respectively.
      These financial results include revenues and expenses associated with the
      Enterprise Search business, the sale of which was completed on August 9, 2007.
      The loss from continuing operations for the fiscal years ended January 31,
      2008,
      2007 and 2006 was $27.0 million, $45.3 million and $19.0 million, respectively.
      We expect that the Company will continue the trend of significant operating
      losses and uses of cash at least for the short term until the revenue base
      for
      our vertical search services grows to sufficient levels to support its expenses.
      We have a short operating history in the vertical search business; the first
      Convera supported vertical search site was launched into production in November
      2006. Previously, our market strength had been in the government sector, whereas
      we now compete solely within the commercial sector. In addition, our revenue
      contracts generally stipulate that we will receive a percentage of website
      advertising revenues, and online advertising is an immature and rapidly evolving
      industry. Accordingly, we cannot assure you that we will generate the revenues
      required to achieve or maintain profitability in the future. You should assess
      our business in light of the risks, difficulties, uncertainties, and expenses
      associated with managing and growing a relatively new business in a rapidly
      evolving market. Our failure to achieve and sustain our profitability will
      negatively impact the market price of our common stock.





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




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




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




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




·
            customer
                needs for search products;




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




·
            the
                strength of sales, marketing and distribution
                support.





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





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          of Contents




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





As
      of
      January 31, 2008, our balances of cash and cash equivalents were approximately
      $36.7 million. We believe our
      current balance
      of cash
      and
      cash equivalents will be sufficient to meet our working capital and capital
      expenditure requirements for at least the next twelve
      months based
      upon our estimates of funds required to operate our business during such
      period .
      However, during
      or after
      that time, we may need to raise additional funds for the following
      purposes:





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


·
            to
                fund any growth we may experience;


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


·
            to
                increase our promotional and marketing activities;
                or


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





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





**We
      experience quarterly fluctuations in our operating results, which may adversely
      affect our stock price** **.**





Our
      quarterly operating results have varied substantially in the past and will
      likely continue to vary. With the completion of the FAST transaction and
      resulting exit of the enterprise search market, our business is evolving as
      we
      focus all of our financial and management resources on the vertical search
      business. Historical operating results may not be useful in predicting our
      future operating results. The vertical search business has yet to generate
      revenues in excess of its expenses and is not anticipated to do so for at least
      the near term. We expect that expenditures will continue to be significant.
      Our
      quarterly operating results are likely to continue to vary substantially from
      quarter to quarter in the future due to a variety of factors including the
      following:





·
            the
                ability of our vertical search services to achieve market
                acceptance;


·
            the
                mix in our revenues between subscription fees and contractual minimum
                revenue amounts and revenues generated as a percentage of publisher
                website advertising revenues;


·
            the
                level of customer demand for our hosting and professional
                services;


·
            an
                increase in competition in the internet search
                industry;


·
            the
                size and timing of individual
                transactions;


·
            changes
                in operating expenses and
                personnel;


·
            changes
                in accounting principles;


·
            changes
                in general economic and geo-political conditions and specific economic
                conditions in the internet search
                industry;


·
            fluctuations
                in the internet advertising budgets of advertisers;
                and


·
            seasonality
                in the spending of internet
                advertisers.





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





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


7
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In
      order
      for our strategy to succeed and to remain competitive, we must provide vertical
      search services that meet the needs of the B2B and specialized publishing
      companies. We will need to invest significant resources in research and
      development to provide the publishers with leading-edge search technology to
      help them deliver unique value to their online community and increase online
      advertising revenues. To effectively compete we will need to continually improve
      our current service offerings and innovate by introducing new services that
      are
      responsive to the needs of our users. The development efforts required for
      this
      are expensive, and we plan to fund these developments with our existing capital
      resources, and other sources, such as equity issuances and borrowings, which
      may
      be available to us. If these developments do not generate substantial revenues,
      our business and results of operations will be adversely affected. We cannot
      assure you that we will successfully develop any new products or services,
      complete them on a timely basis or at all, achieve market acceptance or generate
      significant revenues with them.





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





To
      date,
      the majority of revenues related to our business have been derived from
      publishers in the United Kingdom. For the year ended January 31, 2008, total
      revenue derived from international sales was approximately $1.0 million,
      representing approximately 88% of total revenue. For the year ended January
      31,
      2007, revenue derived from international sales was approximately $0.1 million,
      representing approximately 53% of total revenue. Our international operations
      have historically exposed us to longer accounts receivable and payment cycles
      and fluctuations in currency exchange rates. International sales are made mostly
      from our U.K. subsidiary and are denominated in British pounds or Euros. As
      of
      January 31, 2008, approximately 97% of our total consolidated accounts
      receivable were denominated in British pounds. Additionally, our exposure to
      foreign exchange rate fluctuations arises in part from intercompany accounts
      in
      which royalties on our foreign subsidiary’s sales are charged to our foreign
      subsidiary and recorded as intercompany receivables on our books. We are also
      exposed to foreign exchange rate fluctuations as the financial results of our
      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.




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





·
            potentially
                adverse tax consequences;


·
            difficulties
                in complying with regulatory requirements and
                standards;


·
            trade
                restrictions and changes in
                tariffs;


·
            import
                and export license requirements and restrictions;
                and


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





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





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





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


8
 Table
          of Contents


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





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





·
            pending
                patent applications may not be
                issued;


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


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


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


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


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


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





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





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




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





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





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




**Our
      stock price may fluctuate which may make it difficult to resell shares of our
      stock.**





The
      market price of our common stock has been highly volatile. For example, in
      the
      fiscal year ended January 31, 2008, the market price per share of our common
      stock ranged from $2.00 to $4.75. This volatility may adversely affect the
      price
      of our common stock, and our stockholders may not be able to resell their shares
      of common stock following periods of volatility because of the market's adverse
      reaction to this volatility. We anticipate that this volatility, which
      frequently affects the stock of technology companies, will continue. Our stock
      price may fluctuate and you may not be able to resell shares of our stock for
      a
      profit as a result of a number of factors including:


9
 Table
          of Contents


·
            future
                announcements concerning us or our
                competitors;


·
            quarterly
                variations in our operating
                results;


·
            actual
                or anticipated announcements of technical innovations or new product
                or
                service developments by us or our
                competitors;


·
            general
                conditions in our industry;


·  concentrated
      holdings of our common stock;


·  sales
      of
      stock by us or by our stockholders;


·
            the
                low trading volume of our common stock, which means that small changes
                in
                the volume of trades may have a disproportionate impact on our stock
                price;


·
            developments
                concerning litigation; and


·
            worldwide
                economic and financial conditions.





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





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





As
      of
      January 31, 2008, we had net operating loss carryforwards of approximately
      $208
      million. The deferred tax assets representing the benefits of these
      carryforwards have been offset completely by a valuation allowance due to our
      lack of an earnings history. The realization of the benefits of these
      carryforwards depends on sufficient taxable income in future years. Lack of
      future earnings could adversely affect our ability to utilize these
      carryforwards. Additionally, past or future changes in our ownership and control
      could limit the ability to utilize these carryforwards. Despite the
      carryforwards, we may have income tax liability in future years due to the
      application of the alternative minimum tax rules of the United States Internal
      Revenue Code.





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





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




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


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


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




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





As
      of
      January 31, 2008, Allen & Company beneficially owned approximately 42% of
      our voting power and held three seats on the Board of Directors, and would
      therefore be able to influence the outcome of matters requiring a stockholder
      vote. These matters could include offers to acquire us and elections of
      directors. Allen & Company may have interests which are different than the
      interests of our other stockholders.


10
 Table
          of Contents


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





Future
      changes in financial accounting standards may cause adverse, unexpected revenue
      fluctuations and affect our financial position or results of operations. New
      pronouncements and varying interpretations of pronouncements have occurred
      with
      frequency in the past and may occur again in the future and as a result we
      may
      be required to make changes in our accounting policies. For example, the recent
      requirement to expense stock options in accordance with SFAS No. 123(R) resulted
      in recording $1.2 million and $4.1 million of stock-based compensation expense
      in continuing operations for the fiscal years ended January 31, 2008 and 2007,
      respectively. Compliance with new regulations regarding corporate governance
      and
      public disclosure may result in additional expenses. As a result, we intend
      to
      invest all reasonably necessary resources to comply with evolving standards,
      and
      this investment may result in increased general and administrative expenses
      and
      a diversion of management time and attention from science and business
      activities to compliance activities. For example, we have incurred and expect
      to
      continue to incur substantial costs and expend significant resources to comply
      with the regulations promulgated under Section 404 of the Sarbanes-Oxley
      Act of 2002.





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





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





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




Section 404
      of the Sarbanes-Oxley Act of 2002 requires us to perform an evaluation of our
      internal controls over financial reporting and have our independent registered
      public accounting firm attest to such evaluation on an annual basis. Compliance
      with these requirements can be expensive and time-consuming. While we believe
      that we will be able to meet the required deadlines, no assurance can be given
      that we will meet the required deadlines in future years. If we fail to timely
      complete this evaluation, or if our auditors cannot timely attest to our
      evaluation, we may be subject to regulatory scrutiny and a loss of public
      confidence in our internal controls.





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




As
      of
      January 31, 2007, we identified material weaknesses in internal controls over
      our accounting close and reporting and revenue recognition processes. We
      determined that we lacked a sufficient number of trained accounting and finance
      personnel with knowledge of our accounting close and financial reporting
      processes and adequate technical expertise in the application of U.S. generally
      accepted accounting principles. This inadequate level of skilled resources
      resulted in accounting processes which were completed neither effectively nor
      on
      a timely basis. Subsequent
      to January 31, 2007, we took several steps to remediate the material weaknesses
      and we have concluded that we maintained effective internal control over
      financial reporting as of January 31, 2008, based on the criteria established
      in
      the Committee of Sponsoring Organizations of the Treadway Commission’s Internal
      Control - Integrated Framework. Because of its inherent limitations, internal
      control over financial reporting may not prevent or detect misstatements.
      Projections of any evaluation of effectiveness to future periods are subject
      to
      risks that controls may become inadequate because of changes in conditions,
      or
      that the degree of compliance with the policies or procedures may
      deteriorate.


11
 Table
          of Contents


**Item
      1B.****Unresolved
      Staff Comments**





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





**Item
      2.****Properties**





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





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





**Item
      3.****Legal
      Proceedings**





None.





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





None.


12
 Table
          of Contents


**PART
      II**




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





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





The
      following table sets forth the high and low sale prices for our Class A common
      stock on the NASDAQ Global Market for the period from February 1, 2006 through
      January 31, 2008. The number of stockholders of record of our Class A common
      stock as of January 31, 2008 was 917. There were no shares of our Class B common
      stock issued or outstanding at January 31, 2008. We have never declared or
      paid
      dividends on our common stock and do not expect to do so for the foreseeable
      future.




High
            
            LowFiscal
                2008 (February 1, 2007 - January 31, 2008)First
                Quarter
            
            $
            3.98
            
            $
            2.50Second
                Quarter
            
            
            4.75
            
            
            3.08Third
                Quarter
            
            
            3.98
            
            
            2.72Fourth
                Quarter
            
            
            3.89
            
            
            2.00Fiscal
                2007 (February 1, 2006 - January 31, 2007)First
                Quarter
            
            $
            10.25
            
            $
            7.40Second
                Quarter
            
            
            8.50
            
            
            5.40Third
                Quarter
            
            
            6.80
            
            
            4.56Fourth
                Quarter
            
            
            5.57
            
            
            3.50








The
      following table sets forth, as of January 31, 2008, information with respect
      to
      our equity compensation plans:









**Plan
                Category**
            **Number
                of****Securities
                to be****Issued
                Upon****Exercise
                of****Outstanding****Options,
                Warrants****and
                Rights**
              **(a)**
            
            **Weighted-Average****Exercise
                Price of****Outstanding****Options,
                Warrants****and
                Rights (1)**
              **(b)**
            
            **Number
                of****Securities****Remaining
                Available****for
                Future Issuance****Under
                Equity****Compensation
                Plans (E****xcluding****Securities****Reflected
                in Column****(a))**
              **(c)**Equity
                compensation plans approved by security holders:Convera
                Employee Stock Purchase Plan
            5,354,756
            
            $4.79
            
            11,307,962Equity
                compensation plans not approved by security holders:
            None
            
            N/A
            
            N/A





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


13
 Table
          of Contents


Performance
      Graph





The
      following graph is a comparison of the cumulative total return to stockholders
      of our Class A common stock at January 31, 2008 since January 31, 2003 to the
      cumulative total return over such period of (i) the NASDAQ Stock Market-U.S.,
      and (ii) the Standard & Poor's Information Technology Index, assuming an
      investment in each of $100 on January 31, 2003 and the reinvestment of
      dividends.








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


None.


14
 Table
          of Contents


**Item
      6.****Selected
      Financial Data**





The
      selected financial data presented below have been derived from our consolidated
      financial statements. The balance sheet data as of January 31, 2008 and 2007,
      and the statement of operations data for the fiscal years ended January 31,
      2008, 2007, and 2006 should be read in conjunction with the consolidated
      financial statements and notes thereto included elsewhere in this Annual Report
      on Form 10-K.





Fiscal
                Years Ended January 31,2008
            
            2007
            
            2006
            
            2005
            
            2004Statement
                of Operations Data:**Continuing
                Operations**(1)**:**Revenues
            
            $
            1,118
            
            $
            269
            
            $
            20
            
            $
            -
            
            $
            -Operating
                expenses:Cost
                of revenues
            
            
            9,660
            
            
            8,138
            
            
            1,797
            
            
            -
            
            
            -Sales
                and marketing
            
            
            3,880
            
            
            4,386
            
            
            2,804
            
            
            -
            
            
            -Research
                and product development
            
            
            4,652
            
            
            11,010
            
            
            3,198
            
            
            4,164
            
            
            -General
                and administrative
            
            
            11,179
            
            
            14,833
            
            
            10,860
            
            
            -
            
            
            -Amortization
                of capitalized research and development costs
            
            
            -
            
            
            3,045
            
            
            1,012
            
            
            -
            
            
            -Impairment
                of long-lived assets
            
            
            603
            
            
            6,407
            
            
            -
            
            
            -
            
            
            -29,974
            
            
            47,819
            
            
            19,671
            
            
            4,164
            
            
            -Operating
                loss
            
            
            (28,856
            )
            
            (47,550
            )
            
            (19,651
            )
            
            (4,164
            )
            
            -Other
                income, net
            
            
            1,815
            
            
            2,267
            
            
            602
            
            
            175
            
            
            -Loss
                from continuing operations
            
            $
            (27,041
            )
            $
            (45,283
            )
            $
            (19,049
            )
            $
            (3,989
            )
            $
            -**Discontinued
                Operations:**Income
                (loss) from discontinued operations
            
            
            20
            
            
            456
            
            
            4,788
            
            
            (15,831
            )
            
            (18,059
            )Gain
                on sale of discontinued operations
            
            
            17,925
            
            
            -
            
            
            -
            
            
            -
            
            
            -Income
                (loss) from discontinued operations
            
            
            17,945
            
            
            456
            
            
            4,788
            
            
            (15,831
            )
            
            (18,059
            )Net
                loss
            
            $
            (9,096
            )
            $
            (44,827
            )
            $
            (14,261
            )
            $
            (19,820
            )
            $
            (18,059
            )Net
                income (loss) per common share - basic and diluted:Continuing
                Operations
            
            $
            (0.51
            )
            $
            (0.87
            )
            $
            (0.44
            )
            $
            (0.11
            )
            $
            0.00Discontinued
                Operations
            
            
            0.34
            
            
            0.01
            
            
            0.11
            
            
            (0.45
            )
            
            (0.57
            )Net
                loss per common share - basic and diluted
            
            $
            (0.17
            )
            $
            (0.86
            )
            $
            (0.33
            )
            $
            (0.56
            )
            $
            (0.57
            )Weighted-average
                number of common shares outstanding - basic and diluted
            
            
            53,146
            
            
            52,222
            
            
            43,089
            
            
            35,433
            
            
            31,486Balance
                Sheet Data (at end of period)Cash
                and cash equivalents
            
            $
            36,641
            
            $
            47,433
            
            $
            37,741
            
            $
            17,766
            
            $
            30,530Total
                assets
            
            
            46,367
            
            
            59,281
            
            
            64,217
            
            
            36,294
            
            
            45,695Long-term
                obligations
            
            
            -
            
            
            -
            
            
            3,717
            
            
            -
            
            
            -Accumulated
                deficit
            
            
            (1,124,629
            )
            
            (1,115,533
            )
            
            (1,070,706
            )
            
            (1,056,445
            )
            
            (1,036,625
            )Total
                shareholders’ equity (2)
            
            
            42,735
            
            
            51,097
            
            
            50,841
            
            
            25,149
            
            
            31,368


(1)
      Research and development for our current business began in fiscal 2005 and
      accordingly is included in Continuing Operations in this presentation of
      selected financial data. Prior to fiscal 2005, all of our financial information
      is considered Discontinued Operations.




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




15
 Table
          of Contents


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





**Forward
      Looking Statements**


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





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





**Overview**


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





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





We
      use an
      AT&T facility to host our vertical search offering. This facility, located
      in Dallas, TX, is operated under a master hosting arrangement that expires
      in
      July 2009. We also maintained a hosting facility in San Diego, CA, which was
      vacated on January 31, 2008 in an effort to appropriately scale our hosting
      infrastructure. We believe that our hosting center environment has sufficient
      equipment capacity and redundancy to host vertical search websites for 200
      trade
      publications each with an average community of 40,000 users at competitive
      search performance levels, which is enough capacity to meet our current
      needs.




Trends




As
      of
      January 31, 2008, a total of 39 Convera supported websites were in production
      and a total of 37 vertical search websites were in development awaiting launch.
      This represents a steady increase from November 2006 when the first site was
      launched into production. In fiscal year 2009, our strategy is to continue
      to
      target the top 50 B2B publishers in the United States and United Kingdom, which
      have an estimated 2,000 plus relevant magazine titles that could be converted
      to
      search-based websites. For both newly signed and current customers, our
      expectation is that the publishers will launch vertical search-based websites
      in
      a much shorter period of time than was typical in fiscal 2008 due to the release
      of version 2 of our Publisher Control Panel. The Publisher Control Panel
      shortens the time required to launch a site from six months to less than a
      month, which should translate into our receiving advertising based revenues
      sooner. The majority of the revenues earned for fiscal year 2008 represented
      contract minimum amounts for hosted services. We expect continued growth in
      hosted service fee revenues, as our new and renewal contracts with publishers
      will typically contain a minimum service fee for our vertical search services.
      We expect advertising share based revenue growth as new and existing websites
      build traffic and subsequently increase their advertising sales. We also have
      launched the Convera Ad Service (“CAS”) as an integral part of our vertical
      search services, which should result in additional advertising share revenues
      for us. CAS will enable publishers to better manage the monetization of their
      professional communities’ search experiences and increase the effectiveness of
      search-based revenues on their websites. CAS can also connect the publisher
      websites directly with the providers of advertising inventory, increasing the
      opportunities for the websites to grow their advertising revenues.


16
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As
      a
      result of restructuring actions taken throughout fiscal 2008, we have reduced
      our quarterly expense run rate and expect the full impact of these actions
      to
      become apparent in the first quarter of fiscal year 2009. The combined reduction
      in expenses and increase in revenues should result in a decrease in the net
      loss
      from continuing operations in fiscal 2009.






**Critical
      Accounting Policies**





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





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





Revenue
      Recognition




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





Provision
      for Doubtful Accounts





A
      considerable amount of judgment is required in assessing the ultimate
      realization of individual accounts receivable balances and determining whether
      a
      provision for doubtful accounts is warranted. Our determination is based on
      an
      analysis of our historical collection experience and our portfolio of customers
      taking into consideration the general economic environment as well as the
      industry in which we operate. To the extent we do not recognize deterioration
      in
      our customers’ financial condition in the period it occurs, or to the extent we
      do not accurately estimate our customers’ ability to pay, the amount of bad debt
      expense recognized in a given reporting period will be impacted. Our vertical
      search services have yet to achieve significant revenues and consequently as
      of
      January 31, 2008 we do not maintain a provision for estimated losses resulting
      from the inability of our customers to make required payments. As revenues
      increase, we will periodically review whether a provision is required.





Impairment
      of Long-Lived Assets





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





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Research
      and Product Development Costs





We
      follow
      Statement of Financial Accounting Standards No. 86, “Accounting for the Cost of
      Computer Software to be Sold, Leased or Otherwise Marketed.” Our software
      development costs are included in research and product development and are
      expensed as incurred. Our judgment is required in determining the point at
      which
      our software development projects enter the stage at which costs should be
      capitalized, determining the estimated useful lives over which the capitalized
      costs should be amortized and assessing the recoverability of the capitalized
      software development costs. Previously,
      we capitalized software development costs related to our Excalibur web hosting
      product beginning in the first quarter of fiscal year 2006. We continued to
      do
      so until such time as “commercial availability” was determined. Amortization of
      the previously capitalized software development costs began in the third quarter
      of fiscal year 2006 and was to continue over a twenty-four month period. In
      the
      third quarter of fiscal 2007, we recorded an impairment charge for the
      unamortized balance of the capitalized research and development costs. For
      more
      information regarding the impairment determination, see Note 3, “Impairment of
      Long-Lived Assets” in the accompanying consolidated financial statements
      included in this Form 10-K.





Accounting
      for Income Taxes





We
      follow
      Statement of Financial Accounting Standards No. 109, "Accounting for Income
      Taxes" ("SFAS 109").  Under the asset and liability method of
      SFAS 109, deferred tax assets and liabilities are recognized for the future
      tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. Deferred tax assets and liabilities are measured using enacted tax laws
      and tax rates in each jurisdiction where we operate, and applied to taxable
      income in the years in which those temporary differences are expected to be
      recovered or settled. The effect on deferred tax assets and liabilities due
      to a
      change in tax rates is recognized in income in the period that includes the
      enactment date. In addition, the amounts of any future tax benefits are reduced
      by a valuation allowance to the extent such benefits are not expected to be
      realized on a more-likely-than-not basis. We calculate estimated income taxes
      in
      each of the jurisdictions in which we operate. This process involves estimating
      actual current tax expense along with assessing temporary differences resulting
      from differing treatment of items for both book and tax purposes.





We
      record
      a valuation allowance to reduce our deferred tax assets to the amount that
      is
      more likely than not to be realized. Realization of the deferred tax assets
      is
      principally dependent upon the achievement of projected future taxable income.
      If the estimates and related assumptions change in the future we may be required
      to adjust our valuation allowance against our deferred tax assets, resulting
      in
      a benefit or a charge to income in the period such determination is made. As
      of
      January 31, 2008, we have recorded a full valuation allowance against the net
      deferred tax asset.





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





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





Stock-Based
      Compensation





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








18
 Table
          of Contents




**Results
      of Operations**





For
      the
      fiscal year ended January 31. 2008, total revenues from continuing operations
      were $1.1 million, as compared to revenues of $0.3 million in fiscal year 2007.
      The loss from continuing operations for fiscal 2008 was $27.0 million, or
      $(0.51) per common share, compared to a loss from continuing operations of
      $45.3
      million, or $(0.87) per common share, in fiscal 2007. Income from discontinued
      operations, including the gain from the sale of discontinued operations of
      $17.9
      million, was $17.9 million, or $0.34 per share in fiscal 2008. Income from
      discontinued operations was $0.5 million, or $0.01 per common share in fiscal
      2007. The net loss for fiscal 2008 was $9.1million or $(0.17) per common share
      as compared to a net loss of $44.8 million or $(0.86) per common share in fiscal
      2007.





For
      the
      fiscal year ended January 31, 2006, total revenues from continuing operations
      were $20 thousand. The loss from continuing operations was $19.0 million, or
      $(0.44) per common share, in fiscal year 2006. Income from discontinued
      operations was $4.8 million or $0.11 per share in fiscal 2006. The net loss
      was
      $14.3 million, or $(0.33) per common share in fiscal 2006.





Throughout
      fiscal 2008, we undertook actions to restructure and realign the cost structure
      of our business to focus resources on our strategy to expand our presence in
      the
      online B2B publishing market. These restructurings reduced headcount by
      approximately 54 individuals, principally in research and product development,
      and closed facilities in Montreal, Canada and Lyon, France. These reductions
      were made in order to more appropriately align the number of our personnel
      to
      our business plan. In the fourth quarter of fiscal 2008, we terminated our
      hosting agreement with AT&T for our San Diego data center in order to
      appropriately scale our hosting capabilities. In addition, we recorded an
      impairment charge on the hosting assets that were formerly located in the San
      Diego facility and became idle with the termination of the hosting agreement.
      For the year ended January 31, 2008, we incurred total expenses of approximately
      $2.0 million related to these restructuring actions, including severance costs
      of $1.0 million, estimated facility related closing costs of $0.2 million,
      and
      AT&T contract termination costs of $0.8 million. The impairment charge
      recorded on the hosting assets was $0.6 million. During the second quarter
      of
      fiscal 2008, we entered into a sublease agreement for the Montreal, Canada
      facility and subsequently reduced the restructuring liability related to this
      facility by approximately $0.2 million. The total expenses reported above
      include this credit.


19
 Table
          of Contents


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, 2008 (dollars
      in
      thousands):




***Components
                  of Revenue and Expenses***
              
              
              
              ***Increase
                  (Decrease)******Fiscal
                  years ended January 31,***
              
              
              
              ***From
                  2007***
              
              
              ***From
                  2006******2008***
              
              
              ***2007***
              
              
              ***2006***
              
              
              ***to
                  2008***
              
              
              ***to
                  2007***$
              
              %
              
              
              $
              
              %
              
              
              $
              
              %
              
              
              %
              
              
              %***Continuing
                  Operations:******Revenue***
              
              $
              1,118
              
              
              100
              %
              
              
              
              $
              269
              
              
              100
              %
              
              
              
              $
              20
              
              
              100
              %
              
              
              
              
              316
              %
              
              
              
              
              1245
              %***Expenses:****Cost
                  of revenues*
              
              
              9,660
              
              
              864
              %
              
              
              
              
              8,138
              
              
              3025
              %
              
              
              
              
              1,797
              
              
              8985
              %
              
              
              
              
              19
              %
              
              
              
              
              353
              %*Sales
                  and marketing*
              
              
              3,880
              
              
              347
              %
              
              
              
              
              4,386
              
              
              1630
              %
              
              
              
              
              2,804
              
              
              14020
              %
              
              
              
              
              -12
              %
              
              
              
              
              56
              %*Research
                  and product development*
              
              
              4,652
              
              
              416
              %
              
              
              
              
              11,010
              
              
              4093
              %
              
              
              
              
              3,198
              
              
              15990
              %
              
              
              
              
              -58
              %
              
              
              
              
              244
              %*General
                  and administrative*
              
              
              11,179
              
              
              1000
              %
              
              
              
              
              14,833
              
              
              5514
              %
              
              
              
              
              10,860
              
              
              54300
              %
              
              
              
              
              -25
              %
              
              
              
              
              37
              %*Amortization
                  of capitalized research & development costs*
              
              
              -
              
              
              0
              %
              
              
              
              
              3,045
              
              
              1132
              %
              
              
              
              
              1,012
              
              
              5060
              %
              
              
              
              
              -100
              %
              
              
              
              
              201
              %*Impairment
                  of long-lived assets*
              
              
              603
              
              
              54
              %
              
              
              
              
              6,407
              
              
              2382
              %
              
              
              
              
              -
              
              
              0
              %
              
              
              
              
              -91
              %
              
              
              
              
              0
              %***Total
                  operating expenses***
              
              
              29,974
              
              
              2681
              %
              
              
              
              
              47,819
              
              
              17776
              %
              
              
              
              
              19,671
              
              
              98355
              %
              
              
              
              
              -37
              %
              
              
              
              
              144
              %*Operating
                  income / (loss)*
              
              
              (28,856
              )
              
              
              
              
              
              
              
              (47,550
              )
              
              
              
              
              
              
              
              (19,651
              )*Other
                  income, net*
              
              
              1,815
              
              
              
              
              
              
              
              
              2,267
              
              
              
              
              
              
              
              
              602
              
              
              
              
              
              
              
              
              -20
              %
              
              
              
              
              277
              %*Loss
                  before taxes*
              
              
              (27,041
              )
              
              
              
              
              
              
              
              (45,283
              )
              
              
              
              
              
              
              
              (19,049
              )
              
              
              
              
              
              
              
              -41
              %
              
              
              
              
              138
              %*Income
                  tax benefit*
              
              
              -
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              0
              %
              
              
              
              
              0
              %*Loss
                  (income) from continuing Operations*
              
              
              (27,041
              )
              
              
              
              
              
              
              
              (45,283
              )
              
              
              
              
              
              
              
              (19,049
              )
              
              
              
              
              
              
              
              -41
              %
              
              
              
              
              138
              %***Discontinued
                  Operations:****Income
                  from discontinued operations*
              
              
              20
              
              
              
              
              
              
              
              
              456
              
              
              
              
              
              
              
              
              4,788
              
              
              
              
              
              
              
              
              -96
              %
              
              
              
              
              -90
              %*Gain
                  on sale on disposal of discontinued operations*
              
              
              17,925
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              0
              %
              
              
              
              
              0
              %*Income
                  from discontinued operations*
              
              
              17,945
              
              
              
              
              
              
              
              
              456
              
              
              
              
              
              
              
              
              4,788
              
              
              
              
              
              
              
              
              3835
              %
              
              
              
              
              -90
              %***Net
                  loss***
              
              $
              (9,096
              )
              
              
              
              
              
              
              $
              (44,827
              )
              
              
              
              
              
              
              $
              (14,261
              )
              
              
              
              
              
              
              
              -80
              %
              
              
              
              
              214
              %






**Continuing
      Operations:**





Revenues





Hosted
      services revenue from our vertical search services offering for the fiscal
      year
      ended January 31, 2008 increased to $1.1 million from $0.3 million in fiscal
      2007 due to an overall increase in the number of vertical search sites in
      production. As of January 31, 2008, there were a total of 39 Convera supported
      websites in production from 24 publishers compared to three Convera supported
      websites in production from a single B2B publisher at January 31, 2007. Hosted
      services revenue for fiscal 2006, all of which was generated in the fourth
      quarter of the fiscal year, was approximately $20 thousand. Our vertical search
      services were not commercially available prior to the third quarter of fiscal
      year 2006. The first Convera supported site was launched into production in
      the
      fourth quarter of fiscal 2007.


20
 Table
          of Contents


Revenue
      from international operations is generated from publishers located primarily
      in
      the United Kingdom. Our international sales operation, Convera Technologies
      International, Ltd. (“CTIL”), is headquartered in the United Kingdom.
      International revenues were $1.0 million in fiscal year 2008 compared to $0.1
      million in fiscal 2007. In fiscal 2006, no international revenues were
      generated.





One
      customer, CMP Information Ltd., accounted for 82% of total revenue for the
      fiscal year ended January 31, 2008; three customers accounted for 53%, 29%
      and
      17%, respectively of total revenue for fiscal year ended January 31, 2007;
      and a
      single customer accounted for 100% of the revenue for the fiscal year ended
      January 31, 2006.








Operating
      Expenses:





*Cost
      of Revenues*





Our
      hosted services cost of revenue increased 19% to $9.7 million for the year
      ended
      January 31, 2008 from $8.1 million in fiscal year 2007. This increase is
      attributed to higher personnel-related costs resulting from the formation of
      the
      publisher services implementation team. Hosted services cost of revenue
      increased 353% to $8.1 million for the year ended January 31, 2007 from $1.8
      million in fiscal year 2006. This increase is attributed to a full year of
      costs
      in fiscal 2007 as compared to only three months of such costs in fiscal year
      2006 that began upon the commercial availability of Excalibur in November 2005.
      Primary components of this increase were higher compensation costs due to
      staffing the operations team in early fiscal 2007 and increased depreciation,
      hosting costs and royalties paid on third-party software embedded in the
      product.





Sales
      & Marketing





Sales
      and
      marketing expense decreased 12% to $3.9 million for the year ended January
      31,
      2008 from $4.4 million in fiscal year 2007. The decrease in sales and marketing
      expense for fiscal year 2008 is attributed to lower marketing program costs.
      Sales and marketing expense increased 56% to $4.4 million for the year ended
      January 31, 2007 from $2.8 million in fiscal year 2006. The increase in sales
      and marketing expense for fiscal year 2007 is attributed to higher
      personnel-related costs resulting from a higher average headcount and stock
      option expenses from the adoption of FAS 123(R), increased marketing program
      costs and third-party consulting costs, and market development activities for
      the vertical search business.





*Research
      and Development*





Research
      and product development costs decreased 58% to $4.7 million for the year ended
      January 31, 2008 from $11.0 million in fiscal 2007. The decrease in research
      and
      development costs for fiscal year 2008 is attributed to a decline in
      personnel-related costs resulting from the restructuring actions taken
      throughout fiscal 2008. Additionally, consultant and depreciation costs were
      lower in fiscal year 2008. Research and product development costs increased
      244%
      to $11.0 million for the year ended January 31, 2007 from $3.2 million in fiscal
      2006. This was due to the capitalization in fiscal 2006 of $8.1 million of
      research and development costs. Absent the capitalization of these development
      costs, gross research and development costs of $11.0 in fiscal year 2007 million
      were fairly consistent with research and product development costs of $10.8
      million in fiscal year 2006.





*General
      and Administrative*





General
      and administrative expense decreased by 25% to $11.2 million for the year ended
      January 31, 2008 from $14.8 million in fiscal year 2007. The decrease in fiscal
      year 2008 is due to lower personnel-related costs stemming from the
      restructuring actions taken in fiscal 2008, as well as reduced executive
      staffing levels in 2008. Accounting services and corporate insurance costs
      were
      also lower in fiscal 2008 compared to fiscal 2007. General and administrative
      expense grew by 37% to $14.8 million for the year ended January 31, 2007 from
      $10.9 million in fiscal year 2006. The increase in fiscal year 2007 is due
      to
      higher stock option expense due to the adoption of FAS 123(R), higher
      personnel-related expense as a result of increased average headcount, and
      increased legal fees.








21
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*Amortization
      of capitalized software development costs*





As
      a
      result of the impairment charge in the third quarter of fiscal year 2007 that
      reduced the recorded value of capitalized software development costs to zero,
      there was no amortization of capitalized software development costs recorded
      for
      the year ended January 31, 2008. During fiscal year 2007, $3.0 million of
      amortization of capitalized software development costs was recorded in
      accordance with SFAS No. 86 as compared to $1.0 million of amortization of
      capitalized software development costs in fiscal 2006. We commenced amortizing
      the capitalized software development costs upon achieving commercial
      availability in November 2005.





*Impairment
      of capitalized software development costs, fixed assets and prepaid
      expenses:*





For
      the
      fiscal year ended January 31, 2008, we recorded a $0.6 million impairment charge
      in accordance with SFAS No. 144 for assets that were rendered idle as a
      consequence of vacating the AT&T hosting facility in San Diego. In fiscal
      year 2007, an analysis of the recoverability of the Excalibur capitalized
      software development costs, as well as fixed assets and prepaids related to
      the
      Excalibur web product solution, concluded that such assets were impaired. As
      a
      result, an aggregate impairment charge of $6.4 million was recorded in fiscal
      2007, comprised of a $4.1 million impairment charge for capitalized software
      development costs in accordance with SFAS No. 86 and a $2.3 million impairment
      charge for the fixed assets and prepaids, in accordance with SFAS No.
      144.





*Other
      income*





Other
      income, which consists primarily of interest income, decreased 20% to $1.8
      million in fiscal year 2008, from $2.3 million in fiscal year 2007. This
      decrease was due to a lower average cash balance and declining interest rates.
      Other income increased to $2.3 million in fiscal year 2007 from $0.6 million
      in
      fiscal year 2006 due to a higher average quarterly cash balance and higher
      interest yields.








**Discontinued
      operations** **:**





Income
      from discontinued operations for the fiscal year ended January 31, 2008 was
      $17.9 million, as compared to income from discontinued operations of $0.5
      million in fiscal year 2007. The increase in income includes the gain from
      the
      completion of the sale of the Enterprise Search business of $17.9 million.
      Income from discontinued operations for the fiscal year ended January 31, 2006
      was $4.7 million. The $4.2 million decrease in income from discontinued
      operations from fiscal 2006 to fiscal 2007 was primarily due to a decline in
      Enterprise Search revenues.








**Contractual
      Obligations**




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




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As
      of
      January 31, 2008, we had the following contractual obligations associated with
      our lease commitments, and other contractual obligations for the periods
      indicated below:





**Contractual
                Obligations**
            
            **Payments
                Due By Fiscal Period (in thousands)**Total
            
            2009
            
            2010
            
            2011-2012
            
            2013
                and thereafterOperating
                leases
            
            $
            2,957
            
            $
            1,693
            
            $
            1,153
            
            $
            111
            
            
            -Other
                contractual obligations
            
            
            1,600
            
            
            1,316
            
            
            284
            
            
            -
            
            
            -Total
            
            $
            4,557
            
            $
            3,009
            
            $
            1,437
            
            $
            111
            
            
            -





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





·
            Other
                contractual obligations — represents the principal amounts due on
                outstanding contractual obligations relating to our hosting agreements
                with AT&T for our vertical search product. In January 2008, we
                exercised our right to terminate the contract for the San Diego hosting
                facility (see further discussion in Note 3 of the consolidated financial
                statements). The Other contractual obligations balance includes the
                termination obligation due for the San Diego hosting facility of
                approximately $0.8 million, as well as 100% of the contractual obligation
                for the Dallas hosting facility, although that agreement is cancelable
                for
                a payment of 50% of the remaining balance at the time of cancellation.








**Liquidity
      and Capital Resources**




Our
      combined balance of cash, cash equivalents and restricted cash at January 31,
      2008 as compared to January 31, 2007 is summarized below (in
      thousands).




January
                  31, 2008
              
              January
                  31, 2007
              
              ChangeCash
                  and cash equivalents
              
              $
              36,641
              
              $
              47,433
              
              $
              (10,792
              )Restricted
                  cash
              
              
              -
              
              
              71
              
              
              (71
              )Total
              
              $
              36,641
              
              $
              47,504
              
              $
              (10,863
              )






At
      January 31, 2008, our principal source of liquidity was cash and cash
      equivalents of $36.6 million.





Operating
      activities of continuing operations consumed $24.7 million in cash in fiscal
      2008. The primary use of cash from operating activities was the net loss from
      continuing operations of $27.0 million. The net loss was reduced for non-cash
      expenses represented by depreciation and amortization expense of $2.6 million,
      stock-based compensation of $0.4 million and an impairment charge of $0.6
      million. The $4.1 million decrease in depreciation and amortization expense
      between fiscal 2008 and 2007 is the result of the impairment charge on the
      Excalibur Web offering assets recorded in the third quarter of fiscal 2007
      totaling $6.4 million. The $5.5 million decrease in stock-based compensation
      expense between fiscal 2008 and 2007 is principally due to the
      reduction of
      headcount from our action to restructure and realign our cost structure in
      the
      first quarter of fiscal 2008. The $0.6 million impairment charge recognized
      in
      fiscal 2008 is related to hosting equipment that was rendered idle as a
      consequence of our decision to terminate our hosting arrangement for the San
      Diego facility. We recorded a $6.4 million impairment charge on the capitalized
      software development costs and hosting assets in the third quarter of fiscal
      2007. A decrease in accounts payable and accrued expenses used $1.2 million
      in
      cash in fiscal 2008. The reduction in accounts payable and accrued expense
      is a
      consequence of the reduction of headcount stemming from the restructuring and
      reali gnment
      actions taken in the first quarter of fiscal 2008. Net cash of $1.7 million
      was
      provided by discontinued operations in fiscal 2008.





Our
      investing activities from continuing operations provided $12.1 million in cash
      in fiscal 2008. The sale of the Enterprise Search business provided $16.4
      million, net of expense directly related to the transaction. This was offset
      by
      $4.4 million used in purchases of equipment and leasehold improvements.
      Investing activities of discontinued operations used $4,000.




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Cash
      flow
      from financing activities was all provided by continuing operations. The
      issuance of common stock relating to the exercise of employee stock options
      provided approximately $0.8 million in cash in fiscal 2008. Cash used for the
      repurchase of common shares was approximately $0.2 million in fiscal
      2008.





In
      fiscal
      2007, $16.4 million, or 98.4% of our revenues totaling $16.7 million was derived
      from the Enterprise Search business. The closing of the sale of the Enterprise
      Search business will reduce our revenue base in the short term and continue
      our
      trend of operating losses and uses of cash until the revenue base for the
      vertical search business grows sufficiently to support the underlying expense
      base. We believe that we have sufficient resources to fund operations for at
      least the next twelve months.





**Other
      Factors**





Inflation





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





**Recent
      Pronouncements**




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157 (“SFAS 157”), Fair Value Measurements. SFAS 157 provides guidance for
      measuring the fair value of assets and liabilities. It requires additional
      disclosures related to the extent to which companies measure assets and
      liabilities at fair value, the information used to measure fair value, and
      the
      effect of fair value measurements on earnings. It does not require any new
      fair
      value measurements. SFAS 157 is effective for fiscal years beginning after
      November 15, 2007. We will adopt SFAS 157 for our fiscal year 2009 beginning
      February 1, 2008. We do not expect the adoption to have a material impact on
      our
      consolidated results of operations and financial condition.





In
      February 2007, the FASB issued SFAS No. 159, “ *The
      Fair Value Option for Financial Assets and Financial Liabilities - including
      an
      Amendment of SFAS No. 115”* (“SFAS
      159”), which permits an entity to measure many financial assets and financial
      liabilities at fair value that are not currently required to be measured at
      fair
      value. Entities that elect the fair value option will report unrealized gains
      and losses in earnings at each subsequent reporting date. The fair value option
      may be elected on an instrument-by-instrument basis, with few exceptions. SFAS
      159 amends previous guidance to extend the use of the fair value option to
      available-for-sale and held-to-maturity securities. SFAS 159 also establishes
      presentation and disclosure requirements to help financial statement users
      understand the effect of the election. SFAS 159 is effective as of the beginning
      of the first fiscal year beginning after November 15, 2007. We will adopt SFAS
      159 for our fiscal year 2009 beginning February 1, 2008. We do not expect the
      adoption to have a material impact on our consolidated results of operations
      and
      financial condition.





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


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**Item
      7A.****Quantitative
      and Qualitative Disclosures about Market Risk**





Our
      market risk is principally confined to changes in foreign currency exchange
      rates and potentially adverse effects of differing tax structures. International
      revenues from CTIL, our foreign sales subsidiary located in the United Kingdom,
      were approximately 88% of total revenues in fiscal year 2008. International
      sales are made predominantly from our foreign subsidiary and are typically
      denominated in British pounds, EUROs or U.S. Dollars. As of January 31, 2008,
      approximately 97% of total consolidated accounts receivable was denominated
      in
      British pounds. The majority of these receivables are due within 90 days of
      the
      end of fiscal year 2008, and all receivables are due within one year.
      Additionally, we are exposed to potential foreign currency gains or losses
      resulting from intercompany accounts that are not of a long-term nature. We
      are
      also exposed to foreign exchange rate fluctuations as the financial results
      of
      CTIL are translated into U.S. dollars in consolidation. As exchange rates vary,
      those results when translated may vary from expectations and adversely impact
      overall expected profitability.





As
      of
      January 31, 2008, less than one percent of our cash and cash equivalents were
      denominated in British pounds, EUROs and Canadian dollars, respectively. Cash
      equivalents consist of funds deposited in money market accounts with original
      maturities of three months or less. We also have certificates of deposit of
      $76,000 and $450,000 included in Other assets which are pledged to collateralize
      letters of credit required for leased facilities. Given the relatively short
      maturity periods of these cash equivalents, the cost of these investments
      approximates their fair values and our exposure to fluctuations in interest
      rates is limited.








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





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








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





None.








**Item
      9A.****Controls
      and Procedures**





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





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as defined in Rule 13a-15(f) under the
      Exchange Act, as amended, and for assessing the effectiveness of internal
      control over financial reporting. Our management, with the participation of
      our
      Chief Executive Officer, who is our principal executive officer and our Chief
      Financial Officer, who is our principal accounting officer, conducted an
      evaluation of the effectiveness of our internal control over financial reporting
      as of January 31, 2008. In making this assessment, our management used the
      criteria established in Internal Control -- Integrated Framework, issued by
      the
      Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
      Management has concluded that we maintained effective internal control over
      financial reporting as of January 31, 2008, based on the criteria established
      in
      COSO's Internal Control - Integrated Framework.





Ernst
      & Young LLP, the independent registered public accounting firm that audited
      the Consolidated Financial Statements in Part II, Item 8 of this report, has
      issued an audit report on our internal control over financial reporting as
      of
      January 31, 2008.





(b)
            Changes
                in Internal Control Over Financial
                Reporting





Other
      than the improvements in internal control over financial reporting implemented
      to remediate the material weaknesses in our internal control over financial
      reporting identified as of January 31, 2007, there was no change in our internal
      control over financial reporting (as such term is defined in Rules 13a-15(f)
      and
      15d-15(f) under the Exchange Act) during the quarter ended January 31, 2008
      that
      has materially affected, or is reasonably likely to materially affect, our
      internal control over financial reporting.





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 Table
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Subsequent
      to January 31, 2007, we took several steps to remediate the material weaknesses
      identified as of January 31, 2007, which arose from the combined effect of
      the
      following control deficiencies in the calculation of impairment of our web
      hosting assets and the balances for prepaid expenses, accruals and general
      and
      administrative expenses and properly interpreting and recording revenues before
      all appropriate revenue recognition criteria had been met:





·
            lack
                of sufficiently trained accounting and finance personnel with knowledge
                of
                our accounting close and financial reporting processes and adequate
                technical expertise in the application of U.S. generally accepted
                accounting principles;





·
            inadequate
                management review of transactions and related account analyses and
                reconciliations; and





·
            insufficient
                control monitoring processes to ensure key controls identify accounting
                errors on a timely basis.





We
      implemented internal control improvements in the following areas:





·
            engaged
                an outside consultant to perform a thorough review of our accounting
                close
                and financial reporting process, including revenue recognition, and
                enhanced our close procedures to ensure completeness and a thorough
                review
                of supporting documentation and underlying accounting and reporting
                guidance, by appropriately trained and qualified personnel, is performed;





·
            hired
                an additional staff person with the appropriate level of internal
                control
                training and experience to further improve and monitor the quality
                of
                existing processes and controls;





·
            added
                a supplemental review procedure for the CFO to review all significant
                contracts during each period, prior to approving the entries to recognize
                revenue; and





·
            Provided
                training to the sales and contracts staff to increase awareness and
                allow
                for earlier identification of contract structures and issues that
                could
                impact revenue recognition.





(c)
      Evaluation of Disclosure Controls and Procedures





Our
      management, with the participation of our Chief Executive Officer and Chief
      Financial Officer, evaluated the effectiveness of the design and operation
      of
      our disclosure controls and procedures (as defined in Rules 13a-15(e) and
      15d-15(e) under the Exchange Act) and determined that our disclosure controls
      and procedures were effective as of January 31, 2008. The evaluation considered
      the procedures designed to ensure that information required to be disclosed
      by
      us in reports filed or submitted under the Exchange Act is recorded, processed,
      summarized and reported within the time periods specified in the SEC’s rules and
      forms and communicated to our management as appropriate to allow timely
      decisions regarding required disclosure.





(d)
      Inherent Limitations of Disclosure Controls and Internal Control Over Financial
      Reporting





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Projections of any evaluation of effectiveness
      to future periods are subject to risks that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies or procedures may deteriorate.





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 Table
          of Contents


**Report
      of Independent Registered Public Accounting Firm**











The
      Board
      of Directors and Shareholders of Convera Corporation





We
      have
      audited Convera Corporation’s (the Company) internal control over financial
      reporting as of January 31, 2008, based on criteria established in Internal
      Control—Integrated Framework issued by the Committee of Sponsoring Organizations
      of the Treadway Commission (the COSO criteria). Convera Corporation’s management
      is responsible for maintaining effective internal control over financial
      reporting, and for its assessment of the effectiveness of internal control
      over
      financial reporting included in the accompanying Management’s Report on Internal
      Control over Financial Reporting. Our responsibility is to express an opinion
      on
      the Company’s internal control over financial reporting based on our audit.





We
      conducted our audit 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 effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, assessing the risk that a material weakness exists, testing
      and evaluating the design and operating effectiveness of internal control based
      on the assessed risk, and performing such other procedures as we considered
      necessary in the circumstances. We believe that our audit provides a reasonable
      basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial
      statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      our
      opinion, Convera Corporation maintained, in all material respects, effective
      internal control over financial reporting as of January 31, 2008, based on
      the
      COSO criteria.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets as of January
      31, 2008 and 2007, and the related consolidated statements of operations and
      comprehensive loss, changes in shareholders’ equity, and cash flows for each of
      the three years in the period ended January 31, 2008 of Convera Corporation
      and
      our report dated March 27, 2008 expressed an unqualified opinion
      thereon.










/s/
      Ernst & Young LLP





McLean,
      Virginia


March
      27,
      2008





27
 Table
          of Contents





**Item
      9B.****Other
      Information**





Not
      applicable.





**PART
      III**





**Item
      10.****Directors,
      Executive Officers and Corporate Governance**





The
      information required for this Item will be included in our definitive Proxy
      Statement for the 2008 Annual Meeting of Shareholders to be filed with the
      Securities and Exchange Commission no later than 120 days after January 31,
      2008, which information is incorporated in this report by reference.








**Item
      11.****Executive
      Compensation**





The
      information required for this Item will be included in our definitive Proxy
      Statement for the 2008 Annual Meeting of Shareholders to be filed with the
      Securities and Exchange Commission no later than 120 days after January 31,
      2008, which information is incorporated in this report by reference.








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





The
      information required for this Item will be included in our definitive Proxy
      Statement for the 2008 Annual Meeting of Shareholders to be filed with the
      Securities and Exchange Commission no later than 120 days after January 31,
      2008, which information is incorporated in this report by reference.








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





The
      information required for this Item will be included in our definitive Proxy
      Statement for the 2008 Annual Meeting of Shareholders to be filed with the
      Securities and Exchange Commission no later than 120 days after January 31,
      2008, which information is incorporated in this report by reference.








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





The
      information required for this Item will be included in our definitive Proxy
      Statement for the 2008 Annual Meeting of Shareholders to be filed with the
      Securities and Exchange Commission no later than 120 days after January 31,
      2008, which information is incorporated in this report by reference.








28
 Table
          of Contents


**PART
      IV**





**Item
      15.****Exhibits,
      Financial Statement Schedules**





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





**1.**  **Financial
      Statements:**





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





Index
      to
      Consolidated Financial Statements


Report
      of
      Independent Registered Public Accounting Firm


Consolidated
      Balance Sheets


Consolidated
      Statements of Operations and Comprehensive Loss


Consolidated
      Statements of Shareholders' Equity


Consolidated
      Statements of Cash Flows


Notes
      to
      Consolidated Financial Statements




**2.**  **Schedules
      Supporting Financial Statements:**


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





**3.**  **Exhibits:**





See
      Exhibit Index on the following page.


29
 Table
          of Contents


**Exhibit
      Index**





Exhibit
                No.
            Exhibit
                Title
            
            Incorporated
                by Reference fromthe
                Following Documents3.1
            Amended
                and Restated Certificate of Incorporation of Convera
            
            Form
                S-4 (Registration No. 333-50172), November 17, 20003.2
            By-laws
                of Convera (Amended and Restated)
            
            Form
                10-K, April 30, 20033.3
            Amendment
                to By-Laws
            
            Form
                10-K, March 31, 200610.1
            1995
                Incentive Plan, dated November 1995
            
            Proxy
                Statement dated October 16, 1995 for Annual Meeting of
                shareholders10.2
            Convera
                Stock Option Plan
            
            Form
                8-K, May 3, 200010.3
            Office
                Lease (1808 Aston Avenue, Carlsbad, California) commencing November
                1,
                2001
            
            Form
                10-K, April 30, 200210.4
            Amended
                and Restated Convera Corporation 1996 Employee Stock Purchase
                Plan
            
            Definitive
                Form 14C, December 18, 200110.5
            AT&T
                Master Agreement dated August 24, 2004
            
            Form
                10-K, April 1, 200510.6
            Office
                Sublease (Sublandlord - MWH Americas, 6760 Alexander Bell Drive,
                Columbia
                Maryland) commencing June 1, 2005
            
            Form
                10-K, March 31, 200610.7
            Office
                Lease (6760 Alexander Bell Drive, Columbia Maryland) commencing August
                20,
                2005
            
            Form
                10-K, March 31, 200610.8
            Employment
                Agreement with Patrick C. Condo dated October 24, 2005
            
            Form
                10-K, March 31, 200610.9
            Separation
                Agreement with John R. Polchin
            
            Form
                10-Q, September 11, 200610.10
            Separation
                Agreement with Kurt C. Gastrock
            
            Form
                10-K, May 1, 200710.11
            Office
                Lease Amendment (1808 Aston Avenue, Carlsbad, California) commencing
                January 17, 2007
            
            Form
                10-K, May 1, 200710.12
            Employment
                Agreement with Matthew Jones, dated December 6, 2006
            
            Form
                10-K, May 1, 200710.13
            Amended
                and Restated Asset Purchase Agreement with FAST Search and Transfer
                Inc.,
                effective August 9, 2007
            
            Form
                8-K, August 15, 200710.14
            Office
                Lease Amendment (1921 Gallows Road, Vienna
                Virginia) commencing January 1, 2008
            
            Filed
                Herewith10.15
            Office
                Centre Service Agreement (Venture House,
                Arlington Square, Downshire Way, Bracknell, United Kingdom), commencing
                March 1, 2008
            
            Filed
                Herewith21.1
            Subsidiaries
                of Convera
            
            Form
                10-K, April 30, 200423.1
            Consent
                of Independent Registered Public Accounting
                Firm
            
            Filed
                Herewith31.1
            Certification
                of Chief Executive Officer pursuant to
                Rule 13a-14(a)/15d-14(a)
            
            Filed
                Herewith31.2
            Certification
                of Chief Financial Officer pursuant to
                Rule 13a-14(a)/15d-14(a)
            
            Filed
                Herewith32.1
            Certification
                of Chief Executive Officer, pursuant to
                18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002
            
            Filed
                Herewith32.2
            Certification
                of Chief Financial Officer, pursuant to
                18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002
            
            Filed
                Herewith


30
 Table
          of Contents


**SIGNATURES**


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


CONVERA
      CORPORATION





By: /s/
      Patrick C. Condo


Patrick
      C. Condo


President
      and Chief Executive Officer


Date:
        March 31, 2008


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




Signature
              Title
              Date/s/Patrick
                  C. Condo
              President,
                  Chief Executive Officer
              March
                  31, 2008Patrick
                  C. Condo
              and
                  Director (Principal Executive Officer)/s/
                  Matthew G. Jones
              Vice
                  President, Chief Financial Officer
              March
                  31, 2008Matthew
                  G. Jones
              (Principal
                  Financial and Accounting Officer)/s/
                  Ronald J. Whittier
              Director
              March
                  31, 2008Ronald
                  J. Whittier/s/
                  Herbert A. Allen
              Director
              March
                  31, 2008Herbert
                  A. Allen/s/
                  Herbert A. Allen, III
              Director
              March
                  31, 2008Herbert
                  A. Allen, III/s/
                  John C. Botts
              Director
              March
                  31, 2008John
                  C. Botts/s/
                  Eli S. Jacobs
              Director
              March
                  31, 2008Eli
                  S. Jacobs/s/
                  Donald R. Keough
              Director
              March
                  31, 2008Donald
                  R. Keough/s/
                  Ajay Menon
              Director
              March
                  31, 2008Ajay
                  Menon/s/
                  Sydney Pollack
              Director
              March
                  31, 2008Sydney
                  Pollack/s/
                  Carl J. Rickertson
              Director
              March
                  31, 2008Carl
                  J. Rickertson/s/
                  Jeffrey White
              Director
              March
                  31, 2008Jeffrey
                  White/s/
                  Alexander F. Parker
              Director
              March
                  31, 2008Alexander
                  F. Parker




31
 Table
          of Contents








**Index
                to Consolidated Financial Statements**
            **Page**Report
                of Independent Registered Public Accounting
                Firm
            F-1Consolidated
                Balance Sheets
              As
                of January 31, 2008 and 2007
            F-2Consolidated
                Statements of Operations and Comprehensive Loss
              For
                the
                fiscal years ended January 31, 2008, 2007 and 2006
            F-3Consolidated
                Statements of Shareholders'
                Equity
              For
                the fiscal years ended January 31, 2008, 2007 and
                2006
            F-4Consolidated
                Statements of Cash Flows
              For
                the fiscal years ended January 31, 2008, 2007 and
                2006
            F-5Notes
                to Consolidated Financial Statements
            F-6











32





**Report
      of Independent Registered Public Accounting
      Firm**








To
      the
      Board of Directors and Shareholders of


Convera
      Corporation





We
      have
      audited the accompanying consolidated balance sheets of Convera Corporation
      (the
      Company) as of January 31, 2008 and 2007, and the related consolidated
      statements of operations and comprehensive loss, changes in shareholders’
equity, and cash flows for each of the three years in the period ended January
      31, 2008. These financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these financial
      statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of Convera Corporation
      at
      January 31, 2008 and 2007, and the consolidated results of its operations and
      its cash flows for each of the three years in the period ended January 31,
      2008,
      in conformity with U.S. generally accepted accounting principles.





As
      discussed in Note 2 to the consolidated financial statements, on February 1,
      2006 the Company adopted the provisions of Statement of Financial Accounting
      Standards No. 123(R) Share Based Payment and changed its method of accounting
      for share based payments using the modified prospective transition method.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the Company's internal control over financial
      reporting as of January 31, 2008, based on criteria established in Internal
      Control-Integrated Framework issued by the Committee of Sponsoring Organizations
      of the Treadway Commission and our report dated March 27, 2008 expressed an
      unqualified opinion thereon.








/s/
      Ernst & Young LLP


McLean,
      Virginia


March
      27,
      2008





F-1


**CONVERA
      CORPORATION****AND
      SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


(in
      thousands, except per share data)








ASSETSJanuary
                31, 2008
            
            January
                31, 2007Current
                Assets:Cash
                and cash equivalents
            
            $
            36,641
            
            $
            47,433Restricted
                cash
            
            
            -
            
            
            71Accounts
                receivable, net of allowance for doubtful accounts of $0 and $0,
                respectively
            
            
            182
            
            
            170Escrow,
                prepaid expenses and other
            
            
            4,002
            
            
            1,022Assets
                held for sale
            
            
            -
            
            
            6,281Total
                current assets
            
            
            40,825
            
            
            54,977Equipment
                and leasehold improvements, net of accumulated depreciation of $11,535
                and
                $9,705, respectively
            
            
            4,913
            
            
            3,714Other
                assets
            
            
            629
            
            
            590Total
                assets
            
            $
            46,367
            
            $
            59,281LIABILITIES
                AND SHAREHOLDERS’ EQUITYCurrent
                Liabilities:Accounts
                payable
            
            $
            699
            
            $
            1,796Accrued
                expenses
            
            
            2,282
            
            
            2,232Deferred
                revenues
            
            
            651
            
            
            725Liabilities
                held for sale
            
            
            -
            
            
            3,431Total
                liabilities
            
            
            3,632
            
            
            8,184Commitments
                and Contingencies
            
            
            -
            
            
            -Shareholders'
                Equity:Common
                stock Class A, $0.01 par value, 100,000,000 shares authorized; 53,947,749
                and 53,469,299 shares issued, respectively;
              53,291,194
                and 52,812,744 shares outstanding, respectively
            
            
            538
            
            
            534Treasury
                stock at cost, 656,555 and 656,555 shares, respectively
            
            
            (1,517
            )
            
            (1,517
            )Additional
                paid-in-capital
            
            
            1,170,128
            
            
            1,168,908Accumulated
                deficit
            
            
            (1,124,629
            )
            
            (1,115,533
            )Accumulated
                other comprehensive loss
            
            
            (1,785
            )
            
            (1,295
            )Total
                shareholders' equity
            
            
            42,735
            
            
            51,097Total
                liabilities and shareholders' equity
            
            $
            46,367
            
            $
            59,281











See
      accompanying notes .


F-2


**CONVERA
      CORPORATION****AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS**


(in
      thousands, except share and per share data)





For
                the Fiscal Years Ended January 31,2008
            
            2007
            
            2006Revenues:Hosted
                services
            
            $
            1,118
            
            $
            269
            
            $
            20Expenses:Cost
                of revenues
            
            
            9,660
            
            
            8,138
            
            
            1,797Sales
                and marketing
            
            
            3,880
            
            
            4,386
            
            
            2,804Research
                and product development
            
            
            4,652
            
            
            11,010
            
            
            3,198General
                and administrative
            
            
            11,179
            
            
            14,833
            
            
            10,860Amortization
                of capitalized research and product development costs
            
            
            -
            
            
            3,045
            
            
            1,012Impairment
                of capitalized research and development costs, equipment and other
                prepaid
                expenses
            
            
            603
            
            
            6,407
            
            
            -Total
                operating expenses
            
            
            29,974
            
            
            47,819
            
            
            19,671Operating
                loss
            
            
            (28,856
            )
            
            (47,550
            )
            
            (19,651
            )Other
                income, net
            
            
            1,815
            
            
            2,267
            
            
            602Loss
                from continuing operations
            
            
            (27,041
            )
            
            (45,283
            )
            
            (19,049
            )Income
                (loss) from discontinued operations, net of tax benefit of $241,
                0 and 0,
                respectively
            
            
            20
            
            
            456
            
            
            4,788Gain
                from sale of discontinued RetrievalWare operations
            
            
            17,925
            
            
            -
            
            
            -Income
                from discontinued operations
            
            
            17,945
            
            
            456
            
            
            4,788Net
                loss
            
            $
            (9,096
            )
            $
            (44,827
            )
            $
            (14,261
            )Basic
                and diluted net income (loss) per common share:Continuing
                operations
            
            $
            (0.51
            )
            $
            (0.87
            )
            $
            (0.44
            )Discontinued
                operations
            
            
            0.34
            
            
            0.01
            
            
            0.11Basic
                and diluted net loss per common share
            
            $
            (0.17
            )
            $
            (0.86
            )
            $
            (0.33
            )Weighted-average
                number of common shares outstanding - Basic and diluted
            
            
            53,145,955
            
            
            52,221,644
            
            
            43,088,677Comprehensive
                loss:Net
                loss
            
            $
            (9,096
            )
            $
            (44,827
            )
            $
            (14,261
            )Foreign
                currency translation adjustment
            
            
            (490
            )
            
            145
            
            
            (56
            )Comprehensive
                loss
            
            $
            (9,586
            )
            $
            (44,682
            )
            $
            (14,317
            )








See
      accompanying notes











F-3


**CONVERA
      CORPORATION****AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**


(in
      thousands, except share data)








Common
                Stock
            
            Treasury
                Stock
            
            AdditionalPaid-in
            
            Accumulated
            
            Accumulated Other Compre-
                hensiveShares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Deficit
            
            Income
                    (Loss)
            
            TotalBalance,
                January 31, 2005
            
            
            38,740,215
            
            $
            387
            
            
            (726,408
            )
            $
            (1,678
            )
            $
            1,084,269
            
            $
            (1,056,445
            )
            $
            (1,384
            )
            $
            25,149Private
                placement
            
            
            6,555,556
            
            
            65
            
            
            -
            
            
            -
            
            
            28,700
            
            
            -
            
            
            -
            
            
            28,765Issuance
                of common stock upon exercise of options
            
            
            2,406,090
            
            
            24
            
            
            -
            
            
            -
            
            
            9,646
            
            
            -
            
            
            -
            
            
            9,670Issuance
                of treasury stock for Employee Stock Purchase Plan
            
            
            -
            
            
            -
            
            
            52,055
            
            
            120
            
            
            95
            
            
            -
            
            
            -
            
            
            215Stock-based
                compensation
            
            
            101,325
            
            
            1
            
            
            -
            
            
            -
            
            
            1,358
            
            
            -
            
            
            -
            
            
            1,359Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (56
            )
            
            (56
            )Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (14,261
            )
            
            -
            
            
            (14,261
            )Balance,
                January 31, 2006
            
            
            47,803,186
            
            
            477
            
            
            (674,353
            )
            
            (1,558
            )
            
            1,124,068
            
            
            (1,070,706
            )
            
            (1,440
            )
            
            50,841Private
                placement
            
            
            5,103,333
            
            
            51
            
            
            -
            
            
            -
            
            
            36,693
            
            
            -
            
            
            -
            
            
            36,744Issuance
                of common stock upon exercise of options
            
            
            461,455
            
            
            5
            
            
            -
            
            
            -
            
            
            1,645
            
            
            -
            
            
            -
            
            
            1,650Issuance
                of treasury stock for Employee Stock Purchase Plan
            
            
            -
            
            
            -
            
            
            17,798
            
            
            41
            
            
            71
            
            
            -
            
            
            -
            
            
            112Stock-based
                compensation
            
            
            101,325
            
            
            1
            
            
            -
            
            
            -
            
            
            6,431
            
            
            -
            
            
            -
            
            
            6,432Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            145
            
            
            145Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (44,827
            )
            
            -
            
            
            (44,827
            )Balance,
                January 31, 2007
            
            
            53,469,299
            
            
            534
            
            
            (656,555
            )
            
            (1,517
            )
            
            1,168,908
            
            
            (1,115,533
            )
            
            (1,295
            )
            
            51,097Issuance
                of common stock upon exercise of options
            
            
            337,125
            
            
            3
            
            
            -
            
            
            -
            
            
            817
            
            
            -
            
            
            -
            
            
            820Stock-based
                compensation
            
            
            141,325
            
            
            1
            
            
            -
            
            
            -
            
            
            403
            
            
            -
            
            
            -
            
            
            404Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (490
            )
            
            (490
            )Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (9,096
            )
            
            -
            
            
            (9,096
            )Balance,
                January 31, 2008
            
            
            53,947,749
            
            $
            538
            
            
            (656,555
            )
            $
            (1,517
            )
            $
            1,170,128
            
            $
            (1,124,629
            )
            $
            (1,785
            )
            $
            42,735








See
      accompanying notes





F-4


**CONVERA
      CORPORATION****AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(in
      thousands)





**For
                the year ended January 31,****2008**
            
            **2007**
            
            **2006****Cash
                Flows from Operating Activities:**Loss
                from continuing operations
            
            $
            (27,041
            )
            $
            (45,283
            )
            $
            (19,049
            )Adjustments
                to reconcile loss from continuing operations to net cash used in
                operating
                activities from continuing operations:Depreciation
                and amortization
            
            
            2,611
            
            
            6,685
            
            
            3,710Stock-based
                compensation
            
            
            425
            
            
            5,967
            
            
            1,584Impairment
                of capitalized research and development costs, equipment and prepaid
                expenses
            
            
            603
            
            
            6,407
            
            
            -Changes
                in operating assets and liabilities:Restricted
                cash
            
            
            71
            
            
            -
            
            
            -Accounts
                receivable
            
            
            (9
            )
            
            (170
            )
            
            -Prepaid
                expenses and other assets
            
            
            (141
            )
            
            569
            
            
            189Accounts
                payable and accrued expenses
            
            
            (1,166
            )
            
            814
            
            
            (1,627
            )Deferred
                revenues
            
            
            (10
            )
            
            609
            
            
            79Net
                cash used in operating activities from continuing operations
            
            
            (24,657
            )
            
            (24,402
            )
            
            (15,114
            )Net
                cash provided by operating activities from discontinued
                operations
            
            
            1,672
            
            
            1,323
            
            
            6,684Net
                cash used in operating activities
            
            
            (22,985
            )
            
            (23,079
            )
            
            (8,430
            )**Cash
                Flows from Investing Activities:**Proceeds
                from the sale of RetrievalWare business, net of direct costs
            
            
            16,419
            
            
            -
            
            
            -Capitalized
                research and development costs
            
            
            -
            
            
            -
            
            
            (6,616
            )Purchases
                of equipment and leasehold improvements
            
            
            (4,347
            )
            
            (136
            )
            
            (8,095
            )Net
                cash provided by (used in) investing activities from continuing
                operations
            
            
            12,072
            
            
            (136
            )
            
            (14,711
            )Net
                cash used in investing activities from discontinued operations
            
            
            (4
            )
            
            (306
            )
            
            (299
            )Net
                cash provided by (used in) investing activities
            
            
            12,068
            
            
            (442
            )
            
            (15,010
            )**Cash
                Flows from Financing Activities:**Proceeds
                from the private placement of stock, net
            
            
            -
            
            
            36,744
            
            
            28,765Proceeds
                from the exercise of stock options
            
            
            820
            
            
            1,650
            
            
            9,670Proceeds
                from the borrowings of long-term debt
            
            
            -
            
            
            -
            
            
            5,000Proceeds
                from the issuance of common stock, net
            
            
            (197
            )
            
            (253
            )
            
            (10
            )Repayment
                of long-term debt
            
            
            -
            
            
            (5,000
            )
            
            -Net
                cash provided by financing activities from continuing
                operations
            
            
            623
            
            
            33,141
            
            
            43,425Net
                cash provided by financing activities from discontinued
                operations
            
            
            -
            
            
            -
            
            
            -Net
                cash provided by financing activities
            
            
            623
            
            
            33,141
            
            
            43,425Effect
                of Exchange Rate Changes on Cash
            
            
            (498
            )
            
            72
            
            
            (10
            )Net
                (Decrease) Increase in Cash and Cash Equivalents
            
            
            (10,792
            )
            
            9,692
            
            
            19,975Cash
                and Cash Equivalents, beginning of period
            
            
            47,433
            
            
            37,741
            
            
            17,766Cash
                and Cash Equivalents, end of period
            
            $
            36,641
            
            $
            47,433
            
            $
            37,741


See
      accompanying notes .


F-5


**CONVERA
      CORPORATION A****ND
      SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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





**(1)**  **CONVERA
      CORPORATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**Nature
      of Operations**





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





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





As
      of
      January 31, 2008 and January 31, 2007, Allen Holding, Inc., together with Allen
      & Company Incorporated, Herbert A. Allen and certain related parties
      (collectively “Allen & Company”) beneficially owned approximately 42% of the
      voting power of Convera and held three seats on the Board of
      Directors.





**Principles
      of Consolidation**





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





**Use
      of Estimates**





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





**Reclassifications**





Certain
      amounts presented in the prior year’s financial statements have been
      reclassified to conform to the fiscal year 2008 presentation.





**Revenue
      Recognition**





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


F-6


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





Our
      contracts with publishers typically entitle us to receive a percentage of
      customer search-related advertising revenue earned (typically between 20% and
      50% of net advertising revenues). Many of our contracts with publishers also
      contain monthly minimum service fees that we continue to receive until monthly
      website advertising revenue generated by the publishers’ search sites exceeds
      these monthly minimum amounts. Contract minimums and other hosting fees or
      set-up fees are recognized ratably over the term of the vertical search service
      agreement. Advertising share revenues are recognized when earned under the
      provisions of the vertical search services agreement.





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





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





**Stock-based
      Compensation**





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





We
      use
      the Black-Scholes-Merton (“Black-Scholes”) option pricing model to determine the
      fair value of stock-based awards under SFAS 123(R) which is consistent with
      that
      used for pro forma disclosures under SFAS 123 *Accounting
      for Stock-Based Compensation* .
      We
      elected the modified-prospective transition method as permitted by SFAS 123(R).
      The consolidated financial statements for fiscal year 2006 has not been restated
      to reflect, and does not include the impact of the adoption of SFAS 123(R).
      In
      accordance with the modified -prospective transition method, stock-based
      compensation expense was recorded for all new grants and to the unvested portion
      of grants that were outstanding and unvested and ultimately expected to vest
      as
      the requisite service is rendered beginning of February 1, 2006, the first
      day
      of our fiscal year 2007. Stock-based compensation expense for awards granted
      prior to February 1, 2006 is based on the grant date fair value as determined
      under the pro forma provisions of SFAS 123.





Prior
      to
      the adoption of SFAS 123 (R), we measured compensation expense for our employee
      stock-based compensation plans using the intrinsic method prescribed by APB
      No.
      25. We applied the disclosure provisions of SFAS 123 as amended by SFAS No.
      148 *,
      Accounting for Stock -Based Compensation- Transition and
      Disclosure,* as if
      the fair-value based method had been applied in measuring compensation expense.
      Under APB No. 25, when the exercise price of our stock options was equal to
      the
      market price of the underlying stock on the date of grant, no compensation
      expense was recognized.


F-7


**Research
      and Product Development Costs**





Our
      software development costs are included in research and product development
      and
      are expensed as incurred, in accordance with Statement of Financial Accounting
      Standards (“SFAS”) No. 86, “Accounting for the Cost of Computer Software to be
      Sold, Leased or Otherwise Marketed.”





SFAS
      requires the capitalization of certain software developments costs once
      technological feasibility is established and capitalization ceases when the
      products are available for general lease to customers. 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. Previously, we capitalized software development costs
      related to our Excalibur web hosting product beginning in the first quarter
      of
      fiscal year 2006. We continued to do so until such time as “commercial
      availability” was determined. Total
      costs capitalized in connection with the web hosting product were $8.1 million. Amortization
      of previously capitalized software development costs for this offering commenced
      in the third quarter of fiscal year 2006 and was scheduled to continue over
      a
      twenty-four-month period. For the
      years ended January 31, 2006 and 2007, we recognized amortization expense of
      capitalized research and development costs of $1.0 million and $3.0 million,
      respectively, which is included in continuing operations on the consolidated
      statements of operations and comprehensive loss. In the third quarter of fiscal
      year 2007, we recorded an impairment charge for the unamortized balance of
      the
      capitalized research and development costs. See Note 3, “Impairment of
      Long-Lived Assets” for additional information related to the impairment charge.





**Advertising**





Our
      advertising costs, which were immaterial for the fiscal years ended January
      31,
      2008, 2007 and 2006, are expensed as incurred and included with sales and
      marketing in the consolidated statements of operations.





**Other
      Income** ****




For
      the
      fiscal year ended January 31, 2008, other income primarily consisted of $1.8
      million of interest income. For the fiscal year ended January 31, 2007 other
      income consisted of $2.4 million of net interest income offset by interest
      expense of $0.2 million. For fiscal year 2006, other income consisted of $0.9
      million of net interest income offset by interest expense of $0.3 million.




**Income
      Taxes**





We
      follow
      Statement of Financial Accounting Standards No. 109, "Accounting for Income
      Taxes" ("SFAS 109").  Under the asset and liability method of
      SFAS 109, deferred tax assets and liabilities are recognized for the future
      tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. Deferred tax assets and liabilities are measured using enacted tax laws
      and tax rates in each jurisdiction where we operate, and applied to taxable
      income in the years in which those temporary differences are expected to be
      recovered or settled. The effect on deferred tax assets and liabilities due
      to a
      change in tax rates is recognized in income in the period that includes the
      enactment date. In addition, the amounts of any future tax benefits are reduced
      by a valuation allowance to the extent such benefits are not expected to be
      realized on a more-likely-than-not basis. We calculate estimated income taxes
      in
      each of the jurisdictions in which we operate. This process involves estimating
      actual current tax expense along with assessing temporary differences resulting
      from differing treatment of items for both book and tax purposes.





We
      record
      a valuation allowance to reduce our deferred tax assets to the amount that
      is
      more likely than not to be realized. Realization of the deferred tax assets
      is
      principally dependent upon the achievement of projected future taxable income.
      If the estimates and related assumptions change in the future we may be required
      to adjust our valuation allowance against our deferred tax assets, resulting
      in
      a benefit or a charge to income in the period such determination is made. As
      of
      January 31, 2008, we have recorded a full valuation allowance against the net
      deferred tax asset.





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





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


F-8


**Net
      Loss Per Common Share**





We
      follow SFAS No. 128, “Earnings Per Share,” for computing and presenting net loss
      per share information. Basic loss per common share is computed by dividing
      net
      loss available to common stockholders by the weighted average number of common
      shares outstanding for the period. Diluted loss per common share excludes common
      stock equivalent shares and unexercised stock options as the computation would
      be anti-dilutive. When
      discontinued operations are present, income (loss) before discontinued
      operations on a per share basis represents the “control number” in determining
      whether potential common shares are dilutive or anti-dilutive. A reconciliation of the net loss available to common stockholders and the number
      of shares used in computing basic and diluted net loss per share is in Note
      9.





**Foreign
      Currency**





The
      functional currency of our foreign subsidiaries is their local currency.
      Accordingly, assets and liabilities of our foreign subsidiaries are translated
      into U.S. dollars at exchange rates in effect at the balance sheet date. Income
      and non-monetary
      assets and liabilities are remeasured at historical rates. Revenues
      and expenses are translated at average rates for the period. In
      accordance with Statement of Financial Accounting Standards No. 52, foreign
      currency translation adjustments are accumulated in a separate component of
      shareholders’ equity. Foreign currency transaction gains
      and
      losses arise from the remeasurement of certain transactions denominated in
      a
      nonfunctional currency to the functional currency and are a component of
      operating expenses. Foreign
      currency transaction gains (losses) were approximately $477,000, $(336,000),
      and
      $39,000, for the years ended January 31, 2008, 2007, and 2006,
      respectively.





**Fair
      Value of Financial Instruments**





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





**Cash
      and Cash Equivalents**





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





**Restricted
      Cash**





As
      of
      January 31, 2008 the Company has certificates of deposit of $76,000 and
      $450,000, which are pledged to collateralize letters of credit required for
      leased facilities. The certificate of deposit for $76,000 is pledged as
      collateral for a lease expiring in December 2009. The certificate of deposit
      for
      $450,000 is pledged to a lease commitment through February 2010. Both
      certificates of deposit are included with Other assets on the consolidated
      balance sheet.


**Concentrations
      of Credit Risk**





Financial
      instruments that potentially subject us to concentrations of credit risk consist
      primarily of cash equivalents and accounts receivable. We believe that our
      investment policy limits our exposure to concentrations of credit risk. Our
      customers are primarily large publishing companies, many of which are located
      outside the United States. For the years ended January 31, 2008 and 2007, total
      revenues derived from international sales were approximately $1.0 million and
      $0.1 million, representing approximately 88% and 53% of total revenues,
      respectively. There was no international revenue for the year ended January
      31,
      2006. Most of our international sales are in the United Kingdom. Our
      international operations have historically exposed us to longer accounts
      receivable and payment cycles and fluctuations. We extend credit to our
      customers based on an evaluation of the customer’s financial condition,
      typically without requiring a deposit or collateral. Exposure to losses on
      receivables is principally dependent on each customer’s financial condition.
      Currently, we do not maintain an allowance for anticipated losses. We perform
      ongoing evaluations of our exposure for credit losses, examining our historical
      collection experience and our portfolio of customers, taking into consideration
      the general economic environment as well as the industry in which we operate.
      As
      our customer base grows, we will periodically review whether a provision is
      required. One customer accounted for 82% of total revenues for the year ended
      January 31, 2008. For the year ended January 31, 2007, three customers accounted
      for 53%, 29%, and 17% of total revenues, respectively. A single customer
      accounted for 100% of total revenues in fiscal year 2006.





F-9


**Long-lived
      Assets**





**Equipment
      and Leasehold Improvements**





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





We
      evaluate all of our long-lived assets for impairment in accordance with the
      provisions of Statement of Financial Accounting Standard No. 144, “Accounting
      for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). SFAS No.
      144 requires that long-lived assets, including property and equipment, be
      evaluated for impairment whenever events or changes in circumstances indicate
      that the carrying value of an asset may not be recoverable based on expected
      undiscounted cash flows attributable to that asset. Should events indicate
      that
      any of our assets are impaired, the amount of such impairment will be measured
      as the difference between the carrying value and the fair value of the impaired
      asset and the impairment will be recorded in earnings during the period of
      such
      impairment.





**Exit
      and Disposal Activities**





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




**Recent
      Pronouncements**





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157 (“SFAS 157”), Fair Value Measurements. SFAS 157 provides guidance for
      measuring the fair value of assets and liabilities. It requires additional
      disclosures related to the extent to which companies measure assets and
      liabilities at fair value, the information used to measure fair value, and
      the
      effect of fair value measurements on earnings. It does not require any new
      fair
      value measurements. SFAS 157 is effective for fiscal years beginning after
      November 15, 2007. We will adopt SFAS 157 for our fiscal year 2009 beginning
      February 1, 2008. We do not expect the adoption to have a material impact on
      our
      consolidated results of operations and financial condition.





In
      February 2007, the FASB issued SFAS No. 159, “ *The
      Fair Value Option for Financial Assets and Financial Liabilities - including
      an
      Amendment of SFAS No. 115”* (“SFAS
      159”), which permits an entity to measure many financial assets and financial
      liabilities at fair value that are not currently required to be measured at
      fair
      value. Entities that elect the fair value option will report unrealized gains
      and losses in earnings at each subsequent reporting date. The fair value option
      may be elected on an instrument-by-instrument basis, with few exceptions. SFAS
      159 amends previous guidance to extend the use of the fair value option to
      available-for-sale and held-to-maturity securities. SFAS 159 also establishes
      presentation and disclosure requirements to help financial statement users
      understand the effect of the election. SFAS 159 is effective as of the beginning
      of the first fiscal year beginning after November 15, 2007. We will adopt SFAS
      159 for our fiscal year 2009 beginning February 1, 2008. We do not expect the
      adoption to have a material impact on our consolidated results of operations
      and
      financial condition.




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





F-10




**(2)**  **DISCONTINUED
      OPERATIONS**





On
      August
      9, 2007, we completed the sale of Enterprise Search to FAST for $23.0
      million, including $22.1 million of cash, of which $4.0 million is held in
      escrow for one year, and the assumption of approximately $0.9 million in
      employee-related liabilities to FAST. FAST acquired the assets of the
      RetrievalWare business, assumed certain obligations of the business and retained
      certain employees serving its Enterprise Search customers. The escrow balance
      of
      $4.0 million is offset by a purchase price reduction of $1.0 million related
      to
      working capital adjustments and contingent claims against the Enterprise Search
      business for which we have provided FAST indemnification.





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





The
      assets and liabilities of the Enterprise Search business have been accounted
      for
      as “assets held for sale” and “liabilities held for sale” for all periods
      presented in accordance with the criterion established in SFAS No. 144. We
      entered into a transition services agreement under which we are reimbursed
      for
      services rendered and expenses incurred related to the transfer of finance,
      accounting and contracts functions of the Enterprise Searach business to FAST.
      These transition services will not be material to Enterprise Search cash flows.
      Therefore, in accordance with SFAS No. 144, the accompanying Consolidated
      Statements of Operations and Consolidated Statements of Cash Flows report the
      operations and cash flows of the Enterprise Search business as discontinued
      operations.





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





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





**For
                the Year Ended January 31,****2008**
            
            **2007**
            
            **2006****Revenue**
            
            $
            5,729
            
            $
            16,402
            
            $
            20,988**Expenses**Cost
                of revenues
            
            
            2,019
            
            
            4,452
            
            
            5,467Sales
                and marketing
            
            
            1,423
            
            
            7,120
            
            
            5,386Research
                and product development
            
            
            2,000
            
            
            4,035
            
            
            5,148General
                and administrative
            
            
            267
            
            
            339
            
            
            199Total
                expenses
            
            
            5,709
            
            
            15,946
            
            
            16,200Gain
                on sale of discontinued operations
            
            
            17,925
            
            
            -
            
            
            -**Income
                from discontinued operations**
            
            $
            17,945
            
            $
            456
            
            $
            4,788







F-11





**(3)**  **IMPAIRMENT
      OF LONG-LIVED ASSETS**





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





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







**(4)**  **OPERATIONAL
      RESTRUCTURINGS**





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


F-12





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





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








**(5)**  **EQUIPMENT
      AND LEASEHOLD IMPROVEMENTS**





Equipment
      and leasehold improvements at January 31, 2008 and 2007 consisted of the
      following (in thousands):





**2008**
            
            **2007**Computer
                equipment
            
            $
            13,106
            
            $
            9,873Office
                furniture
            
            
            2,812
            
            
            2,949Leasehold
                improvements
            
            
            530
            
            
            59716,448
            
            
            13,419Less
                accumulated depreciation
            
            
            (11,535
            )
            
            (9,705
            )$
            4,913
            
            $
            3,714








Equipment
      and leasehold improvements are recorded at cost. Depreciation is calculated
      on
      the straight-line method over three years for computer equipment, five years
      for
      office furniture and over the shorter of the depreciable life or the life of
      the
      related lease for leasehold improvements. Depreciation expense for fiscal years
      2008, 2007, and 2006 was $2.6 million, $3.7 million and $2.9 million,
      respectively.








**(6)**  **ACCRUED
      EXPENSES**





Accrued
      expenses at January 31, 2008 and 2007 consisted of the following (in
      thousands):





**2008**
            
            **2007**Accrued
                payroll and bonuses
            
            $
            719
            
            $
            1,194Accrued
                audit and accounting fees
            
            
            462
            
            
            556Restructuring
                reserve
            
            
            878
            
            
            -Other
            
            
            223
            
            
            482$
            2,282
            
            $
            2,232





F-13


**(7)**  **INCOME
      TAXES**





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




For
                  the Fiscal Years Ended January 31,2008
              
              
              2007
              
              
              2006Federal
                  benefit at statutory rate
              
              $
              (3,184
              )
              
              (35
              )%
              
              
              
              $
              (15,690
              )
              
              (35
              )%
              
              
              
              $
              (4,993
              )
              
              (35
              )%Effect
                  of:State
                  benefits, net of federal benefits
              
              
              (355
              )
              
              (4
              )
              
              
              
              
              (1,748
              )
              
              (4
              )
              
              
              
              
              (556
              )
              
              (4
              )Lower
                  effective foreign tax rate
              
              
              867
              
              
              9
              
              
              
              
              
              (130
              )
              
              0
              
              
              
              
              
              241
              
              
              2Expiration/use
                  of NOL carryforward
              
              
              4,892
              
              
              54
              
              
              
              
              
              1,871
              
              
              4
              
              
              
              
              
              1,168
              
              
              8Effect
                  of stock options
              
              
              279
              
              
              3
              
              
              
              
              
              438
              
              
              1
              
              
              
              
              
              (4,582
              )
              
              (32
              )Other
              
              
              1,791
              
              
              20
              
              
              
              
              
              129
              
              
              0
              
              
              
              
              
              70
              
              
              0Valuation
                  allowance
              
              
              (4,290
              )
              
              (47
              )
              
              
              
              
              15,130
              
              
              34
              
              
              
              
              
              8,652
              
              
              61Net
                  deferred tax assets
              
              $
              -
              
              
              0
              %
              
              
              
              $
              -
              
              
              0
              %
              
              
              
              $
              -
              
              
              0
              %


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





Our
      net
      deferred tax assets at January 31, 2008 and 2007 were as follows:





2008
            
            2007Deferred
                tax assets:Net
                operating loss carryforwards,not
                yet utilized
            
            $
            78,850
            
            $
            77,694Capitalized
                research & development costs
            
            
            19,441
            
            
            20,866Stock
                Compensation
            
            
            (344
            )
            
            2,101Deferred
                revenue
            
            
            255
            
            
            1,173Restructuring
                Reserve
            
            
            308
            
            
            -Other
            
            
            (87
            )
            
            192Total
                deferred tax assets
            
            
            98,423
            
            
            102,026Valuation
                allowance
            
            
            (98,423
            )
            
            (102,026
            )Net
                deferred tax assets
            
            $
            -
            
            $
            -








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





Our
      Canadian Subsidiary received a tax refund of $241 from a scientific research
      and
      experimental development tax credit during fiscal 2008. This tax benefit was
      triggered through the use of previously recorded net operating loss
      carryforwards generated by the Canadian subsidiary. This tax benefit is recorded
      as a component of discontinued operations, as we closed this operation in the
      operational restructuring actions undertaken during fiscal 2008 as discussed
      further in Note 4





F-14


We
      adopted the provisions of FASB Interpretation No. 48, “ *Accounting
      for Uncertainty in Income Taxes”* (“FIN
      48”) on February 1, 2007. The adoption of FIN 48 did not impact our financial
      position or results of operations. We concluded that there are no uncertain
      tax
      positions requiring recognition in our consolidated financial statements. Our
      policy is to recognize interest and penalties in the period in which they occur
      in the income tax provision (benefit). We file income tax returns in the U.S.
      federal jurisdiction, various states and local jurisdictions and in foreign
      jurisdictions, primarily the UK and Canada. Tax years that remain subject to
      examination include: US federal and state tax returns from fiscal 2005 to
      present; Tax returns in the UK from fiscal 2006 to present and Canadian tax
      returns from fiscal 2005 to present. We are not currently under audit for income
      taxes in any jurisdiction.





At
      January 31, 2008, the Company had net operating loss carryforwards (“NOLs”) of
      approximately $208 million that are expiring now and continue at various dates
      through fiscal year 2027. The use of these NOLS may be limited by Section 382
      of
      the Internal Revenue Code as a result of the Combination or other equity
      transactions. Approximately $28.3 million of the NOLs relate to stock option
      exercises, and $20.3 million relate to UK operations. The tax benefit associated
      with the stock option exercises will be credited to equity when and if
      realized.





As
      of
      January 31, 2008, our deferred tax assets exceeded the deferred tax liabilities.
      As we have not generated earnings and no assurance can be made of future
      earnings needed to utilize these assets, a valuation allowance in the amount
      of
      the net deferred tax assets has been recorded.








**(8)**  **CAPITALIZATION**





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




In
      the
      first quarter of fiscal year 2007, we completed a private placement of 5,103,333
      newly-issued shares of common stock to a group of institutional investors
      resulting in net proceeds of approximately $36.7 million. The shares were sold
      at a price of $7.50 per share, which represented a 6.58% discount to Convera’s
      trailing 10-day average closing price preceding the date of Board approval. Allen
      & Company LLC, a company affiliated with the majority shareholder, acted as
      placement agent for the private placement and was paid a commission of $1.5
      million, or 4%. Concurrent
      with this private placement, we retired the Silicon Valley Bank term loan
      facility. The remaining balance of the private placement proceeds, which totaled
      approximately $31.6 million are to be used for general corporate purposes.




In
      the
      second quarter of fiscal year 2006, we completed a private placement of
      6,555,556 newly issued shares of our Class A common stock to two investors.
      We
      sold 5,555,556 shares directly to the Legg Mason Opportunity Trust at a purchase
      price of $4.50 per share. The remaining 1 million shares were purchased by
      an
      affiliate of Herbert A. Allen, a significant stockholder and a member of our
      board of directors, at a purchase price of $4.84 per share. Net proceeds to
      us
      of approximately $28.8 million were used for general corporate purposes. Allen
      & Company LLC, a company affiliated with the majority shareholder, acted as
      placement agent for the private placement and was paid a commission of 4% on
      the
      shares purchased directly by the Legg Mason Opportunity Trust.





No
      shares
      of the Company’s Class B common stock are issued or outstanding at January 31,
      2008.








**(9)**  **NET
      LOSS PER COMMON SHARE**





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


F-15


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








**For
                the Fiscal Year Ended****January
                31,****2008**
            
            **2007**
            
            **2006**Continuing
                Operations Numerator:Loss
                from continuing operations
            
            $
            (27,041
            )
            $
            (45,283
            )
            $
            (19,049
            )Discontinued
                Operations Numerator:Income
                from discontinued operations
            
            $
            17,945
            
            $
            456
            
            $
            4,788Net
                loss numerator:
            
            $
            (9,096
            )
            $
            (44,827
            )
            $
            (14,261
            )Denominator
                Continuing and DiscontinuedOperations:Weighted
                average number of common shares outstanding - basic and
                diluted
            
            
            53,145,955
            
            
            52,221,644
            
            
            43,088,677Basic
                and diluted net loss per common share from continuing
                operations
            
            $
            (0.51
            )
            $
            (0.87
            )
            $
            (0.44
            )Basic
                and diluted net income per common share from discontinued
                operations
            
            $
            0.34
            
            $
            0.01
            
            $
            0.11Basic
                and diluted net loss per share
            
            $
            (0.17
            )
            $
            (0.86
            )
            $
            (0.33
            )








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,****2008**
            
            **2007**
            
            **2006**Stock
                options
            -
            
            463,564
            
            3,761,226Deferred
                stock
            203,843
            
            731,525
            
            616,613








**(10)**  **EMPLOYEE
      BENEFIT PLANS**





Our
      Stock
      Option Plans authorize the granting of stock options and other forms of
      incentive compensation to purchase up to 14.25 million shares of our Class
      A
      common stock in order to attract, retain and reward key employees. Of the total
      number of shares authorized for stock based compensation, options to purchase
      5,054,756 shares and 300,000 deferred shares were outstanding as of January
      31,
      2008. We had a total of 5,953,236 shares of Class A common stock reserved for
      the issuance of warrants, deferred shares and options under the plans as of
      January 31, 2008.





Each
      qualified incentive stock option has an exercise price as determined by a
      committee appointed by the Board of Directors, but not less than 100% of the
      fair market value of the underlying common stock at the date of grant, a
      ten-year term and typically a four-year vesting period.





A
      non-qualified option granted pursuant to the plans may contain an exercise
      price
      that is below the fair market value of the common stock at the date of grant
      and/or may be immediately exercisable. The term of non-qualified options is
      usually five or ten years.


F-16


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





Number
                of Options
            
            Weighted-AverageExercise
                Price
            
            Weighted-Average
                RemainingContractual
                Term (Years)
            
            Aggregate
                Intrinsic Value
              (In
                thousands)Outstanding,
                January 31, 2007
            
            
            9,222,546
            
            $
            5.23Granted
            
            
            332,750
            
            
            3.77Exercised
            
            
            (337,125
            )
            
            2.43Forfeited
            
            
            (2,432,482
            )
            
            5.86Expired
            
            
            (1,730,933
            )
            
            5.90Outstanding,
                January 31, 2008
            
            
            5,054,756
            
            $
            4.79
            
            
            5.43
            
            $
            -Vested
                or expected to vest
            
            
            4,818,085
            
            $
            4.78
            
            
            5.27
            
            $
            -Exercisable,
                January 31, 2008
            
            
            3,834,617
            
            $
            4.77
            
            
            4.56
            
            $
            -


The
      total
      intrinsic value of options exercised during the years ended January 31, 2008,
      2007, and 2006 was $0.4 million, $1.7 million, and $11.8 million, respectively.





Cash
      received from option exercises under all share-based arrangements for the years
      ended January 31, 2008, 2007, and 2006 was $0.8 million, $1.7 million, and
      $9.7
      million, respectively. We have a policy of issuing new shares to satisfy share
      option exercises.





The
      following table summarizes additional information about stock options
      outstanding at January 31, 2008:





Options
                Outstanding
            
            Options
                ExercisableRange
                of Exercise Prices
            
            Number
                ofOptions
            
            Weighted-Average
                Remaining ContractualLife
            
            Weighted-AverageExercise
                Price
            
            NumberExercisable
            
            Weighted-AverageExercise
                Price$2.24 to $4.25
            
            
            624,032
            
            
            6.76
                years
            
            $
            3.21
            
            
            399,965
            
            $
            3.22$4.38
                to $4.38
            
            
            2,022,487
            
            
            2.82
            
            
            4.38
            
            
            2,022,487
            
            
            4.38$4.40
                to $4.71
            
            
            1,742,709
            
            
            7.41
            
            
            4.66
            
            
            1,042,632
            
            
            4.69$4.75
                to $16.09
            
            
            632,678
            
            
            7.15
            
            
            6.69
            
            
            336,683
            
            
            6.77$20.52
                to $46.06
            
            
            32,850
            
            
            2.16
            
            
            29.62
            
            
            32,850
            
            
            29.625,054,756
            
            
            5.43
                years
            
            $
            4.79
            
            
            3,834,617
            
            $
            4.77


SFAS
      No.
      123(R) requires the use of a valuation model to calculate the fair value of
      stock-based awards. We have elected to use the Black-Scholes option-pricing
      model, which incorporates various assumptions including volatility, expected
      life, risk free interest rates and dividend yields. The expected volatility
      is
      based on term-matching historical volatility. The expected life of an award
      is
      computed using a combination of historical holding periods combined with
      hypothetical holding periods on a weighted average basis.





During
      the third quarter of the fiscal year ended January 31, 2008, we evaluated
      various grouping schemes for all option holders based on holding periods and
      exercise behavior. Based on this evaluation, we determined that the grouping
      of
      Directors and non-Directors displayed significantly different exercise behavior.
      The FASB has stated that where such diversity exists, the options should be
      valued separately with different assumptions. As such, we established two groups
      for option valuation: Group 1 is comprised of Directors; Group 2 includes all
      other employees. As SFAS No.123(R) requires that stock-based compensation
      expense be based on awards that are ultimately expected to vest, stock-based
      compensation expense for the year ended January 31, 2008 has been reduced for
      estimated forfeitures. In the third quarter of fiscal year 2008, we reevaluated
      our forfeiture rate as a result of the current year restructuring actions,
      the
      sale of the Enterprise Search business to FAST and the current quarter
      regrouping of option holders to address the impact that these actions have
      on
      the ultimate vesting of stock options. As a result, we set the forfeiture rate
      to be used in the computation of stock option expense for the remainder of
      the
      year ended January 31, 2008 to 1.2% for Class 1 and to 15% for Class
      2.


F-17


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





**For
                the year ended January 31,**
            **2008**
            
            **2007**
            
            **2006**Expected
                term of stock options
            3.16
                years
            
            6.14
                years
            
            5
                yearsExpected
                volatility
            68%
            
            62%
            
            80%Risk
                free interest rates
            4.0%
                to 5.0%
            
            4.6%
                to 5.0%
            
            3.9%
                to 4.4%Dividend
                yield
            None
            
            None
            
            NoneWeighted
                average grant date fair value of options granted during the
                period
            $1.38
            
            $3.29
            
            $4.40








As
      of
      January 31, 2008, no stock-based compensation costs related to stock options
      were capitalized as part of the cost of an asset. As of January 31, 2008 a
      total
      of $9.9 million of unrecognized compensation cost related to stock options
      is
      expected to be recognized over a weighted average period of 1.9
      years.





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








Deferred
      Stock Compensation Plan





Beginning
      in fiscal year 2004, pursuant to our 2000 Stock Option Plan, several of our
      senior officers have been awarded shares of deferred stock with varying vesting
      provisions. Nonvested shares of stock granted under the 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 our common stock. Such value is recognized
      as
      compensation expense over the corresponding service period. Deferred stock
      compensation is subject to the provisions of FAS 123(R) and as such is adjusted
      for estimated forfeitures. During the first quarter of the fiscal year ended
      January 31, 2008, the employment of two officers in the plan was terminated
      prior to vesting their awards. The forfeiture of these shares represented a
      large percentage of the total plan and as a result increased the forfeiture
      rate
      related to this plan significantly. The cumulative effect of this adjustment
      to
      the forfeiture rate resulted in a net compensation expense credit of $1.1
      million, or $0.02 per common share, recorded in the first quarter of fiscal
      year
      2008. As of January 31, 2008, an aggregate of 300,000 shares of deferred stock
      was outstanding.





The
      following table summarizes the deferred stock compensation plans as of January
      31, 2008:





**Deferred
                Stock Plan Shares**
            
            **Shares**
            
            **Weighted-Average
                Grant-****Date
                Fair Value**Nonvested
                at February 1, 2007
            
            
            890,000
            
            $
            5.64Granted
            
            
            -
            
            
            -Vested
            
            
            (190,000
            )
            
            6.14Forfeited
            
            
            (400,000
            )
            
            5.50Nonvested
                at January 31, 2008
            
            
            300,000
            
            $
            5.50








As
      of
      January 31, 2008, there was $0.3 million of total unrecognized compensation
      cost
      related to nonvested share-based compensation arrangements granted under the
      Deferred Stock Plan. That cost is expected to be recognized over a
      weighted-average period of 1.0 year. The total fair value of shares vested
      during the years ended January 31, 2008, 2007 and 2006 was $1.2 million, $0.7
      million and $0.7 million, respectively.


F-18


The
      impact on our results of operations of recording stock-based compensation
      related to stock options, the ESPP and deferred stock for the years ended
      January 31, 2008, 2007 and 2006 was as follows (in thousands):





**Fiscal
                Year Ended January 31,****2008**
            
            **2007**
            
            **2006**Continuing
                OperationsCost
                of revenues
            
            $
            269
            
            $
            216
            
            $
            -Sales
                and marketing
            
            
            200
            
            
            248
            
            
            -Research
                and product development
            
            
            (795
            )
            
            1,684
            
            
            440General
                and administrative
            
            
            751
            
            
            3,819
            
            
            979Continuing
                Operations Total1
            
            
            425
            
            
            5,967
            
            
            1,419Discontinued
                Operations
            
            
            176
            
            
            830
            
            
            -Total
            
            $
            601
            
            $
            6,797
            
            $
            1,419




(1)
      During fiscal year 2006 stock-based compensation of $165 was included in
      capitalized research and product development costs and is not reflected in
      the
      totals reported above.





Had
      compensation cost for our 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 2006 consistent with the method of SFAS No. 123, our net loss
      and basic and diluted net loss per common share would have been increased to
      the
      pro forma amounts indicated below.








**Fiscal
                Year Ended January 31, 2006**Net
                loss, as reported
            
            $
            (14,261
            )Stock-based
                compensation, as reported
            
            
            1,419Total
                stock-based compensation determined under fair value based method
                for all
                awards
            
            
            (5,539
            )Pro
                forma net loss
            
            $
            (18,381
            )Basic
                and diluted net loss per common share,as
                reported
            
            
            ($0.33
            )Basic
                and diluted net loss per common share,pro
                forma
            
            
            ($0.43
            )








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.








Employee
      Savings Plan





We
      have
      an employee savings plan that qualifies under Section 401(k) of the Internal
      Revenue Code. Under the plan, participating eligible employees in the United
      States may defer up to 100 percent of their pre-tax salary, but not more than
      statutory limits. The plan was amended in the fiscal year ended January 31,
      2001
      to allow us to match $0.50 on every dollar up to the maximum of 8% of the
      employee’s contribution on total compensation.





For
      the
      fiscal years ended January 31, 2008, 2007and 2006, we contributed approximately
      $0.3 million, $0.4 million, and $0.4 million, respectively, to the employee
      savings plan.


F-19


**(11)**  **COMMITMENTS
      AND CONTINGENCIES**





**Lease
      Commitments**





We
      conduct our operations using leased facilities. The leases terminate at various
      dates through fiscal year 2011 with options to renew. Certain leases provide
      for
      scheduled rent increases and require us to pay shared portions of the operating
      expenses such as taxes, maintenance and repair costs. We also have operating
      leases for equipment that are included in the figures below. Future minimum
      rental payments under non-cancelable operating leases as of January 31, 2008
      along with sublease rental receipts are as follows (in thousands):





Year
                EndingJanuary
                31,
            
            OperatingLeases
            
            Sublease
                RentalReceipts2009
            
            $
            1,693
            
            $
            2832010
            
            
            1,153
            
            
            1212011
            
            
            111
            
            
            -2012
            
            
            -
            
            
            -2013
                and beyond
            
            
            -
            
            
            -$
            2,957
            
            $
            404





Total
      rental expense under operating leases was approximately $1.5 million (net of
      sublease rental receipts of $0.2 million) for fiscal year 2008 and $1.6 million
      and $1.8 million for fiscal years 2007 and 2006, respectively.





**Contingencies**





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








**(12)**  **SEGMENT
      REPORTING**





We
      have
      one reportable segment. Prior to our agreement on March 31, 2007 to sell the
      assets of the Enterprise Search (RetrievalWare) business to FAST, we operated
      under two reportable segments: the Enterprise Search segment and the vertical
      search segment (previously called our Excalibur web hosting product). Financial
      information is located in the financial statements beginning on page F-2. The
      assets and liabilities of the Enterprise Search business have been reported
      as
“assets held for sale” and “liabilities held for sale” on the Consolidated
      Balance Sheets. Revenue, expenses and cash flows related to the Enterprise
      Search business have been reflected as discontinued operations in the
      Consolidated Statements of Operations and of Cash Flows.





**Operations
      by Geographic Area**





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





Fiscal
                Years Ended January 31,Sales
                to customers:
            
            2008
            
            2007
            
            2006United
                States
            
            $
            139
            
            $
            126
            
            $
            20United
                Kingdom
            
            
            979
            
            
            143
            
            
            -$
            1,118
            
            $
            269
            
            $
            20Long-lived
                assets:United
                States
            
            $
            5,459
            
            $
            4,158
            
            $
            15,665All
                Other
            
            
            83
            
            
            146
            
            
            661$
            5,542
            
            $
            4,304
            
            $
            16,326


F-20




**Major
      Customers**




One
      customer accounted for 82% of total revenue for the fiscal year ended January
      31, 2008, three customers accounted for 53%, 29% and 17%, respectively of total
      revenue for fiscal year ended January 31, 2007; and one customer accounted
      for
      100% of the revenue for the fiscal year ended January 31, 2006.








**(13)**  **SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION** (in
      thousands):





For
                the Fiscal Years Ended January 31,Supplemental
                Disclosures of Non-cash Investing and Financing
                Activities:
            
            2008
            
            2007
            
            2006Stock
                options exercised
                under deferred compensation arrangements
            
            $
            -
            
            $
            365
            
            $
            225Cash
                paid for
                interest
            
            $
            2
            
            $
            154
            
            $
            306





F-21


**(14)**  **SELECTED
      QUARTERLY INFORMATION (UNAUDITED)**


(Amounts
      in thousands except per share data.)








1stQuarter
            
            2ndQuarter
            
            3rdQuarter
            
            4thQuarter***2008***Revenues
            
            $
            324
            
            $
            255
            
            $
            259
            
            $
            280Operating
                loss from continuing operations
            
            
            (8,240
            )
            
            (6,697
            )
            
            (6,400
            )
            
            (7,519
            )Other
                income
            
            
            491
            
            
            478
            
            
            482
            
            
            364Impairment
                of long-lived assets
            
            
            -
            
            
            
            
            
            -
            
            
            603Loss
                from continuing operations
            
            
            (7,749
            )
            
            (6,219
            )
            
            (5,918
            )
            
            (7,155
            )Gain
                from sale of discontinued operations
            
            
            -
            
            
            -
            
            
            17,759
            
            
            166Income
                from discontinued operations
            
            
            206
            
            
            4
            
            
            17,570
            
            
            165Net
                income (loss)
            
            $
            (7,543
            )
            $
            (6,215
            )
            $
            11,652
            
            $
            (6,990
            )Basic
                and diluted loss per common share - Continuing Operations
            
            $
            (0.15
            )
            $
            (0.12
            )
            $
            (0.11
            )
            $
            (0.13
            )Basic
                and diluted loss per common share - Discontinued
                Operations
            
            $
            0.01
            
            $
            0.00
            
            $
            0.33
            
            $
            0.00***2007***:Revenues
            
            $
            20
            
            $
            68
            
            $
            65
            
            $
            116Amortization
                of capitalized research and product development costs
            
            
            (1,015
            )
            
            (1,015
            )
            
            (1,015
            )
            
            -Impairment
                of capitalized research & development costs, equipment and prepaid
                expenses
            
            
            -
            
            
            -
            
            
            (6,407
            )
            
            -Operating
                loss from continuing operations
            
            
            (10,983
            )
            
            (10,875
            )
            
            (16,499
            )
            
            (9,193
            )Other
                income
            
            
            373
            
            
            649
            
            
            643
            
            
            602Loss
                from continuing operations
            
            
            (10,610
            )
            
            (10,226
            )
            
            (15,856
            )
            
            (8,591
            )Income
                (loss) from discontinued operations
            
            
            594
            
            
            (836
            )
            
            1,844
            
            
            (1,146
            )Net
                loss
            
            $
            (10,016
            )
            $
            (11,062
            )
            $
            (14,012
            )
            $
            (9,737
            )Basic
                and diluted loss per common share - Continuing Operations
            
            $
            (0.21
            )
            $
            (0.19
            )
            $
            (0.30
            )
            $
            (0.16
            )Basic
                and diluted loss per common share - Discontinued
                Operations
            
            $
            0.01
            
            $
            (0.02
            )
            $
            0.03
            
            $
            (0.02
            )





F-22


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








As
                reported
            
            Reclassification
                of R& D expenses
            
            As
                restated***2008
                - 2******nd******Quarter***Operating
                loss from continuing operations
            
            $
            (6,507
            )
            $
            (190
            )
            $
            (6,697
            )Loss
                from continuing operations
            
            
            (6,029
            )
            
            (190
            )
            
            (6,219
            )Income
                (loss) from discontinued operations
            
            
            (186
            )
            
            190
            
            
            4Basic
                and diluted loss per common share - Continuing Operations
            
            $
            (0.11
            )
            $
            (0.01
            )
            $
            (0.12
            )Basic
                and diluted loss per common share - Discontinued
                Operations
            
            $
            (0.01
            )
            $
            0.01
            
            $
            0.00***2008
                - 3******rd******Quarter***Operating
                loss from continuing operations
            
            $
            (6,349
            )
            $
            (51
            )
            $
            (6,400
            )Loss
                from continuing operations
            
            
            (5,867
            )
            
            (51
            )
            
            (5,918
            )Income
                from discontinued operations
            
            $
            17,519
            
            $
            51
            
            $
            17,570








**(15)**  **LONG-TERM
      DEBT**





On
      March
      23, 2005, we secured a $5 million term loan to provide financing for capital
      purchases including those for our vertical search product. The loan incurred
      interest at 7% per annum and was secured by a first lien on all corporate
      assets, excluding intellectual property. We retired the facility in the first
      quarter of fiscal year 2007. During the fiscal years ended January 31, 2007
      and
      2006 we recorded interest expense of approximately $0.2 million and $0.3
      million, respectively.








F-23